Why Bloomberg Should Embrace Cap-and-Trade

Michael Bloomberg is not a man to shy away from brainless cliché: "cities are increasingly becoming incubators of change and drivers of innovation," he blathers meaninglessly in the Economist. But at least he's on the side of the angels when it comes to urban policy. When it comes to climate change, however, he seems to be increasingly, and unhelpfully, adamant that a carbon tax is vastly better than cap-and-trade system. Now he's taking that message to Bali:

Bloomberg, who addresses the conference Friday as a representative of the world's local governments, told a meeting with environmentalists Thursday that carbon trading "is attractive to many politicians because it doesn't have that three-letter word 'tax'."
"But it's a very inefficient way to accomplish the same thing that a carbon tax accomplishes," he said. "It leaves itself open to special interests, corruption, inefficiencies."

Well, so does a tax – but a tax is much less flexible, which means a cap-and-trade system is much better placed to react to future knowledge about the urgency of carbon reductions.

The other problem with a tax is that it's less likely to be passed than a cap-and-trade system. That doesn't bother Bloomberg, however: "that's what leadership is all about, and we need leaders around the world who get things done," he said. To which Evan Herrnstadt has a great reply:

Is it just me, or do politicians put far too much stock in their own ability to lead America to greatness?

Bloomberg should be campaigning for any US cap-and-trade system to auction as many of its permits as possible, which would make it tax-like and flexible. That's a realistic goal: the RGGI system in the US north-east is, to most observers' surprise, going to be almost entirely auctioned. Bloomberg should know that it's easier to swim with the tide than against it, especially when there are really no compelling reasons to prefer a carbon tax (under which emissions can continue to climb uncapped) to a cap-and-trade system (which, by design, caps emissions at steadily-lower levels).