The Hive on Cap and Trade

The Hive has the first of a weekly series – a short essay on an issue.

This week is on why they prefer a carbon tax to a cap and trade emissions trading scheme:

Imagine a country that had a business tax. The size of the business tax varied daily, and was subject to international forces – global supply and demand and exchange rate variation. No one therefore knows the size of the tax but estimates suggests that the size will be somewhere between $15 and $75 per tonne of carbon emission equivalent (in the short term, long term prices in the $100 plus range are regarded as conservative).

Investors don’t like uncertainty. This tax would add considerable uncertainty. Would investors invest in a country that had such a regime?

And the alternative:

Compare the cap and trade regime with a carbon tax – it is simple, predictable and the size of the tax in the immediate future doesn’t need to be large to meet our liabilities under the Kyoto Protocol. $3 a tonne starting 1 January 2009 is all that is needed.

A number of think tanks, which are normally anti tax, say a carbon tax is preferable. They also suggest that the level of the tax be tied to the increase in global temperature so if things do heat up more quickly than expected, then the tax rises proportionally, and if the increases don’t happen, the tax drops.

The Hive concludes:

So at The Hive, we agree fully with the policy that the Green Party has been advocating since the early 1990s. A carbon tax offset against reductions in general taxation is the best way forward. We just can’t understand why so many people have decided to support the cap and trade alternative. Those on the left, we understand – it will screw the economy. But on the centre and right?

I am not sure an ETS is not a better solution in the long term, but agree that in the short to medium term a carbon tax would be preferable – especially with the price of carbon credits so variable.