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Thank you for the clear description! I've heard many people claim a carbon tax is basically the same as a cap-and-trade system with auctioned permits, but this is the first explanation I've seen for why.

However there are still ways that matter in which the approaches are not equivalent. For one, ultimately what we're trying to do is reduce GHG emissions. The environment is directly affected by the absolute amount we are polluting. A cap-and-trade approach allows us to control this absolute amount directly, instead of guessing an appropriate value for a tax. We would inevitably guess wrong and be constantly correcting in an unpredictable way.

Assuming that we have en emissions target Q1, how do you set the carbon tax such that you achieve it? Doesn't this imply that you know the slopes of the curves?

One significant difference is that quotas don't have to be 100% auctioned with the government collecting the proceeds, as is the case with a Pigouvian tax. When the quotas are just given away to the polluting firms, the country is essentially in a "pollutees pay" regime and citizens who are harmed by pollution could buy and retire some pollution permits (if they can overcome free-riding), with the money going to the firms as compensation for reducing their pollution. Alternatively, if the permits were given to the citizens, the country would be in a "polluters pay" regime as polluters would need to buy permits from citizens in order to release any pollution. I suppose we could call a regime where permits are auctioned directly by the government as being a form of polluters pay if we take the government to be the agent for citizens.

One possible advantage of permits over a tax is that it allows the government the possibility of giving away some permits to polluters and auctioning others (i.e., less than 100% auction), which, by giving some property rights to polluters might mollify their opposition. Whether doing so would be necessary depends on their lobbying power and ability to prevent the measure from being adopted. There are also conservatives (especially in the US) who are allergic to the word tax and would have a knee-jerk reaction against anything that is called a tax. For these people, calling the measure cap-and-trade may frame it in a more palatable way.

Dropped by your blog after posting on economists view to see what others are doing. Just started posting my own keyhole into alternative energy and all that means. All about money in the end.

So, how much does Canada get for the tar sands that T. Bonne Pickens wants to harvest?

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