Ryan Avent has been doing some great posting on cap and trade versus carbon taxes. With all information known, the two are theoretically identical. But in the real world they will differ; the question is how much.
One way to think about it is that we are choosing between two kinds of transparency: transparency to regulated companies, and transparency to voters. Politicians like cap and trade because the connection between the plan and higher energy prices will be less obvious to the voters. For that reason, a libertarian should generally prefer a direct tax.
On the other hand, cap and trade provides more certainty for companies, and a more direct relationship between their actions and profits. So the tax is not always a perfect slam dunk.
On balance I prefer taxes to cap and trade. However, politically, no one is going to enact a carbon tax with gasoline at $4.00 a gallon. Cap and trade is what we're going to get. In practice, that will mean that companies get subsidies to get them to go along (liberals who want cap and trade should concede on this issue to make it easier to pass), while prices rise somewhat. It's not clear to me how big a difference it will make in the long run.
We want to hear what you think about this article. Submit a letter to the editor or write to firstname.lastname@example.org.