A reader writes:

I have been following your discussion of cap and trade versus carbon tax, and I participated in the development of the RGGI cap and trade scheme.  I think there are some unintended consequences no one has discussed.

As some of your commenters have alluded, the logical place to measure and price carbon (whether a tax or C&T scheme) is at the point where it is extracted.  This is particularly true if an international agreement is to be completed.  That would seem to give producing countries (say Venezuela or Iran or Saudi Arabia) a huge tax windfall at the expense of consuming countries, but maybe not.  Crude oil prices are not set in a market; they are set by OPEC (really Saudi Arabia) to maximize its wealth.  That requires prices low enough to avoid economic catastrophe.  OPEC "prices" will only decline by the amount of the tax.  Whether you call a payment a "price" or a "tax" is irrelevant if it is paid to a socialist government.

On the other hand, US domestic natural gas producers will pay that tax (or whatever pricing regime is developed).  The result is that natural gas (the lowest carbon fossil fuel) will be disadvantaged relative to oil.  That's the worst case of all.  It makes us MORE dependent on foreign oil, and ADDS carbon to the atmosphere (unless of course it shrinks the economy as GW deniers fear).

The better, simpler, maybe even unilateralist alternative is an increasing tax on oil imports.  It does not directly address carbon from all sources, but it reduces the value of foreign oil, makes domestic production (including renewable sources) more profitable, cannot easily be gamed, and may have more real effect on carbon than the scheme currently being negotiated.  And it would make the Saudi Arabians piss their pants.

Ironically, a Pigovian tax on carbon is impossible in the US, but a tax on oil imports might be get the support of anti-free-trade protectionists for all the wrong reasons.

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