Why defend emissions trading?

An argument for emissions trading at John Quiggin

I don't understand why an economist on the left of politics like John Quiggin is still arguing for an emissions trading scheme as being preferable to a carbon tax.

Surely, the recent experience of financial markets ought to make anyone very cautious about a proposed new scheme which is welcomed by those who can see that there is money to be made in a potential novel market. I expected it would make Labor types especially skeptical.

In the post linked above, Professor Quiggin argues boldly that the recent collapse in the price of the European emissions permits is not a warning against using ETS:

Most commentators have seen this as a strike against emissions trading, but actually it’s a positive. The big concern about price uncertainty arises when we are very uncertain about the cost of reducing emissions. Under cost uncertainty, setting the emissions target too low could impose unexpectedly high costs on the economy.

What’s happening here is that we are uncertain about the rate of growth of the economy. An emissions target is countercyclical since it imposes a relatively high cost when the economy is strong, and a much smaller cost when the economy is weak. This is a Good Thing.

There are many comments following which contest that view, and I find some of them very convincing. TerjeP argues, for example:

If the focus of the carbon emission policy is to reduce carbon emissions by ushering in new energy technology then the key business sector that needs price certainty from a carbon tax is the renewable base load energy sector. They are after all the ones in need of new capital and who must persuade investors and bankers that things will work out as planned.....

However dealing with the volatile carbon price that an ETS would deliver makes investment in such unproven high risk commercialisation a far less certain venture.

And besides which: doesn't a hell of a lot depend on whether the US goes down the ETS path as well? If Obama actually goes for a carbon tax, wouldn't it be wise to follow?

UPDATE: How convenient. Penny Wong has column space in the Australian this morning in which she explains why an ETS is preferable to a carbon tax. Her key point:

Arguments around the merits of emissions reductions policies can be complex, but the core explanation for why emissions trading is superior to a carbon tax is simple. A carbon tax does not guarantee emissions reductions. A cap-and-trade scheme does.

Delivering a target is a key part of domestic and international efforts to reduce carbon pollution.

Cap and trade gives us certainty that targeted reductions will occur, whereas a carbon tax gives no guarantee over the quantity of reductions. Under a cap-and-trade scheme, the government issues permits for each tonne of carbon up to the total cap. Under a carbon tax, the government needs to estimate how emissions levels would respond to a carbon tax rate, introducing uncertainty about whether the target would be reached.

But Penny: that assumes that the ETS actually works. She claims:

Emissions trading gives businesses and the community more certainty.....While the carbon price will fluctuate under a cap-and-trade model, there is a capacity for firms to use market instruments to help manage movement in the carbon price.

Yes, market instruments have been working so well, lately. (Disengage sarcasm mode.)

More Wong claims:

Emissions trading opens up the prospect of sharing the burden of reducing emissions with other countries through linking the CPRS to schemes overseas. A carbon tax would take Australia out of this emerging international market.

But problems with the credibility of credits claimed for reductions in other countries has been one of the major issues of the European ETS, hasn't it? And wouldn't common sense suggest that there is always going to be an incentive for businesses engaged in quantifying the effects of overseas mitigation to be biased towards overstating the benefits of schemes? I mean, that keeps all potential customers happy.

I would have thought that one of the benefits of a carbon tax is that you can cut out that part of an ETS and just worry about accurately assessing what is going on in your own country.

Penny doesn't want to wait, though, and that's a worry:

Now is the time for getting on with the job not kicking around theories.

It's not the theories we want discussed, Penny; we're saying it's the practicalities that need to win out over theory.