As the U.S. Senate debates climate change legislation this week, many have proclaimed the virtue of its “cap and trade” system as a “market solution” to reducing carbon emissions. Nothing could be further from the truth.
Unlike a direct tax, cap and trade is a European-style scheme that masks its negative consequences on the economy behind the rhetorical benefits of new government programs designed to help us. In truth, neither is good for consumers or the economy, but a closer look reveals why so many politicians find comfort in cap and trade.
The economic argument for penalizing carbon emissions is straightforward. If emissions from human activities are contributing to dangerous temperature increases as some scientists claim, then textbook theory says that the government should take steps to increase the private costs to those emitting carbon. Markets are efficient only when firms take all costs of their behavior into account…
Cap and trade is not a market-based solution. It relies on a political scheme to increase costs, and can therefore be justly viewed as a tax, stealthy or otherwise, on energy - the lifeblood of our economy. So here’s the real difference: cap and trade masks the causes of higher consumer prices much better than a straightforward tax. And that is precisely why so many politicians endorse it.