Diane sent me this article about why carbon trading, like a cap-and-trade system, won't work to lower carbon emissions sufficiently, and that therefore we ought to embrace a carbon tax. I gave her a quick rundown of what I thought of the controversy, and then sort of blew her off with a conclusion along the lines of, "Hey, it's all good for us." I'm going to recapitulate my thoughts on carbon taxes versus cap-and-trade, and then explain why that initial response was off the mark.
The central argument of the link is that the cap-and-trade system in Europe was kind of a disaster, and that extending it worldwide will be extremely problematic. And that's true. When prices on the European carbon market crashed, it was definitely a setback. But that's because it was a poorly designed program. Polluters were able to game the limits, setting them too high; the market was also structured by allowing polluters to own the rights at the start, rather than having to purchase them. This gave polluters little incentive to actually reduce their emissions in the short term.
On the other hand, my understanding is that the economics (that is, the incentives) of a well-designed cap-and-trade program and a well-designed carbon tax are basically equivalent. You can get the same reductions through either one. However, the key there is "well-designed"--both programs require a good design, and both have major pitfalls. A carbon tax, for instance, requires getting the tax right, and there's something of a trade-off between control (i.e., being sure that you hit your reduction goals) and simplicity (cap-and-trade has an enormous administrative overhead that a tax wouldn't have). A badly designed tax, however, will either underperform or be too costly--and the former is likely to lead to an abrupt swing toward the latter. In other words, that control isn't just good for meeting goals, it's also good because it's more predictable for all involved. And if we're talking about reducing risk of climate change, it's a bit silly to then insert a lot of risk over how the carbon market is going to work on a year to year basis. (This assumes, of course, that a cap-and-trade system can leverage sufficient incentives to make reductions go smoothly.)
As I said above, my initial conclusion for Diane was basically "Springfield is in a good place regardless of what the feds choose to do." However, if we get a bad policy, we get a bad policy, and that's that, regardless of whether it's a cap-and-trade or carbon tax. So, I'd amend that to say that when the feds really get down to haggling over different climate change plans, we have to be ready to weigh in in favor of quality programs. Businesses know they can game the system, and someone has to resist that.