The Sightline blog discusses when we should favor cap-and-trade versus carbon tax solutions to curbing greenhouse gas (GHG) emissions:
Do we want a system where the emissions reductions are fairly certain, but the price tag for polluting is unpredictable (i.e., a cap)? Or would we rather have a system in which prices are a given, but the effects are difficult to gauge in advance (i.e., a tax)?
I agree with this reasoning, but I think it is missing an important aspect. As I pointed out on my a few months ago, we must also consider what we know about the costs of climate due to GHG emissions versus what we know about the optimal level of GHG emissions directly. If we have better estimates of the marginal social cost of GHG emissions we should favor a carbon tax because it will help us find the optimal emission level. On the other hand, if we know the most about what the optimal GHG emission level, such as if there is a tipping point when further GHG emissions have very large marginal social costs, then we should favor a cap-and-trade scheme because. If we have some combination of information, perhaps a hybrid policy, like cap-and-trade with a “safety valve” or its opposite, an emissions right sale with a quantity limit, would be best.
I do know that marginal cost estimates for GHG emissions are not good, but I don’t know if climate scientists predict any sort of tipping point.