Happy California Cap-And-Trade Eve

Nice radio program on California's cap-and-trade allocation auction that starts taking bids tomorrow, and on Monday we'll find out the price per ton, with a minimum price set by regulation at $10/ton.  Second biggest cap-and-trade market in the world after Europe.  Hopefully we've learned from other's mistakes (and I think we have).

One critique deserving a response is whether including a minimum and maximum price on allocations somehow proves a failure of the cap system.  The idea is if a cap's appeal over a carbon tax is that it determines the total amount of emissions, then the floor and ceiling prove the lack of commitment to determine the right amount of emissions.

Three responses:

1. Doesn't matter anyway unless the price hits the floor or ceiling.

2. It's a little simplistic to say a tax focuses on specific price for carbon while a cap focuses on specific quantity of carbon emissions.  The floor and ceiling for a cap just lets society choose a tradeoff between price and quantity.  You could do something similar with a tax by letting the tax price change if total emissions fall through a floor or above a ceiling.

3. If greenhouse gases were as easy to eliminate as ozone-destroying chemicals then we'd have a similar schedule for phaseout.  It's not that easy, so we're doing things less quickly under either a carbon tax in Australia, or cap in Europe and in parts of the US.  Putting a floor is an indication that we overestimated the difficulty in achieving a reduction and therefore will require a larger reduction.  It's actually good news, that we can achieve reductions more quickly than anticipated.