Jasper: I addressed most of those issues in my print piece on cap-and-trade. It's true that C&T produces price uncertainty, but Rognlie simply asserts without evidence that this is by far the most important consideration in carbon policy. That's a defensible point of view, but you have to do more than just say so. Besides, treating the subject solely from the point of view of finance, as he does, is much too narrow.Let's spell it out more clearly, then. There are three principal disadvantages of carbon price uncertainty and instability:
Ironically, one way to reduce price uncertainty with C&T is.....derivatives! That's how you reduce price uncertainty with any kind of commodity.
Investors deal with price uncertainty all the time, and in any case I think the price uncertainty associated with C&T is much exaggerated by its critics. It's not a reason to reject it.
- By making the returns to investors less certain, they discourage investment in green innovations. As Drum mentions, in some cases this can be alleviated by hedging with derivatives.
- Wild swings in price will make aggressive carbon policy much harder to defend politically. Voters wouldn't have been so angry with $4 gasoline if it had been at that level for years; more than the price itself, it's the sudden pain of a price increase that arouses political opposition. Given how politicians fell over themselves during the recent oil spike with gimmicky proposals to relieve the burden on consumers, you can imagine what will happen when they have the direct ability to bring down a rising carbon price.
- Most importantly, price swings represent a simple inefficiency. If permit prices are $20 per ton this year and $60 the next, you can make $40 per ton by transferring carbon emissions ahead one year, with minimal impact on climate change. Eliminating these inefficiencies enables us to set more aggressive targets for carbon emissions with no increase in cost.
I'm also unsure what possible reason one could have to oppose simple modifications that alleviate this problem, like allowing investors to borrow and save permits. If there is a good argument, I haven't heard it.