Cap and trade vs. carbon tax (updated)

I pointed out here that in theory cap and trade systems and a carbon tax give the same result. Now Tyler Cowen at Marginal Revolution argues that in practice they are not the same. He writes

When there is uncertainty about the location of the social optimum, and uncertainty about elasticities, a carbon tax and cap-and-trade are by no means equivalent. If you see very high costs from setting the binding cap too low and choking off growth -- as Samuelson mentions -- you should prefer the carbon tax. The price of carbon is more certain and you bear less risk from uncertainty about how fast solar power and other technologies will develop. Alternatively, you might say that risk is transformed into price risk rather than "you can't exceed this cap no matter what" risk.

Of course the postulated uncertainties are realistic in this context and you don't have to invoke uncertainty about the science of global warming.

If there is very high environmental risk to having emissions above a certain level, and we are unsure about the relevant elasticities (again, uncertainty about the pace of technological development can drive this), that militates in favor of cap and trade. It is then easier to ensure that emissions do not exceed a particular level.

Over at the Economic Investigations blog Gabriel also argues that in practice the results may not be the same

From my point of view, cap-and-trade should be preferable to carbon taxes for someone really into the idea of reducing carbon emissions (or getting carbon emissions on a politically-determined path, e.g. 1995 levels by 2015), for one simple reasons.

With cap-and-trade, you actually set the level of emissions and the market for permits helps people make the most of that level (the carbon permits go to the most valuable uses — again, under a series of baseline assumptions).

With carbon taxes, you set a per-unit tax and that will, in general, induce a decrease in output, but the exact quantity of the reduction is determined by the elasticities (or slopes) of the demand and supply schedules.

Given that out estimates of supply and demand schedules (in general and of carbon in particular) are plagued by uncertainty, it might turn out very difficult to hit a particular reduction, indirectly, via the tax.

Tyler Cowen also tell us that Brad DeLong sums up the difference between cap and trade and carbon taxes in the following way:

I would say that to first order cap-and-trade and carbon taxes are the same, that there are five first-order differences:

* Cap-and-trade involves less redistribution because the losses of the losers are partially offset by their initial awards of tradeable permits.
* Cap-and-trade runs the risk that the cap will be set at the wrong place and so the price will go damagingly above its social optimum value.
* Carbon taxes run the risk that the tax will be set too low and so the quantity emitted will go damagingly above its social optimum value.
* Carbon taxes have the advantage that the government gets money that it can use for good--either to cut existing taxes that have large deadweight losses or to expand underfunded programs that have large social benefits.
* Carbon taxes have the disadvantage that the government gets money that it can use for ill, and that the recipients and beneficiaries of that ill-used money will then dig in and defend their rent-seeking gains beyond death itself.

and that there are two third-order differences:

* It's easier to get not-too-bright Republicans to vote against something that is actually in their long-run interest if you can demagogue it by calling it a tax.
* It's easier to get not-too-bright Democrats to vote for something that actually is not in their long-run interest if you can demagogue it by claiming that it's just a restriction on the behavior of corporations and not something that directly impacts people.

Update: See also Arnold Kling, Will Wilkinson and Megan McArdle.