Krugman and Yglesias pile on James Hansen for misunderstanding the carbon tax, but I think they misunderstand his misunderstanding. Hansen’s claim, quite justifiably, is that with a cap reducing your own emissions doesn’t reduce global emissions. Instead, it just gives other people more room to pollute. Hansen also says
Because cap and trade is enforced through the selling and trading of permits, it actually perpetuates the pollution it is supposed to eliminate. If every polluter’s emissions fell below the incrementally lowered cap, then the price of pollution credits would collapse and the economic rationale to keep reducing pollution would disappear.
This is also correct. What Hansen misses is that both these effects work in reverse.
Suppose I decide that I really don’t care about the climate one bit and I am so rich that I don’t care about the tax. I am going to pollute to my hearts content. Under a pollution tax scheme this rampant polluting on my part is not offset by any reduction in polluting by anyone else. The pollution tax remains the same and my pollution is simply added to what would have otherwise existed. Under a cap, however, I may be polluting to my hearts content but I am really just driving up the price for someone else, who will be forced to reduce.
Similarly, suppose the demand for power skyrockets as the population grows. With a tax the incentive to move away from carbon is overwhelmed by rapidly growing demand and carbon levels would rise faster than projected.
With a cap, however, a surging economy produces a surging demand for permits and an increased incentive to move away from carbon.
Hansen is right about both effects, he is just missing that they work in either direction. The carbon reducing potential of greater conservation and lower energy demand are undone by a carbon cap. However, the effects of less conservation and greater energy demand are also undone by a carbon cap.
The tax results in stable incentives, but the cap results in stable environmental effects.