Paul Krugman Explains Cap & Trade

I am so tired of watching the sleazy commercials by American's for Prosperity (they care only about their own) against Cap & Trade in addition to their lies about a new healthcare fill. Their latest ad campaign is meant to scare consumers about the cost of electricity. If there is no climate left, there will be no people left who require electricity. We can all cut back if it gets too expensive but it is a cost well worth it to save the earth, humanity and our precious plant and animal species.

By Krugman
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A tax puts a price on emissions, leading to less pollution. Cap and trade puts a quantitative limit on emissions, but from the point of view of any individual, emitting requires that you buy more permits (or forgo the sale of permits, if you have an excess), so the incentives are the same as if you faced a tax. Contrary to what Hansen seems to believe, the incentives for individual action to reduce emissions are the same under the two systems.
This is true even if some emitters are “grandfathered” with free allocations of permits, as will surely be the case. They still have an incentive to cut their emissions, so that they can sell their excess permits to others.
The only difference is the nature of uncertainty over the aggregate outcome. If you use a tax, you know what the price of emissions will be, but you don’t know the quantity of emissions; if you use a cap, you know the quantity but not the price. Yes, this means that if some people do more than expected to reduce emissions, they’ll just free up permits for others — which worries Hansen. But it also means that if some people do less to reduce emissions than expected, someone else will have to make up the shortfall. It’s symmetric; there’s no reason to emphasize only one side of the story.
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Read it here.