Cap-and-Trade Once Again: The Highly-Intelligent, Thoughtful, and Honorable Tyler Cowen Misreads Robert Samuelson:

Tyler reads this from Robert Samuelson:

Unless we find cost-effective ways of reducing the role of fossil fuels, a cap-and-trade system will ultimately break down. It wouldn’t permit satisfactory economic growth. But if we’re going to try to stimulate new technologies through price, let’s do it honestly. A straightforward tax on carbon would favor alternative fuels and conservation just as much as cap-and-trade but without the rigid emission limits. A tax is more visible and understandable. If environmentalists still prefer an allowance system, let’s call it by its proper name: cap-and-tax.

And writes:

Mark Thoma gets upset at this passage, here is Ryan Avent, Brad DeLong and Matt Yglesias, all upset.  Avent was the fount of the opposition:

Yowza. As any economist worth his or her salt will tell you, a cap and trade plan with auctioned permits is essentially identical to a carbon tax. That also happens to be exactly what Barack Obama is proposing. So, another way for Samuelson to have written this column would have been to title it, “Barack Obama has a good plan to reduce carbon emissions."

But Samuelson is correct here and Avent is misleading.  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.

You can see that we are comparing the "growth threshold problem" to the "environment threshold problem."  Samuelson is apparently more worried about the former than the latter.  Maybe he shouldn't be so sure he is focusing on the right problem, but on the economics he is on the mark in the criticized passage.

I think that Tyler Cowen has misread Robert Samuelson. First, let's give some more of the context:

Just Call It 'Cap-and-Tax': [C]ontrolling greenhouse gas emissions is... hard and perhaps futile.... One of the bad ways [to try to do it] is cap-and-trade.... [Cap-and-trade's] complexity... allows its environmental supporters to shape public perceptions in essentially deceptive ways.... [It's] a tax, but it's not described as a tax. It would regulate economic activity, but it's promoted as a "free market" mechanism.... [I]t would trigger a tidal wave of influence-peddling....

Cap-and-trade extends the long government tradition of proclaiming lofty goals that are impossible to achieve.... [T]he simplest way to stop [greenhouse gas] emissions is to regulate them out of existence. Naturally, that's what cap-and-trade does.... [But i]f we suppress emissions, we also suppress today's energy sources, and because the economy needs energy, we suppress the economy. The models magically assume smooth transitions.... [In] the real world, if... the supply of electricity doesn't keep pace with demand, brownouts or blackouts will result. The models don't predict real-world consequences. Of course, they didn't forecast $135-a-barrel oil....

The idea that higher fuel prices will be offset mostly by lower consumption is, at best, optimistic.... [C]ap-and-trade would tax most Americans. As "allowances" became scarcer, their price would rise, and the extra cost would be passed along to customers.... [G]overnment would expand enormously. It could sell the allowances and spend the proceeds; or it could give them away, providing a windfall to recipients.... Call this "environmental pork."... The program's potential to confer subsidies and preferential treatment would stimulate a lobbying frenzy. Think of today's farm programs -- and multiply by 10.

Unless we find cost-effective ways of reducing the role of fossil fuels, a cap-and-trade system will ultimately break down.... [I]f we're going to try to stimulate new technologies through price, let's do it honestly. A straightforward tax on carbon would favor alternative fuels and conservation just as much as cap-and-trade but without the rigid emission limits. A tax is more visible and understandable...

Tyler Cowen reads Samuelson as making a reasoned argument based on the brilliant Martin L. Weitzman (1974), "Prices vs. Quantities", Review of Economic Studies 41:4 (Oct.), pp. 477-491. Price-based tax regulation puts no limit on how high the quantity can go if we get the price signal wrong--and is to be avoided if having the quantity go too high above the social optimum is very expensive. Quantity-based cap-and-trade regulation puts no limit on how high the price can go if ew get the quantity target wrong--and is to be avoided in having the price go too high above the social optimum is very expensive. These, however, are second-order considerations. To first-order, as Ryan Avent carefully explains, they do the same thing. It is not the case that one way is "bad" and another way "good": the pluses and minuses depend on the balance of uncertainties and the cost of errors.

But this is not Samuelson. Every paragraph Samuelson writes criticizing cap-and-trade can be easily rotated into an alternate universe in which Samuelson criticizes tax-based global warming control plans on exactly the same grounds. For example this:

[C]ontrolling greenhouse gas emissions is... hard and perhaps futile.... One of the bad ways [to try to do it] is cap-and-trade....[Cap-and-trade's] complexity... allows its environmental supporters to shape public perceptions in essentially deceptive ways.... [It's] a tax, but it's not described as a tax [but as a control]. It would regulate economic activity, but it's promoted as a "free market" mechanism.... [I]t would trigger a tidal wave of influence-peddling...

Becomes this:

[C]ontrolling greenhouse gas emissions is... hard and perhaps futile.... One of the bad ways [to try to do it] is a carbon tax....[The carbon tax's] complexity... allows its environmental supporters to shape public perceptions in essentially deceptive ways.... [It's] a control, but it's described as a control but a tax. It would regulate economic activity, but it's promoted as a "free market" mechanism.... [I]t would trigger a tidal wave of influence-peddling...

And this:

Cap-and-trade extends the long government tradition of proclaiming lofty goals that are impossible to achieve.... [T]he simplest way to stop [greenhouse gas] emissions is to regulate them out of existence. Naturally, that's what cap-and-trade does.... [But i]f we suppress emissions, we also suppress today's energy sources, and because the economy needs energy, we suppress the economy. The models magically assume smooth transitions.... [In] the real world, if... the supply of electricity doesn't keep pace with demand, brownouts or blackouts will result. The models don't predict real-world consequences. Of course, they didn't forecast $135-a-barrel oil...

Becomes this:

The carbon tax extends the long government tradition of proclaiming lofty goals that are impossible to achieve.... [T]he carbon tax claims to be a "free market" mechanism, but its real purpose is to regulate greenhouse gas emissions out of existence. Naturally, that's what the carbon tax does.... [But i]f we suppress emissions, we also suppress today's energy sources, and because the economy needs energy, we suppress the economy. The models magically assume smooth transitions.... [In] the real world, if... the supply of electricity doesn't keep pace with demand, brownouts or blackouts will result. The models don't predict real-world consequences. Of course, they didn't forecast $135-a-barrel oil...

And this:

Unless we find cost-effective ways of reducing the role of fossil fuels, a cap-and-trade system will ultimately break down.... [I]f we're going to try to stimulate new technologies through price, let's do it honestly. A straightforward tax on carbon would favor alternative fuels and conservation just as much as cap-and-trade but without the rigid emission limits. A tax is more visible and understandable...

Becomes this:

Unless we find cost-effective ways of reducing the role of fossil fuels, a carbon tax system will ultimately break down.... [I]f we're going to try to restrict carbon emissions, let's do it honestly. A straightforward cap on carbon emissions with tradeable emissions permits would favor alternative fuels and conservation just as much as the carbon tax but without the risk that the tax gets set too high. A global cap on emissions is more visible and understandable...

The Weitzman (1974)-based discussion is worth having, and is important. But that's not what Samuelson is doing, is it? I don't see a single word of argument in there about how the risk that the price will go too high is more worth guarding against than the risk that the quantity of emissions will go too high. Do you? All I see are rants about how environmental controls are big government and big government is bad and we never should have passed the Clean Air Act or established the EPA in the first place.

Why oh why can't we have a better press corps?