A tax on energy use would be a better way to fight pollution than the proposed emissions trading scheme, according to RMIT economics professor Sinclair Davidson in a recent article in The Age. Davidson says that the positioning of the emissions trading scheme as a “market solution to a market problem” is a “clever piece of rhetoric that has long escaped scrutiny.” He argues that the people who are proposing the trading scheme are usually not free-market enthusiasts, and they are misusing economic terminology.
“The climate is not produced in a market, nor bought and sold in a market, nor can governments subsidise production of the climate,” says Davidson, who goes on to argue that one of the chief reasons for the popularity of the emissions trading scheme with the government is that it is a non-transparent form of taxation, a way of raising taxes without accountability. He argues that an energy consumption tax would be a more efficient way of addressing the issue of “carbon pollution”.
I think Davidson is overlooking some of the possible features of an emissions trading scheme. If the goal is to create a system in which the total amount of net carbon dioxide emissions is a particular amount, it makes sense to issue “credits” for that amount and auction them off to the highest bidders, while at the same time awarding extra tradeable “credits” to people who arranged negative emissions such as by planting trees or through carbon dioxide sequestration. Taxation alone would not provide these benefits.