Monday, May 18, 2009

Krugman Part II: Taxes vs. Cap and Trade

Krugman argues that cap and trade is better than taxes, particularly from a verification perspective. He points out that it is going to be difficult for anyone to check whether a specific firm in China was taxed for its carbon emissions or not, but it will be easier to verify that the total emissions have been reduced by China if they relied on the cap and trade mechanism. It is not clear to me how the verification of whether a given firm has actually paid carbon taxes (which should be in the company's financial statements, presumably) is more difficult to verify than whether the same company did actually do the activity that enabled it to get the carbon credits to trade (This would likely need a full scale carbon audit). While I am in favor of cap and trade over carbon taxes, verification does not appear to be a factor that favors cap and trade over carbon taxes.

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