Much has been made of cap and trade in the Copenhagen Climate Summit. As I explain in this radio segment on WYPR, cap and trade is not only inefficient, it is fundamentally dishonest. All production results in consumption. The problem with taxing production is that it hides the cost of the consumption decision, so there is no incentive to mitigate our consumption.
While the 'trade' creates the illusion of a market mechanism for the right to pollute, the 'cap' is politically determined or at least heavily influenced in negotiation by powerful stakeholders. There is no well founded reason, for example, why the EU target of a 20% reduction by 2020 is any better or worse than the revised target of 30% reduction by 2020. Therefore, the 'trade' is merely an arbitrage opportunity. It does not actually allocate resources, based on consumer choice, in the same way that a real market would.
Cap and trade is simply a politically expedient way to avoid the tough question, which is this, 'How much economic growth and jobs are we willing to give up to slow carbon emissions growth?' It is true that CO2 emissions as a ratio of GDP has steadily fallen in the last 25 years. This is largely due to the increase in technological intensity and shift from manufacturing to services. However, 85% of energy sources in the U.S. is carbon based and given that energy is the basic input to productive and consumption activities, any scheduled reduction in carbon based energy use implies reductions in consumption, which means reductions in production and hence economic growth, and jobs. There's simply no such thing as a free lunch, no matter what the politicians try to tell us.
No one disputes the importance of the environment. In fact, any system that directly reveals the environmental costs of our individual choices (like a carbon tax) is at least more honest, and certain more efficient than the political laden cap and trade. We should find ways to limit our environmental footprint. We can't do this well until we have an honest discussion of the tradeoffs.