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I wrote a while back about how the Obama administration was advocating for some policies that are  typically included in proposals for a carbon tax as part of their cap and trade plan. Specifically, the idea of using revenues raised as a tax refund to offset increased costs to end-users.

It turns out, it’s not the only part of the proposed legislation that merges aspects from two policy ideas. The National Journal has a very well-written piece that examines how some of the details of the carbon legislation floating around the Hill actually take the best aspects of the cap and trade and carbon tax ideas. Here’s an excerpt:

The notion of keeping the tax constant and letting quantities vary also fits with the idea that additional carbon emissions have a known environmental cost. In principle, if you set the tax rate equal to that cost, the market can be left to decide what the correct ceiling on emissions should be. Most environmental scientists, however, would prefer to set a ceiling for the sake of extra certainty in achieving cuts of a particular size. The case for this is stronger if the damage caused by carbon emissions has so-called threshold effects — that is, if the damage rises discontinuously once a certain line is crossed, which is a distinct possibility. You set a ceiling to ensure that the threshold is not crossed.

The trouble is, using that approach, the implicit carbon tax may then fluctuate so much that it disrupts the economy and makes energy planning for the future more difficult. Moreover, the logic of threshold effects is a little dubious when you are setting limits for the U.S. economy in isolation. Global carbon emissions, not national carbon emissions, drive global warming. The United States can set a quantitative ceiling for its own emissions, but even if it complies with that target, emissions elsewhere will decide whether a critical global threshold is crossed.

The draft bill actually envisages a compromise between the two approaches. It would create a “strategic reserve” of extra permits that could be allocated to prevent “unexpected allowance-price fluctuations.” If this reserve were of sufficient size, and if it were used to hold the prices of permits steady at a specific amount — say, $20 per ton of carbon — then the result would be akin to an outright carbon tax set at that rate. If the architects of cap-and-trade have something along these lines in mind, the case for cap-and-trade over an explicit carbon tax collapses, and vice versa: The two become one.

If cap-and-trade were administered this way, the only remaining differences would be whether you use the word “tax,” and how much cover you give to Congress in creating and disbursing pork.

[National Journal]