Pigou Club Pigou Club Homepage – an elite group of economists and pundits that promote the use of pigovian taxes

Cap and Trade Incentives

Eric Sutherland wrote a comment:

• "Amongst the many arguements for Pigou taxes, a very important concept often goes unmentioned. The expectation of future taxes creates investment and innovation long before the tax is collected. Consequently, even a very small tax increase phased in over a period of time has an immediate payoff."

I think there is a point to be made about the difference between Pigovian taxes and cap-and trade schemes. If Pigovian taxes are expected in the future people and companies will (or at least some of them) react in the present time. They will buy smaller cars, invest in better insulation etc. But if cap-and-trade scheme is expected the incentives are for the companies to increase their emissions of greenhouse gases. The more they emit now, the more credits they will get in the future. Credits can later be turned into money on the market. It seems to me that even talking about future cap-and-trade scheme could be harmful.