Will dogs survive in cap and trade?
Most people argue that European and American politicians prefer cap-and-trade over tax because taxes are unpopular with the electorate. There is another benefit to cap-and-trade: by using an cap, the problem of demand elasticity is avoided. A post on Free Exchange today mused whether dogs or SUVs have bigger carbon footprints, and then said that if you tax their emissions then it doesn’t matter, because the market will decide which is worse.
Dogs and SUVs (dogs particularly) are quite elastic. When the price is increased, consumption does not reduce to the extent that would be expected. You are left with a pile of tax revenue, but there are still lots of SUVs and (allegedly) carbon intensive dogs out there. With cap-and-trade, on the other hand, the market is not given the option of simply paying for emissions (by cutting back on some other, potentially low-intensity goods). Refusing to reduce emissions under a cap-and-trade scheme drives the price of allowances so high that something has to give.