Cap and Share - Economic Assessment

Economic Assessment

If the future were known with certainty, then the economic implications of Cap and Share would equal the economic implications of a carbon tax with lump sum recycling—that is, the carbon tax revenue would be used to send every household a cheque in the post. Some argue that lump sum recycling is an inferior way to recycle the revenue of environmental taxes, and that this has been repeatedly confirmed for Ireland. The rationale is that with the carbon tax revenue coming into government coffers, it could be directly spent by the government rather than distributed to the population via cheques, and that other kinds of taxation, such as labour taxation, could be decreased correspondingly. It is argued that this would have a positive effect on GDP since there would be a greater incentive for firms to increase employment, and that it would also positively affect social equity, since labour taxes are regressive by nature.

The NGO that developed Cap and Share, Feasta, argues that while it is definitely a good idea to shift the tax burden away from labour and towards capital, a carbon tax is not the optimal instrument for this purpose. Carbon taxes do not establish a predictable level of emissions cuts, unlike a cap, and can be vulnerable to short-term political pressures such as an increase in the price of oil, since a country's tax policy is usually adjusted each year in the annual Budget. Feasta suggests that if a carbon tax were to be introduced, it would work best in tandem with Cap and Share. The two policies could be used to help countries fine-tune their responses to climate change and Peak Oil.

Feasta also advocates the introduction of a land-value-based tax, which they believe could be used as a substitute for taxation on labour and could therefore have a similar effect on the market to a carbon tax.

As the future is not known with certainty, some argue that cap and share has all the drawbacks of quantity-based regulation for a stock pollutant. In the case of greenhouse gas emissions, the argument goes, price-based regulation (incl. a carbon tax with lump-sum recycling) is more robust to uncertainty and leads to lower welfare losses. Again, however, Cap and Share advocates argue that the problem of assuring that specific emissions targets are reached is not properly addressed by using a purely price-based mechanism for emissions reduction. From their perspective, a definite, substantial decrease in greenhouse gas emissions, carried out in an equitable way so that the poor are not adversely affected, is well worth a possible decrease in "welfare" as measured by GDP (a highly problematic instrument for measuring wellbeing).