First, while the natural starting point for both systems is one in which the government collects the entire implied value of emissions, either as tax revenue or as the proceeds from auctioning permits, the emissions trading system allows for (but doesn’t require) free allocation of some permits. Particularly in transitional stages when not all sources are covered, this can be used to offset unanticipated distributional consequences of the scheme, and thereby increase its political feasibility. Obviously, if you’re strongly opposed to any compensation of existing emitters and are prepared to risk total failure rather than concede this point, this is a disadvantage rather than an advantage. (It’s important not to issue too many free permits as was done with the first round in the EU, but some limited issue might be beneficial. I don’t want to overstress this point as much the same outcome can be achieved by paying cash compensation out of tax revenue.

Second, since we are uncertain about the elasticity of demand for emissions we are faced with a choice between allowing this uncertainty to be reflected in uncertainty about reaching the targeted level of reductions in emissions, uncertainty about the price, or some mixture of the two. Given the risk that we will fail altogether if individual countries fall short of their targets, I’d prefer some uncertainty about the price

Third, and most importantly, the ultimate solution has to be an international agreement to reduce emissions in the most cost-effective way possible. The obvious way to do this is through the creation of international markets for emissions permits. Although a full-scale global market might be some way off, regional or multiregional markets linked through something like the existing Clean Development Mechanism could be set up reasonably easily. By contrast, I can’t see how, in a world of sharply varying exchange rates, it would be possible to set up a co-ordinated global system of carbon taxes.

And in response McKibbin says to that:

a global carbon market is a theoretical construct that cannot in my view survive a change of major governments over the political cycle in major countries or given the shocks that we don’t know yet will occur.

But why, asks Ian Gould, does McKibbin believe that the hypothetical carbon market is fundamentally different to the CFC-regulation model set up under the Montreal Protocol?
As Gans observes, McKibbin has tried from before Kyoto to develop an argument that would secure political support for his scheme, but has not yet succeeded in that job anywhere in the world.

Those who advocate carbon taxes rather than emissions targets and tradeable permits schemes, have to put up or shut up on negotiating the price or tax. Anyone who advocates a carbon tax has to put up on three questions: 1) When it starts and at what rate 2) How it would change over time and 3) How it would be negotiated internationally, given where we are in global climate change negotiations. And when they do, they had better name a price that bites, not a mickey mouse Nordhaus price (A Question of Balance, p 15) that that will shift nothing, if they really mean it to have effects.

As Quiggin says, most of us would prefer uncertainty about the price not the impact, and that is why he goes for targets and an emissions trading scheme like that the Garnaut report proposes. That is what the choice is here.

The world has already gone a long way down the track towards an emissions trading system (with some modest hybrid elements) and this is the way we are going to go. At this point, it’s more important to push for urgent action (with the phase-in that Garnaut has proposed in developing an emissions trading scheme) than to get hung up in disputes about the details and who’s purer than whom.