—William F. Buckley, Atlanta Journal, 1986

Importance:  Cap and trade, puts the same price on oil as coal, thus ignoring security issues. This discourages cooperating between the two energy camps.

  Q:  Wouldn't OPEC just take advantage of a price floor and raise the world price to that floor?

  Q:  Or, as Prof. Hogan of Harvard put it: "Over the years, I have often heard the objection that a price floor changes the elasticity of residual demand facing a monopoly OPEC, and makes it easier to raise prices up to the floor."

  A:  This is the most frequently asked question about the book, and it is likely the most important. The side-bar on page 249, "Fighting OPEC's Market Power" mentions this problem and concludes: "This is an advanced design topic that I will

discuss in more depth on stoft.com." So here we are.

The short answer is this. If OPEC were a monopoly, this problem be severe, but in fact, OPEC is a poorly disciplined cartel, with Saudi Arabia doing all the work (it has a 12%, not a 100%, market share). Because of it's limited power, prices were low from 1986 through 2002. Combine this with the fact that the floor price would be different in different countries, and the problem largely goes away. Still, it remains an important design consideration.

There are three obvious approaches to taxing:

1. a Pigouvian tax = $ / ton of carbon  (price fluctuations are unchanged)

2. an sales tax = % of price  (price fluctuations are reduced)

3. a tax that reduces price fluctuations  (say be setting a floor price)

To be continued ...

China and India have nixed caps. Without these caps, Kyoto fails. What can be done?

Carbonomics explains "wrecking" the economy, "peak oil," caps, carbon taxes, and Kyoto.