Ramesh, McCain is completely disingenuous if he argues that he prefers a “cap and trade” program to a carbon tax because the latter would function as a gasoline tax. The simple fact is that either program would function as such a tax and increase gas prices for consumers. There is also no evidence that a “cap and trade” program would produce greater “green” innovation within the energy industry than a carbon tax. Either approach would create economic incentives to develop less carbon-intensive energy sources. Yet insofar as a “cap and trade” program fails to cover all emission sources, it will actually generate fewer incentives for innovation and conservation, and could generate greater price increases in those portions of hte energy sector subject to the regime.
There are political reasons to prefer “cap and trade” over a carbon tax, however, as it may generate less political opposition. A “cap and trade” program imposed on industrial energy users would impact consumer prices indirectly, diffusing the political costs of such a program. A tax, on the other hand, even if imposed upstream, is still a “tax,” and is more likely to be identified as a cause of subsequent price increases.
Another irony in a so-called reformer like McCain pushing a “cap and trade” program over a carbon tax is that there are reasons to believe that the former is significantly more vulnerable to rent seeking and special interest manipulation. I explained this point in a post last year on the Volokh Conspiracy:
Implementation of a cap-and-trade regime requires many more decisions about regulatory design than a tax regime, and that each decision presents the opportunity for rent-seeking behavior. While a tax can be designed to be relatively uniform, implementing a trading scheme necessarily requires many decisions about how to allocate and value allowances – e.g. are the allowances to be allocated by auction, lottery, or past behavior? If by lottery, how is participation determined? If by past behavior, what behavior counts? What is the relevant time period? Is it purely retrospective, or partially prospective? What metric is to be used to evaluate comparable, but not identical, activities? Must some allowances be discounted in certain sectors to account for monitoring or enforcement problems? And so on. Users of allowances are not the only with something to gain through rent-seeking, those who seek to trade or broker allowances can also capture rents by influencing program design. (This was one of the reasons Enron fought so hard to get the Bush Administration to endorse carbon trading.) Insofar as rent-seeking involves a socially wasteful (and at times, even destructive) use of resources, the vulnerability of a system to rent-seeking should be a relevant consideration when choosing between various policy instruments.
There are arguments to be made in favor of “cap and trade” over a carbon tax, to be sure (though I do not find them particularly compelling), but the one’s you’ve attributed to McCain are not among them. Were it up to me, I would advocate replacing a substantial portion of existing corporate taxes and excises with a carbon tax of some sort, but such choices are made above my pay grade.