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Carbon Tax V. Cap and Trade: The conversation

20 March 2009

Our climate change debate engendered a lively conversation among readers that pushed the original essays well beyond their starting points. One side advocated a carbon tax (argued by Gregg Easterbrook), while the other side proposed a cap-and-trade plan (argued by Carter Bales and Rick Duke.) Community response provides a nuanced look at the issue, revealing far more facets than our starting points uncovered. In his defense of the carbon tax, for example, Easterbrook makes the case that a tax is simpler and less prone to gaming by lobbyists, legislators, and the market players. Many readers pushed back:

“ . . those arguing that a tax is less likely to be gamed should read our current Byzantine tax code and note the very healthy industry that exists around both lobbying for tax credits and exemptions and then helping people get around the existing code through crazy schemes!” — RogersCQ Weed
“Most proponents of the carbon tax understate the complexity involved in implementing it. The cap-and-trade bills are lengthy and complex because folks have thought long and hard about how to implement [them]. . . . Once proponents of a tax have addressed comprehensively these issues then they might have a basis to say that it’s simpler.” — Julian Turecek
“Simpler is not always better. Simpler is better only when the same goal can be achieved and better results delivered. The first car in the world was not favored by people who were accustomed to [a] carriage simply hauled by horses. And few people understood the advantage of the world’s first computer . . . over the then easily used abacus.” — Vivi Lu

Bales and Duke argued that a cap-and-trade program provides greater price certainty, because long-term abatement levels would be known and the market would quickly price the cost of meeting them. Many readers were skeptical:

“Putting a price on carbon is useless if future carbon prices are uncertain and/or extremely volatile. Unless there is certainty about future carbon prices, critical private-sector investments in low-carbon technologies will be delayed. Europe’s experience makes it abundantly clear that carbon markets will need decades to mature to a point where prices are relatively stable. A weak price signal is a useless price signal.” — William Pentland
“ . . . the market for emission credits or investment projects that cancel emissions will fluctuate with both the level of overall economic performance and the creativity of entrepreneurs to identify viable alternatives.” — Jose Tormo
“It does not make sense to pay for the costs of one externality, carbon emissions, by creating what amount to essentially another externality, the costs of administering and policing a cap-and-trade system.” — Tota Mukherjee

Readers also brought up points that weren’t part of the kick-off debate essays. For example, several readers pointed out that cap and trade was successfully used to reduce acid rain, but disagreed about whether it would work for carbon:

“The US acid rain problem was solved using this mechanism and there is no reason why it wouldn’t work for CO2.” — Mondher Ben-Hamida
“Reducing CO2 emissions is a problem several orders of magnitude bigger than reducing sulphur.” — Bernardo Neri
“Previous C&T programs for other emissions worked due to a controlled technology being available to reduce the emissions and control costs. There is no viable control and sequestration technology for CO2.” — Steve Jackson

Others were doubtful that any plan could be effective that was not global:

“Carbon is a global issue, and as such needs a coordinated global solution. To get 200 plus countries to agree to a common carbon tax that doesn’t change through the next 50 years will be impossible. As such a carbon tax doesn’t meet the need to address a global issue with global solution.” — Oscar J.
“Cap and trade has worldwide support and the emissions problem is a worldwide one-so let’s create a US plan that uses market mechanisms acceptable worldwide and could be synched up with plans of other nations.” — Bill Nieman
“A worldwide agreement (Copenhagen 2009) on which system to adopt will be far more effective than bickering over the “ideal” system.” — Chris Vansnick
“ . . . if the OECD has CO2 costs and China does not, then CO2 regs are just a massive wealth transfer to China. More importantly it will lead to higher CO2 emissions globally as they just shift production from relatively more efficient OECD plants to less efficient Chinese facilities. The argument that the US needs to lead on GHG regs and then the rest of the world will follow is naïve.” — David Gee

The debate was, of course, tempered by today’s economic climate as readers raised the issue of staying competitive in a time of economic strain and evaluated how the alternatives might contribute to innovation in a post-crises economy:

“The pure attraction of a cap is that it sets a target against which emissions performance can be measured and reported annually, and policy settings adjusted, in order to manage down the cap year on year. . . . this will facilitate more coordinated action by business and use the beneficial power of the markets to drive innovation and reward achievement.” — Bill Royce
“Cap and trade gives positive incentives for innovation, taxation gives incentives to minimize taxation liability, not the most effective way to stimulate positive behaviour.” — Terrance Barkan
“Both systems will encourage innovation as both place cost on emissions. A flat tax ensures as far as possible that innovation will be systems based or research based, and not merely sleight of hand.” — Richard
“The carbon tax is an old world, domestic approach to addressing a new world, global problem. Innovation is in order, along with gradually increasing limits on GHG emmissions. Cap and trade gives corporations flexibility in the way they deal with imposed limits, while creating new revenue streams [for] those who aggressively innovate.” — Doug Hoover

Finally, a significant number of respondents disputed the notion that climate change was a problem requiring a major policy fix.

“This world has real problems-nuclear armed North Korea, economic recessions, hunger, crazy terrorists, Vladimir Putin, etc.; let’s not make up problems we don’t have or we can have little impact on.” — John Passyn
“It doesn’t matter what you call it, it’s a tax. When Louisiana decided to implement a lottery, my late brother-in-law likened it to paying your “stupid” tax. When you’re worried about global warming after we just saw a record low temperature of -50F in Vermont, I’d say that’s a pretty good name for it.” — David Sims
“I am amazed at how easily the leadership of this country has given up on the science and is now focusing on costly policy making without a sound basis. The science debate has not been settled. Our climate models have large errors and cannot yet be used as forecasting tools. More work is still required. I refuse to vote on carbon tax or cap and trade at this time. We are not there yet.” — Balvy Bhogal-Mitro
“Climate change has clearly become a political issue, not a scientific one. Never mind the degree of climate change, or even if man is the cause of climate change, we burden our economy with ever greater penalties in pursuit of a poorly understood objective without regard for the cost.” — Paul Kleinen

Clearly there is no consensus around either market-based solution as the landscape continues to shift with the economy. What do you think?

Editor’s Note: Thank you all for your contribution to this conversation. Passions obviously run high on this topic. While we encourage the expression of all points of view, we ask that comments focus on the merits of the arguments.

Please also note, as we prepare to introduce a new debate topic next week, comments on this article were closed on Friday, March 20, at 5 p.m. EDT.

Comment [43]

Agree? Disagree? Let us know what you think. Please include your full name with your comment. Comments may be edited.

As a system, humans are part of Earth, and Earth is part of humans. Thus, if humans don’t take care of Earth, then, Earth won’t take care of humans. Energy is always in balance.

Posted 20 March 2009, 13:56 by Andrei Garcia
Scientists throughout the world disagree on global warming and man’s role in climate change. Let us not forget that many of them are funded by groups with a political agenda, so their “research” is biased. This is well defined in Michael Crichton’s great book “State of Fear”. Politicians have no power unless they create fear among the public, as they are doing with the current economic crisis.

Posted 20 March 2009, 11:37 by Rocco Belmonte
Sorry I did not have time or money to read or buy the book “The Weather Makers”, but please read my point of view about the Climate change with an open mind, there may be something that could trigger your thinking.

Climate Change; is it really a cause of Human behavior towards their development! Not really. The earth is not facing a climate change for the first time, and it is not going to face it for the last time. There are proofs that countries that were once filled with volcano’s have now become countries with cold weather. If global warming is going to be because of high generation of Carbon di Oxide which is a green house gas, then what about generation of water vapor, even water vapour is a green house gas, and earth is 3/4 filled with water, and there is a huge amount of water vapor being generated every day from the sea; are we going to stop all the water vapour from evaporation? More over the atomic mass of CO2 is higher than H2O, so CO2 should be heavier than H2O, and should remain within the atmosphere. Is the entire world thing of moving from generating Carbon di Oxide to generate water vapour (fuel cell technology) does it mean that we are not producing any green house gasses???

It is something more or different than what we normally think. We as a human as we are living within the system we find it difficult to think out of it. Since all the KYOTO protocol and Carbon footprint, Carbon management say that CO2 generation is causing this global warming. It doesn’t mean they are correct and CO2 has an effect on global warming. Just question yourself? Did anyone take samples of air in the troposphere or stratosphere to confirm it? Don’t know. We should have studied in out schools that Mass in= Mass out+ Mass accumulated. So is there anything from the space is polluting the earth? Don’t know. If not, then all the CO2 that is being generated is only generated from the earth but it is a combination of Carbon and Oxygen existing in a different form. For everyone’s information, even if we are not taking the Crude oil from the ground, it will find its way out to the surface in one way or another when the earth’s plates move. If anyone thinks that use of petrol is the main reason for the global warming, then another question arises, are we going to stop the crude from seeping out from the ground? If we couldn’t then it is again pollution. The problem is not because of using the crude oil, the problem is how we are using the crude oil, and it is not the reason for global warming, but it is a reason for global pollution. For which the research and developing technology should come up with an answer. Ther are research proofs that say, that sun has a major impact on the temperature rise on the earth. Everyone knows that sun is the biggest source of energy near to earth, and all our climatic conditions are dependent on sun. FYI When ever there is an increase in the amount of explosion of the sun’s spots on it surface rises the temperature of the earth also rises, so my point is, why don’t we think that sun is the reason for global warming? Is anyone going to say no? I am not saying that global warming is not an issue that should be worked out on, do the research, learn how things change and record it, it will be useful for our future generation to learn from it. Treat global warming as a global issue not a polical issue or a business issue, for governments and companies finding it as a chance to extract money from the public. We should work on the ways to reduce the pollution, but not tying CO2 generation with global warming, instead of global pollution.

Posted 20 March 2009, 09:41 by Bhavani Vijayakumar
Consumers hold the power and the power should exercised through product labelling. While Fairtrade is increasing in popularity, most consumers will have no direct contact with those communities they are supporting. On the other hand, climate change will directly impact us and our children. Thus the impetus for consumers to make concious choices to avoid climate change is strong. Products should include a carbon rating or even a “greenhouse factor” on their labels (since climate change is about more than just carbon output!). A rating that allows consumers to make choices between purchasing products that are more or less harmful (in terms of production) for the environment.

Posted 19 March 2009, 11:38 by Derrick Khan
With the glaciers melting, whichever method we can implement faster, we should. The citizens of Miami (and many other sea level areas across the globe) will thank you. And if we think we have geopolitical problems over oil, wait until Asia doesn’t have enough water for agriculture.

Posted 19 March 2009, 09:07 by Michael Baker
I believe that in order to get more validated opinions on the issue at hand (C&t vs tax), it is necessary to have an understanding of the problem it is meant to tackle. The benefit of implementing caps is that targets will be progressively lowered. It seems to me that unless those voting understand the very nature of global warming and the urgency for CO2 concentration turnaround before we reach a tipping point, there will be little support for a measure selected to address the difficulties of the problem we are facing.

It might be relevant to mention that models do display great uncertainty, however evidence has shown that it lies in severe underestimation of future temperatue rise.

Posted 19 March 2009, 06:19 by Leyla Stender
I find the level of complacent ignorance on climate change truly stupefying. Global warming does not mean that everywhere gets warmer. It means that the average global temperature increases. As a result there is more available energy in the climate system and therefore increased variability and greater extremes of temperature, precipitation, and wind. What the future climate will become will remain unknowable until well after the tipping point has been passed. Up until 6 months ago there were still vociferous statements being made from the financial sector, based on financial data, that a recession was not coming. Now the financial sector is claiming expertise in judging climate data. The global econo,y is chicken feed compared to the climate. However, the last time I looked there was not one published peer reviewed paper that argued that current climate change was not anthropogenic in origin. On the other hand there were nearly 900 that said it was. The “scientific debate”, whatever that might refer to, will never be over, if it actually exists at all at the moment. This is because science is the process of people trying to replace flawed models with less flawed ones. The Theory of Relativity is approximate. E does not exactly equal MC2. But Hiroshima did benefit from the absence of 100% scientific accuracy. Climate models can never be finalised until the climate once again achieves a period of stability, a time that is perhaps 1,000 years into the future at current estimates. Of course curent climate models have large errors. But all the data in all the models points in the same direction and each new revision paints an increasingly bleaker picture. There is no data pointing in the opposite direction and no serious science either. The Captain of the Titanic also wasn’t 100% certain that there were icebergs around. His actions too were guided by money and ignorance rather than common prudence and the advice of true experts. This is not a conversation about sunnier summer holidays but about the food chain aka the particular ecosystem of which we are a part.

sincerely
robin
www.phoenixchange.com

Posted 18 March 2009, 16:56 by Robin Greaves
Regarding the arguments against the carbon tax summarized above, if that’s the best cappers have by way of rebuttal, they should fold their hand and stop prolonging this.

To those who say a tax would also be gamed, OK, but the point is that there is less chance of that. (See below.) To those who say it will be more complicated, it is just not conceivable that it could be more complicated than setting up a whole trading system and continuously auditing companies. To those who criticize that simpler isn’t always better, OK fine, but in this case it is.

Some of the responders here have strange ideas about how this tax might work, and maybe that is the basis of their objection. Here’s my take. There are only a finite number of companies with a finite number of oil wells and coal mines. The tax would apply to these companies at the wellhead/coal face. From there, the higher priced carbon would work its way through the economy, and the market system would take over, allowing cheaper alternative energy to compete its way to the fore.

In addition, there would be a schedule of increases announced for 25 years into the future, with the tax rising steeply over that time. Everyone would see the writing on the wall, and plan accordingly.

I would in addition propose a new trading regime whereby trade would be relatively free among carbon taxed countries, but there would be punishing duties against imports from non-carbon taxed countries.

Posted 18 March 2009, 15:37 by Dieter Heinrich
A carbon tax is absolutely the better approach. Not only would it avoid the evasion and market manipulation that are inherent to a cap and trade scheme, but it would also incentivize the creation of new, climate-friendly technology. The only downside is possibly its greatest strength: it’s transparent, straightforward and called what it is: a tax.

Posted 18 March 2009, 11:22 by CTF
The “2009 INTERNATIONAL CONFERENCE ON CLIMATE CHANGE – NEW YORK, 10-12 MARCH” was created by the “Heartland Institute”; hardly a scientific organization. It was a mishmash of scientists that are not trained in climate science nor work in the field. If you really want to know the latest on climate change read the paper Joel B. Smith et. al., in the current issue of the Proceedings of the National Academy of Sciences (one of the most prestigious scientific journals in the world). http://www.pnas.org/content/106/11/4133.full

Now go stick your heads back in the sand…

Posted 18 March 2009, 08:28 by P McCann

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