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It’s simple. It’s easy to enforce. And it provides the right incentives to polluters as well as inventors and engineers working to develop cleaner technologies. -
A cap and trade policy gives business greater certainty about future costs. It also puts a limit on emissions and is more likely to result in a real reduction in greenhouse gases.
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Ed. note: Our climate change debate engendered a lively conversation among readers that pushed the original essays well beyond their starting points.
Gregg Easterbrook
Why we need a carbon tax
It’s a three-letter word that starts with “t,” ends with “x.” Go ahead, don’t be afraid to say the word—“tax.” The simplest, most efficacious, least bureaucratic, and best-for-the-nation initial move against greenhouse gas buildup would be a carbon tax.
This is not a liberal nostrum. Economist Martin Feldstein, once President Ronald Reagan’s chief economic advisor, has been advocating a carbon tax for nearly 20 years. In 2007 N. Gregory Mankiw, former chief economic adviser to President George W. Bush, threw his weight behind the idea, saying that a carbon tax “may be the closest thing to a free lunch that economics has to offer.” Here are the main arguments for a carbon tax:
- Such a system would be far less complex than any cap-and-trade scheme. The McCain-Lieberman greenhouse gas cap-and-trade proposal, which drew 43 votes in the Senate in 2005, was 491 sections long. And that was just the authorizing legislation, not the tens of thousands of pages of administrative orders required to put the bill into force! The Obama plan is likely to be equally complex by the time it wends its way through Congress.
- Because carbon cap-and-trade systems are inherently super-complex, they are nearly certain to be “gamed“—defeated by gimmicks, litigation, and special-favors lobbying. Lawyers will always think of pretexts faster than regulators can repair flaws in the language of complex regulation. America’s approach to environmental regulation is already too steeped in litigation. A carbon cap-and-trade system would make this problem worse.
- Whatever you tax, you get less of. Today America mainly taxes labor and capital—but we want more of both! We don’t want more carbon, so let’s tax that instead.
- Owing to simplicity, enforcing a broad-based carbon tax is imaginable. Enforcing a broad-based carbon cap-and-trade scheme is hard to imagine.
- If carbon is taxed, individuals—not government—will make the decisions about greenhouse-gas reduction strategies. Individuals have a much better track record at economic decision-making than government does.
- Carbon taxes will offer a clear, easy-to-understand profit incentive to those who devise carbon-reduction technology—so inventors and engineers will get to work. Conversely, cap-and-trade programs will offer an incentive to game the system; so pollsters and lobbyists will get to work.
- The only policy failure concern about a carbon tax is that individuals and firms will simply pay the tax rather than reduce emissions. This is possible, but unlikely: experience shows that individuals and firms change behavior to reduce taxation.
But isn’t it totally and utterly politically impossible to enact a tax? Perhaps in the 1990s, when the federal budget was in surplus. Today the federal government is on the worst borrowing binge in its history—the national debt has doubled in a decade! Voters are not fools; they know little twinkling fairies will not come in the night to replace all the borrowed money. Debt must be repaid, and a carbon tax, which would create net benefits to society, may look a lot better to voters than other possibilities.
Carter F. Bales and Richard D. Duke
Carbon caps are better
There are two main contenders for constraining carbon emissions: caps and taxes. Both are market-based approaches that put a price on carbon and other greenhouse gases and provide an economy-wide signal to encourage emission reductions, beginning with the lowest-cost opportunities.
The main difference between the two is that a pure tax fixes the price of carbon (but allows the amount of carbon emissions to vary) while a pure cap places limits on carbon emissions (letting the market price of tradable carbon allowances vary). We argue that a well-designed cap with certain tax-like features is the most efficient strategy to radically reduce emissions. This approach has four advantages.
First, a well-designed cap offers superior investor certainty relative to a tax because it establishes clear, long-term abatement requirements and allows the private sector to estimate the allowance prices needed to get the job done. In contrast, a carbon tax would likely start too low given political pressures and it would be exposed to unpredictable adjustments, as politicians would tend to raise or lower the tax in reaction to economic conditions. A well-designed cap should also include specific tax-like provisions.1 Most important, the government should purchase and delete allowances if the price falls below a gradually rising floor.
Second, a cap on carbon provides more fundamental environmental certainty than a tax, because it is, by definition, a fixed limit on emissions and because the political process to define a cap is less likely to result in emissions loopholes. In particular, the political horse trading involved in defining a cap centers on distributing a fixed number of allowances—with equity and economic productivity implications but with no impact on future emissions levels. In contrast, negotiations to define a carbon tax might result in exemptions for certain sectors, which would allow higher emissions levels.
Third, once carbon caps are in place, all energy consumers share an interest in promoting complementary policies that reduce emissions. For example, all energy consumers will benefit from lower carbon allowance prices if they persuade policymakers to enact and enforce minimum energy efficiency standards for buildings, appliances, and vehicles.
Fourth, carbon caps provide a useful economic shock absorber, since allowance prices automatically soften as soon as the economy enters a recession. In principal, carbon taxes could also be adjusted frequently to make them more countercyclical, but to do this effectively would require an unlikely level of sophistication, objectivity, and alacrity on the part of policymakers.
Experience from the US cap-and-trade system for controlling the sulfur emissions that cause acid rain suggests that a well-designed approach can yield unanticipated cost-reducing innovations. If we do not take action immediately, greenhouse gas abatement costs will rise sharply.
1 See us-cap.org to download the Blueprint for Legislative Action, issued in January 2009 by 25 major corporations and 5 NGOs.
07 May 2010 · 08:42:14 PM GMT
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People
I work in the Energy industry. Oil and Gas and all types of Power Generation. First I would like to say that I am not a liberal or conservative and don’t really care about the coal or green energy industry. What surprises me about this debate is that Corporate America is making a fool out of the American people. Renewable sources are 2 to 3 times more expensive then any other form of energy.
Lets look at this as a consumer of electricity in today’s market place (remember this does not include electric cars). I live in Houston and wanted to move my electricity provider. I checked with Green Mountain energy that is 100% renewable. The rate they offer is 14.9 cents per kilowatt hour. Compared to the 9.9 cents from StarTex. StarTex has 50% coal, 36% gas, 10% nuclear and 4% renewable. So renewables are almost 40-50% more expensive. I know for some people that makes no difference when you look at $/kWh but that is the same difference we see in $3.00 gasoline and $4.5 gasoline.
Now lets imagine a world where 50% of American’s generation that is coal is made more expensive with Cap and Trade or any other system. Wipe out that supply from the market. Start adding electric cars to the current electricity grid that can barely manage the current load and start funding these renewable projects from our tax money. Yes none of the renewable projects can run without significant tax breaks or grants. Any renewable producer will get 30% of its investment in grants from the Treasury within 60 of their application. That is your money for them to use and make a quick buck.
Now lets look at other elements.
1) One big wind farm has around 100 of those monster towers that can only produce a total of 150MWs. They take up 15 or 20 times more land then any other type of facility and produce less energy then one turbine in a natural gas plant. To give us some comparison, one turbine is equal to a jet engine of a plane. So that one jet engine is equal to 150MW vs 100 of these wind turbines.
Well I can keep going on this topic for a long time, but the bottom line is that we will need all forms of energy available to us. We need to phase out the current coal plants and not tax the hell out of them. These coal plants need to be replaced by Clean Coal or Nuclear facilities. No other source can make as much power for the right amount of money. If we use Natural Gas we will end up raising the price of Natural Gas equivalent to a $5 gasoline price.
Most power companies are shutting down their coal plants, raising their prices to the end consumer and investing in wind or other renewable and taking that free money from the government. For almost 35 states in the US, electricity is rate regulated. This means that for every $1 that the cost of Power goes up either through investing in expensive projects like wind or by a coal cap and trade, they are able to pass this on the consumer at $1.10 (the make a guaranteed rate of return of 10%). So you are the ultimate payer of all this.
In end I would like to say that I’m not a writer or even a native english speaker so please excuse my errors. I just wanted to throw some light on this topic.
Posted 19 March 2009, 09:53 by A Ahmad
It seems that the main problem we are trying to address is to convert using cheap & polluting energy to clean energy.
Lets keep it simple and try do it fast.
Energy is all around us so how lazy of a species are we not to use it? Why do we have to put other people on a drilling rig to get some black substance from underneath the sea bed or from a 40+ degree celcius desert? Weird.
Task: change the “oil and gas” industry to a “sun, water, wind” industry.
Therefore I propose we increase the price of energy so that it is based on FULL CYCLE use. Eg cost of getting it, using it, and returning it to the environment. It should be paid at one instance, eg when we buy it (prior to using) as in our limited world we do not pay for throwing it into nature (in form of heat, CO2 and the likes).
If price of energy is set higher than current market price we can – use the difference between traditional (petrol, gas, oil) energy cost and price to finance the cleanup and invest in renewables – make renewable investments / business cases more acceptable and attractive to investors – drive out INEFFICIENT consumer behaviour such as oversized cars, houses, food and other energy wasting products
The oil and gas industry can continue as they are or invest in the new industry. Hence a strong signal yesterday by Shell as they are leaving the wind, water, sun industry due to investments not being rewarding.
Once we have left our polluting and non-sustainable lifestyles, we can decrease the price of energy, ban fossile fuels etc.
Call it a tax or call it whatever, we have to: – compensate for our past behavour – change our current behavour – prepare for future behaviour
and make it sustainable
Whatever the choice for tax or cap and trade, we have to put measures in place that change behaviour. This is key.
Also the measures have to be simple, the aim is to change an industry, not to create a new one (the “slowly and painfully change oil and gas industry”).
The good news is that we can return to our wastful energy behaviour once our energy needs are based on wind, water and sun. So lets make the change now before we distroy what we have.
Simplification? No doubt but we need some decisive action.
If we do not, perhaps nature will do it for us.
Posted 19 March 2009, 03:28 by Ruud van Winden, Beijing
Financial penalties will not impact on environmental hazards and disasters. As a tiny little consumer who is not in a manufacturing busines, my comment/protest would be that if a producer emits enough pollution that requires monitoring by the epa or any other organization then SHUT THEM DOWN! ‘Polluter pays’ will have no effect on the amount of waste that is produced. Profit margins will just be redirected. Also shut down all production of plastics for 100 years and then we will have fuel for our cars, less problems with the land fill crises, less estrogen dominant health problems and we wont have to all become vegetarians. Problem solved. And let the people who are responsible for the pollution stand in a dole queue and get a taste of that!
Posted 18 March 2009, 20:41 by helen greville, Australia
Growth of population can`t be limited by a tax in a democracy, only dictators can do that. Energy consumption per capita should preferably go down by many measures such as energy efficiency. Governments should stimulate this to the utmost. The market forces of companies work for the short term, such as 10 years of a discounted cash flow analysis of projects. Governments can stimulate energy transition in taxing use of fossil fuels and use the same amount of money to let develop alternative energy sources, such as solar energy, which is available for ever and is probably the ultimate future, but requires much development work to make it economical. Governments should never cap the use of energy as this is dictatorial and counterproductive.
Posted 18 March 2009, 07:34 by harry bakker
This may be a contrarian view but have we ever considered that this debate is all about $$$$$, funding and smoke and mirrors.
That is not to say we should not be aware and do what is necessary to use technology to get us to as close to zero as possible but which can never be zero as long as cows and humans continue to expel methane, vegetation rots and volcano’s continue to erupt.
There remains a large body of qualified opinion that questions that Global Warming and carbon emmissions are the issue some would make it out to be.
Christopher Bookers article “President-elect Barack Obama proposes economic suicide for US” is worth a read in this context as is the info included in the second link.
telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2008/11/30/do3010.xml
http://mclean.ch/climate/IPCC.htm
Posted 18 March 2009, 01:26 by Norman
The science is good. Those that argue against it have been hiding in a hole.
Carbon tax is simpler. The carbon tax can be implemented easily because you tax it as soon as it comes out of the ground or crosses the border. It is easier and cheaper to administer. It is fair. It is hard to cheat. It can be implemented slowly over 5 years. The consumer has options. The consumer can see it coming. The consumer will have a predictable environment in which to make decisions. We should still have a major education campaign to try to reach those who do not like to be informed so they won’t get too badly hurt by inaction.
Posted 17 March 2009, 22:27 by G. Heintzman
.
In the Middle Ages there was a tax called Indulgences – a ‘donation’ to the church which would, it was said, get you into heaven.
Of course those who paid were no doubt disappointed.
The same will happen with carbon taxes.
Industries will be crippled and economies even more destabilized, but the climate will continue as it has done in the past, get warmer and cooler in cycles.
The temperature has been gradually increasing (with some cooling periods) from the Little Ice Age and we are now at about the average for the last 3,000 years.
Lack of sunspots suggest we are going to get cooler for a few years.
Rob
Posted 17 March 2009, 21:54 by Robert
I am amazed at the comments by so many that the science is weak on climate change. Lets leave that aside – the oceans are acidifying at an alarming rate. Ocean life as we know it is threatened gravely. There is no serious or legitimate debate on ocean acidification. The proven culprit? You guessed it – carbon dioxide emissions. Those who argue for the status quo of dumping our waste into the atmosphere might as well be aiming a loaded gun at their grand children and pulling the trigger.
Posted 17 March 2009, 18:18 by Jon Myers
Cap and trade, definitely. Either option will be gamed, lobbied, and manipulated.
But C&T is a remedy most consistent with how the principal cause of the problem, oil, is allocated via OPEC.
It’s also the system that best rewards and incents solution-finders.
And it best fits with the systems already in place, or likely to be adopted, in other countries.
Posted 17 March 2009, 16:25 by Paul Gallagher
The objective must be to regulate down emissions in line with the guidance from the UN IPCC scientific reports – or at a higher precautionary level. This has worked for ozone depleting substances through the Montreal protocol. We need to separate arrangements for carbon-trading which elegantly reward the more efficient organisations. This would help with public understanding and support.
Professor Emeritus Ross King
CSEM Centre for Sustainability Management
London
Posted 17 March 2009, 16:19 by Prof. Ross King