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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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- Acumen Fund
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- Social Impact Exchange
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Re-arranging deck chairs on Titanic?
Both policies appear to have merit and maybe a hybrid —- yet again, would be best. Time and again we have seen Mr Smith’s invisible hand at work and, since punishment of excess emitters is impractical, the self interest of tax avoidance would be my choice.
The Titanic reference highlights what we are doing is triage, a slowing of the vessel, the course to the iceberg remains the same. The so-called carbon footprint of each of us here in North America is so huge we could never be voluntarily dislodged. Two to four thousand square foot homes, every adult over 18 in the home having vehicle access, generations of cheap fuel and electricity that make for habits impossible to break. Fully enclosed air conditioned shopping malls – the footprint is massive and according to my kids it had better be in HD with Climate Control. Individually we will not willingly give that up, it will have to be taken.
Maybe we can learn from the drug wars where there has been billions spent trying to control supply, but only tokenism in addressing demand. Demand is not because we are fat cat lazy Americans, it is a direct outcome of how our societies are built. Energy ignorant construction quality, minimal public transit, jobs and homes planned to be 30 miles apart, cheap cars and cheap gas.
Modulating how we service the existing demands will not save us, only wholesale rethinking and validation of the demand itself will give us a chance.
The problem then becomes everything that involuntarily curbs demand will make the incepting politician inelectable
Posted 3 March 2009, 22:26 by Dan Coll
I attended The Summit on the Grand Challenges in Engineering this week and I heard something I thought I would never hear. A Mobil-Exxon exec (Emil Jacobs, VP of Research & Development)saying that it is time for a carbon tax. Clearly if an Exxon exec can say this to 1000 attendees this idea is becoming mainstream.
Another interesting bit of science at this session was Antarctic ice analysis where the small air bubbles in ice cores is used to show carbon content in the air for the last 600,000 years. Carbon dioxide was between 180 and 280 parts per million consistently until the last 200 years. There was a corrolation between cold time periods and low carbon content and warm periods and high carbon content. Carbon dioxide is now 380 parts per million and rising. This is a clear sign it’s time to act.
The carbon tax makes sense because it would be easy to apply to electricity coal would quickly become more expensive than nuclear, as well as transportation. Cap & trade approach when it comes to gasoline…isn’t as straight forward. The tax has to be large enough to make a difference though. Current electricity rates are about $.08 / KWHour in the southeast, these will have to double to make an impact. In the current economic environment this may well have to be phased in over time.
Posted 3 March 2009, 22:15 by Phil Korest
Indeed a carbon tax is easier to manage! Everyone pays and the tax collected can help improve the governmental and state run buildings carbon footprints. Some of the taxes collected on the State level can also fund more environmental friendly schools. In parallel, it is critical to also force polluting businesses to invest in better pollution control equipment. The EPA could easily develop and enforce a regulation that would require businesses to invest in the cleanest technology available in their own industry. This would trigger a virtuous circle of cleanliness where the reluctant and greedy companies would end up paying heftier taxes.
I also believe that consumers should pay higher taxes on their energy consumption. It is easy to point the finger and keep the A/C too low or the heating system too high or to drive 11 miles/ gallon cars. Like recycling at home, every citizen has to pay for his/ her own environmental impact.
Last, we should limit imports from countries or companies that do not prove that their emissions are under control. There is a fine line between forcing American companies to become cleaner and pay a carbon tax and allowing “dirty” imports.
Posted 3 March 2009, 22:10 by PH Chevalier
The objective of both “C&T” and a “C Tax” is to reduce emissions over the longer term. Both enable those who chose to pollute and pay to continue to do so. The burden to reduce emissions then falls on those who cannot afford to pay or those who go out of their way to reduce emissions. Regulation is also needed to drive behaviour for all consumers and businesses. I see a simple “C Tax” and regulation driving construction, transport, agriculture and forestry behaviour coordinated on a international basis as the way to drive change.
Posted 3 March 2009, 22:07 by David Mitchell
I think people need to understand the fundamental reason before we get into this brouhaha of carbon taxes and cap trade systems.
The immediate need of the day is to arrest the climate change and limiting carbon emissions would be an obvious response to that.
I believe Cap and Trade serve this purpose very well. Moreover lawmakers can think of imposing carbon taxes on entities that surpass the cap.This will ensure that instead of trading carbon emissions and benefiting the developing countries thru this trading, companies / individuals will start to look for ways and means to reduce their emissions and thereby their taxes.
This will be like the best of both worlds and hence would be a win-win situation for environmentalists.
Posted 3 March 2009, 22:01 by Ajinkya
The complexity of cap & trade is a strong argument against it. The very criterion of additionality and then all the monitoring necessary to ensure the validity of the carbon credit, carry with it a significant operational overhead to implement —> operations create a carbon footprint – so why not choose the simpler alternative? In my opinion we are begging for absurd, unnecessary complexity in both implementation and regulation with the C&T alternative. So, if it is true as Bill McDonough has said “regulation is a sign of design failure,” why not choose the simpler design and avoid some of regulatory overhead?
I believe the reason is that we do not have the political will to “bite the bullet” on a carbon tax. Problem is that we cannot “hide from the facts” too long.
One concern I have with the carbon tax is whether it would be unfair to the less privileged in society in the same manner that a ‘flat tax’ proposal might be? I suspect not!
Posted 3 March 2009, 22:01 by Sanjay Kapoor
One option that doesn’t get enough attention is the “Carbon tax with 100% dividend” approach advocated by NASA’s chief climate scientist, Jim Hansen.
In Hansen’s plan, the tax is fully refunded equally to every adult legal resident via a monthly direct deposit to their bank account. People who consume less carbon than the average come out ahead, those who don’t lose money. This creates a powerful incentive to conserve, which will create demand for renewable innovation.
This scheme avoids the potential for gaming the Cap & Trade system, and is more politically palatable than a tax alone.
Posted 3 March 2009, 21:40 by Ken Karnofsky
As I have been involved in the contestable electricty market (not with my current employer) in the retail trading of electricity & natural gas I have listened to discussion on both since the mid 1990’s. My view of a carbon tax is simplistic – it is the lesser of 2 evils. Using a financial instrument such as caps etc seems to overall increase the cost of such schemes as the various professional groups view it as a way of generating a new industry. Initally it looks attractive (caps that is), but as the average commercial / industrial customer just wants to cover their core business they generally out source this aspect. If we have to have something in place then lets have a simple carbon tax and allow business to just concentrate on what they are good at. I do not doubt the theoretical advantages of the CAP scheme – just how the schemes work in a practical sense.
Posted 3 March 2009, 21:36 by Len Robson
A problem with cap and trade (the proposed Australian version) is that it fixes the minimum emission level rather than limits it to a maximum. So, if a private citizen installs solar hot water or electricity, consequently reducing energy demand on utilities, the utilities have a smaller incentive to reduce emissions, or can trade certificates. The situation is even worse if certificates are used as subsidies for such plant.
See http://www.tai.org.au/ for some interesting papers.
Posted 3 March 2009, 21:22 by Peter Horan
As an environmental scientist and having been involved in delivering local Environmental Protection legislation I am not convinced that a carbon tax will reduce significant CO2 emissions. I believe this whole carbon tax concept is an academic exercise and, for others, a money making scam for the “middle-(wo)men”. Climate change is a natural phenomena and somehow the Mums and Dads of the world and lay politicians are being duped into believing that this scientifically loose argument would inure the world from aberrations of climate change. The world would be a better place if each citizen observed and acted upon the concept of giving more benefits to the environment than extracting from it.
Posted 3 March 2009, 21:19 by Bill Silvey