-
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.
Comment
Print
Link to this-
Share
-
Text size
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
The arguments against implementing or leveraging successful business practices are so short-sighted they’re hardly worth reading anymore. Anyone who operates a social enterprise and refuses to consider ways to be more successful purely for...—Jeff Hancock
In response to Should social entrepreneurs adopt the language and practices of business?
01 May 2010 · 04:38:37 AM GMT
The false dichotomy of business-model versus a social-impact model is a vestige of a dying world. As an entrepreneur turned social entrepreneur, I think Bukner is describing all entrepreneurs, not just social ones when he says “Real…...—theGeoffDavis
In response to Should social entrepreneurs adopt the language and practices of business?
30 Apr 2010 · 03:01:47 AM GMT
‘passionate social entrepreneurs’ are a figment of the romantic imagination. also the ‘poor’ are not a separate species. most humans want the same things: a full belly; security, education and medical support for the family. d...—vikram sundarji
In response to Should social entrepreneurs adopt the language and practices of business?
27 Apr 2010 · 05:12:22 PM GMT
Yes, where appropriate just as some businesses are adopting language and practices from social entrepreneurs. It is an evolving path so there will be stumbles on all sides. Yet in this ever more connected world, savvy people who want to st...—Kare Anderson
In response to Should social entrepreneurs adopt the language and practices of business?
24 Apr 2010 · 02:53:45 AM GMT
Should social entrepreneurs adopt the language and practices of business?Social entrepreneurism and the word ‘business’ have very different connotations. Where one is viewed in the light of service to the society regardless of whether it ...—Savita Rao
In response to Should social entrepreneurs adopt the language and practices of business?
24 Apr 2010 · 02:12:45 AM GMT
To me it appears that the debate would benefit by moving away from the tyranny of “or” and move towards the benefits of “and”. The question is not about business management practices vs the passion of social entrepreneurship. ...—Durga Prasad Duvvuri
In response to Should social entrepreneurs adopt the language and practices of business?
- Acumen Fund
- Change.org
- Changemakers
- David Bornstein Stories of Change
- Draper Richards Foundation
- McKinsey Learning for Social Impact
- McKinsey Social Sector Office
- The Schwab Foundation for Social Entrepreneurship
- Social Impact Exchange
- Social ROI
- Social Venture Network
- Stanford Social Innovation Review
- The University Network for Social Entrepreneurship
Both systems have merit. On the carbon tax side I would be interested in knowing what this tax will fund. Will it fund research on renewables or other initiatives to mitigate climate change?
On the cap-and-trade side, I would be interested in a global system rather than a US only system (I live in India). The problem at hand is global and the solution needs to be global.
Posted 3 March 2009, 21:13 by Premkumar Pandurangam
After having done some background reading on the pros and cons of a carbon tax vs cap & trade, my vote firmly goes to the latter. Tax is elegant in its simplicity, but it does not get to the main point of the tax: reducing emissions to a set number by a set time.
Setting the tax rate (and deciding who to place it on) would be one tricky issue, re-setting it a few years later, e.g. to adjust for rising emissions, would be practically impossible from a political perspective.
The success cap & trade has had in reducing SOx and NOx speaks volumes; and the US would do well in adapting a cap & trade scheme that can be fully integrated with the CDM and the ETS in Europe over the course of the next 5 years or so.
It’s no miracle that both McCain and Obama favored cap & trade over tax: if you’re serious about reducing emissions, it is the only serious option.
Posted 3 March 2009, 21:05 by Ernst van Nierop
Neither expert discussed the industry breadth of cap-n-trade. From what regulators and others have told me, coming close to the carbon reduction goals desired by scientists or carbon revenue desired by obama will require carbon tax/cap-n-trade on many sectors of the economy, not utilities and high energy/carbon use. EU ETS and RGGI are the only cap-n-trade programs we have now on carbon and we need to learn from both.
Posted 3 March 2009, 20:58 by Paul Baier
Does it have to be a binary decision?
If the goal is to limit the amount of emissions, then a cap and trade system makes sense for the fundamental reason that that is its sole purpose. If the goal is to raise revenue for government spending, then of course a tax is the way to go. If the goal is both (i.e., provide a structure that causes private enterprise to find the most efficient solution and raise revenue for the purpose of funding R&D, a historically vital but shrinking role of the federal government), then we need both.
I don’t mean to ignore the difficulty of putting in place one of these structures, let alone both, but isn’t the option of having both a cap and trade system and a carbon tax worthy of a discussion?
Posted 3 March 2009, 20:43 by John Tydlaska
The entire debate is asinine. Why don’t we begin by assuming that we don’t need either. Neither will have any material effect on global warming and either will have a significant effect on the economy, which at the present doesn’t really need any more rocks thrown at it. The only people this debate and the whole issue of global warming is useful to are those who make their living sucking up federal grants to study the issue. The MO of the government is to find a small insignificant problem and turn it into a catastrophic mess. Then they tell us they need higher taxes to fix the mess they made. The government needs to stay out of it.
Posted 3 March 2009, 20:40 by Mike Meredith
The aim is to reduce the amount of carbon in the atmosphere. All carbon emitters should be taxed at say $US10/tonne increasing 5% per annum. A cap trading system also should be in place. Bidders bidding for an allocation up to the emitters maximum certified emissions. The cap can be budgeted on a monthly basis due to seasonal emissions. Verification of emissions to be done on a monthly basis. If you don’t have an allocation, or allocation is less than what you emit, the excess carbon you produce is DOUBLE TAXED. Caps can be obtained only on an annual basis. The national traded cap is reduced by 2% annually. If you emit less than your certified emission then 95% of your unused allocation can be carried over into the next year. The cap cannot be traded. Industry that permanently remove carbon and other atmospheric pollutants from the atmosphere would get a rebate based on the tonnage of carbon removed from the atmosphere. Central banks control interest rates, an environmental bank can do the same. Being Carbon Neutral must not be considered, its wool over the eyes. Taxes & caps gathered would be used to fund as partners alternate carbon substitution projects. For once profit and market speculation must be removed from this equation. Capitalism is the best system ever devised, even with many short comings, it has the ability to adjust to stop spoiling and trashing its own shop. Its money spent to clean up its own back yard. The Central Environmental should be centralised through the UN or equivalent body by international treaty. Did I miss anything?
Posted 3 March 2009, 20:39 by Edward C J Zbik
I currently live in Australia where the Emissions Trading Scheme is due to be implemented next year. It is a well designed cap scheme in principle but suffers from two practical realities: 1) Many are being granted exemptions if they are competing internationally or with imports that are not subject to the same regime, so huge holes are emerging in the system. 2) The government does not appear to be listening to business, understandable in their drive to get the system implemented and not hijacked. Taxing consumers through the supply chain (in the manner of a consumption tax or VAT with the ability to claim back carbon tax paid if you are selling on to customers who have to pay the tax) is the most workable solution.
Posted 3 March 2009, 19:36 by Miles Protter
The question is a false choice. The models and the data bases used to advance the global warming scare lack adequate & independent testing, analysis, and validation. Thus, the carbon cap ‘n tax arguments evolve into ever more complex rationalizations, and envision administrative laws that no one will be able to completely fathom. There is, though, a conclusion that is fundamental: people in the USA will suffer higher tax payments, and the monies will be spent by bureaucrats on things far removed from necessity. The cap/trade/warming hysteria will transfer wealth from the achievers to the federal government. All else is secondary.
Posted 3 March 2009, 19:35 by mike silverman
Cap and Trade (CAT) is preferable if the object is to impact the volume of carbon emissions negatively, or lower it. CAT would provide for lower benchmarks or caps against which everyone is eventually expected to comply. If a designated benchmark is not complied with, you compensate the society for offloading your excessive emissions, and because of that very same fact, also suffer higher costs. Such compensation also serves as the reimbursement of higher costs of those that comply with cleaner methods/fuels as angel suppliers of the same goods/services.
When these CAT rules are applied internationally, China and India, and other developing countries would all be required to factor in the full costs of their excessive carbon emissions, and also perhaps disadvantage themselves in many world markets, if not all. But their environments would vastly improve, as would their air and water quality which would translate into less sickness and higher health standards and longevity.
A carbon tax would bring about the same effect, but the government or EPA authority is expected to make the emitter pay more directly and instantly than under CAT. Be that as it may, the three letter word is abhorred by all. Even if the outcomes are more or less the same, revenue going into government coffers may not have the welfare effects as under the market system. In the light of the current economic turmoil, we can debate this till the cows come home and still not resolve anything. And it would then be too late for either of the two proposals! And so try CAT for a few years, and if the impact on the environment is negligible, try the other proposal. Different locations may report varying degrees of success with either one of them.
S.V. Char
Posted 3 March 2009, 19:20 by Sudhanva Char
If you look at the evidence the only possible conclusion is that we don’t need either.
The evidence says that the world is cooling. All the temperature records agree that this is the case. More and more people now believe that we are at the beginning of a cooling phase. Supporting evidence includes the unusually long sunspot cycle and recent evidence that man-made greenhouse gases do not cause global warming.If the world is cooling, then we don’t need emissions trading, we don’t need subsidies for renewable energy and we don’t need the IPCC. If the world is cooling, those that have persuaded people to invest in renewable energy and carbon trading while failing to warn them of the possibility of cooling, will be sued to death. And rightly so.
Man-made global warming is just another scam. A $500bn plus scam that the world does not need. Especially in the present circumstances.
What we do need is an objective look at the evidence rather than people chasing power and money telling us that every little climatic shift is proof of man-made global warming. It isn’t. The climate changes naturally and it will continue to do so.
Bryan Leyland New Zealand
Posted 3 March 2009, 19:09 by Bryan Leyland