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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
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 approaches are essentially a tax. This much is revealed in the Presidents budget proposal which understates the amount of tax to be collected under the C&T scheme but applies that tax to fund a social transfer payment. The real issue is the legitimacy of such a profound program to limit carbon dioxide. It is amazing that the same people who ridicule the black box quants on wall street are so willing to believe the black box unproven quant models of the global warming histeria. What insanity or ignorance has gripped our current culture that would make it fashionable to drive energy intensive production off shore?…along with capital and leaving labor behind. The cost of these programs are enormous and the speculative benifits, even if the proforma model is correct, are insignificant. The real crises of global civilization is how to provide affordable energy for sustainable growth. This crises will be ripe as soon as the curren economic decline is over. The progress of human civilization in the near and moderate term can only proceed with a renewed capital investment in hydrocarbon production and distribution on an emergency basis…not by a tax against it.
Posted 12 March 2009, 16:56 by Ed Breen
The answer depends on the objective.
If the objective is to provide certainty for stakeholders about the cost of emissions then a carbon tax is preferred.
If the objective is to reduce the amount of emissions and provide certainty about the amount of emissions then a cap is required. I favour this approach, because after all the purpose is to reduce CO2 emissions!
The objective must be clear, unambiguous & driven by the policymakers.
Posted 12 March 2009, 06:05 by Steve Murphy
Regarding the Cap & Trade argument, out of the four points made in favour, two are for the benefit of investors, one predicated on the population rallying en mass to sway politicians (while competing with highly organized and deep pocketed special interest groups and lobbyists) and the last based on politicians engaging in negotiations for favourable terms and exceptions in a tax system but not in a cap and trade system? Huh, I guess no politician has ever tried to negotiate say for an intensity based cap or say provide exceptions for industries in the northeast that use outdated and dirty technologies. Not a very compelling argument and it was 2 against 1!
Posted 12 March 2009, 00:01 by Piero
The cap and trade system will not affect the transportation sector, keeping outside the policy a main contributor to GHG emissions. While a carbon tax would increase the price of fossil fuels and therefore automatically support efficient vehicles, biofuels and other alternatives for transportation
Posted 11 March 2009, 07:38 by Rami Harfouch
I disagree with the carbon tax only because it will not achieve the real goal of limiting the amount of atmospheric carbon. Sure by taxing this bad it promotes carbon-reduction technology, but it ignores an essential positive feed back loop: people are more likely to consume more when they are more efficient. We need to keep in mind the true goal of all of this – reduce carbon in the atmosphere and put an end to climate change.
Posted 10 March 2009, 15:35 by Diane Hannigan
Gregg Easterbrook’s arguments seem more populist and hand-waving.
Carbon caps provide increasing fiscal pressure the more an entity polutes towards ceilings in emission. A tax allows accountants to bean count easily and ajust selling prices accordingly (price = cost + margin + tax). So the simplicity argument, while enticing, is a weakness, not a strength.
Posted 10 March 2009, 01:28 by Sam Broderick
There would appear to be two potential benefits from a cap – an absolute reduction in emissions and through this the pricing of those emissions. If a cap may be exceeded, and this excess is perhaps compensated by purchasing credits from elsewhere, then the first benefit of the cap is lost. It becomes no more than a ‘relative’ cap. There are no actual emission reductions. Also, if the credits are cheaper than making efficiencies, then it might be perverse but economically sensible to increase emissions. (for reference, see Europe)
A global absolute declining cap is essential, and through the scarcity created by this cap, the rights to emit GHGs can be priced. A global declining cap, after all, is the end result that we want to achieve. It is then possible to use the price of the right to emit in the construction of a tax, so that those who emit GHGs pay for their emissions relative to the scarcity of the right to emit.
This tax will naturally feed down to the consumer, who will have to pay more for GHG intensive goods and services. Those that consume more, pay more.
This is a global problem, and we should not get too tied up in local or regional problems in rejecting solutions. The money raised through the tax should be taken out of the hands of national governments and used by a UN central body to assist developing nations, particularly SIDS, in adapting to and mitigating the effects of climate change.
It is perhaps significant although not unexpected that it is the economists and traders who promote ‘cap and trade’ schemes, while those at the front end seem to prefer the simplicity of administration inherent in a tax.
Posted 9 March 2009, 23:56 by Arthur B
From the McKinsey work on global carbon abatement opportunities we learned that around 70% of the potential to reduce emissions until 2020 lie in the developing world. Those countries have contributed only marginally to the cumulative problem over the past 150 years and they contribute only marginally to the problem per capita now. So they very much have the right to feel that if the developing world does not pay them, they won’t do anything. They might take on some part of the burden, but only if the developing world pays for the other part.
I find it very difficult to believe that somebody will collect tax money in the US and send it to India (or even more so China). If, however, US companies have the right to fulfill part of their obligation with credits from India, companies are happy because they get the credits cheaper, nobody complains and you get the same money transfer anyhow.
Furthermore, I don’t buy the theory that there is a much higher complexity in a cap & trade system versus in a tax system. From the review of the European Emission Trading Scheme I can tell that the biggest issue for companies in a cap & trade is the monitoring and measuring of the actual emissions – a topic in which you have the same requirements in both instances.
Posted 9 March 2009, 14:06 by Christoph Grobbel
The CO2 emission appx 80% is due to anthropological reasons and is due to Human interface(rather interference to fulfill the greed) with natural growth of the Universe.
I strongly recommend a tax regimen to revert the situation. It should be depending upon theCARBON FOOT PRINT of the individual as declared in the INCOME TAX.
We can only enforce such stricter measures.wish you all a sustainable and
Healthy environment.
Posted 9 March 2009, 12:18 by anil kumar
I would suggest both options with modification as below and would leave to companies to select the scheme they want to opt for.
i. Tax with Cap rather only Tax
ii. Tax with Cap and Trade
Tax and cap should be there in any case and should be based on their projected emissions which can be claimed back by companies after achieving set targets.
In first option companies can only claim back their carbon tax paid for previous year in case set targets are achieved in current year where as second scheme will enable companies to trade also excess reduction after claiming back carbon tax. Low emitters may go for first one as it would be simple and easy where as large emitters may opt for second scheme to make more money out of carbon reduction.
In both schemes companies can claim carbon taxes back ones they achieve set targets. Carbon taxation will facilitate inventorization of GHG.
Only taxation may not help in reducing GHG, cap on emission should be there.
Posted 9 March 2009, 10:14 by Vimal Kumar