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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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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
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In response to Should social entrepreneurs adopt the language and practices of business?
24 Apr 2010 · 02:12:45 AM GMT
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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
Since our objective is to reduce the level of greenhouse gas emission, I believe that a cap-and-trade system would work better, because companies would have positive incentives to maintain or diminish the level of CO2 in the atmosphere.
Although some argue that a cap-and-trade system could be “gamed” due to complex legislation, the same argument could be used to prevent companies from paying taxes on greenhouse gas emission: the same lawyers, gimmicks etc. would find breaches in the law and make their way on helping companies to pollute.
Also, in a cap-and-trade system, companies above their permitted level of CO2 emission would not be able to increase production without sacrificing profits, for obvious reasons, unless such companies change their production processes. On the other hand, companies with “cleaner” production processes would show higher profits than peers.
Thus, since companies would have economic reasons to pollute less, a cap-and-trade system, despite its intricate legislation, could reduce the level of greenhouse gas on the globe.
Posted 4 March 2009, 13:19 by Leonardo Pontes dos Reis
The debate between tax and cap is premature. The premise that humans have the ability to significantly impact climate change has yet to be established beyond reckless journalism, hyperbole, and irrational fear. The resulting rush to debate tax vs cap as solution to a problem that may not exist only further diminishes the credibility of proponents on both sides and raises questions about the motive of climate change assertions.
Posted 4 March 2009, 13:13 by Tom
While it is important to act, I still have fundamental questions: 1. Is the goal of US Gov. to curb U.S. emissions only or U.S. induced emissions elsewhere also? 2. Which entities will be directly regulated (both C&T and Tax) – utilities, industrials, commercials, residences? 3. Will an entity be regulated for only what it emits, or what it is indirectly influencing? (example: will a design company be taxed for what it designs, even if it does not produce it?)
I WOULD APPRECIATE ANSWERS.
Ramesh Srinivasan
Posted 4 March 2009, 12:38 by Ramesh Srinivasan
In my opinion cap and trade in a different format is feasible in a long run. The entire project cycle of getting the CDM project approved/registered is very cumbersome and lengthy besides costly. we need to look at the discounted cash flows into account to arrive at future prices of emission reductions ceritficates.These CDM projects get audited/validated/verified every year during the projecat cycle of 7 0r 10 years.
In today’s context of fallen crude prices and the world economies being dynamic and the stock markets and commodity markets are so highy volatile,the prices of carbon credits are going nose dive when crude is a definately cheaper option and money has become very dear.How are we in a position to determine the prices for the future and that also prices with upward trend?
The investments required are huge and benefit of these trades ofVER/CERs from investiment perspective are minimal in comparison as on date and for some time to come.Kyoto gets over in 2012 .Therefore new markaeat mechanism for cap and trade needs to be evolved which should work on sustianed basis.
Having said against Cap and trade system in the current format, Tax is something which no individual likes as the same becomes mandatory and limits individual’s creativity and positivity.It takes away the thrill to innovate and come out with alternative sources of energy and inventions of new and green technology.
The best practice should be to give emission reduction certificates with single window clearanaces and on lumpsum and yearly basis rather than registering the projecats for 7-10 years etc.
But still the cap and trade would be working on sustained basis if the correct market based mechanism is evolved considering the economic meltdown around the world.
Posted 4 March 2009, 12:35 by shivangi sheth
This is a very interesting debate. As some have remarked, I feel that the approach itself will succeed only when it is accompanied by a fundamental shift in thought. McKinsey published a piece last quarter about how climate change and carbon mitigation could affect corporate valuations and cash flows in the future. In summary, it seemed that many corporations do not see carbon emissions as a genuine threat or risk to the health and welfare of their companies. Unless this changes I’m not sure either approach can be successful. If this issue is woven into the fabric of the financial modeling systems we use to measure and assign value companies AND this effort is accompanied by pressure from the consumer base and regulatory pressure perhaps we will see movement.
Posted 4 March 2009, 12:28 by John Siggins
Please … just make a decison! While the debate continues we’re waisting resources and impacting the environment. We know that there are pro’s and con’s to both systems and there’s no way of making everyone happy. So let’s just bite the bullet. Just do it!
Posted 4 March 2009, 11:49 by Ken Elsey
Tax a corporation for the building of a dirty product and for emissions created during the life of that product. That should drive up the cost of the product enough to encourage cleaner products. In fact, a corporation should be taxed for the disposal of any products created as well. That would begin to bring the true cost of consumerism home to the consumer.
Taxing or cap and trading should be equally effective, and the winner should be the system easiest to control and the most difficult to go around.
Posted 4 March 2009, 11:45 by Ken Havekost
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. If the anti carbon people were serious, they would embrace energy sources like nuclear but these are opposed as well. Meanwhile the Europeans give carbon control lip service because they cannot face up to the economic penalties they would pay if they were to live up to their carbon reduction promises. Meanwhile, China, Russia, and India roll merrily along free of the self imposed burdens we Americans place on ourselves.
Posted 4 March 2009, 11:13 by Paul Kleinen
How about a paradigm shift?
Since global warming is well on its way to becoming a myth with the facts routinely disputing the theory and an ever-growing number of leading scientists calling it into question or out-and-out claiming it is a fabricated hoax at this point, why do we not instead argue that this is one tax that can be avoided all together. Offering a minor reprieve for any over-taxed population dealing with a severe recession.
This approach would have obvious benefits and might actually stimulate something akin to capital growth and economic recovery.
Posted 4 March 2009, 10:45 by Jim Myers
No one can disagree with Mr. Easterbrook that the framers of any plan to limit emissions should aim to create the simplest plan possible. However, based on my experience with taxes, they never are as simple as he makes out. A tax will just turn into another bonanza for lobbyists and tax lawyers.
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 – forget about a US tax that will make most congressmen squirm just thinking about voting for it.
Posted 4 March 2009, 10:02 by Bill Nieman