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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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Both approaches fail to influence consumer choices directly. We need a simpler system which will directly influence the consumer.
Arguably 50 percent of carbon emissions in the developed world are virtually fixed because these flow from running existing residential and commercial buildings and the other 50 percent is very stubborn. 25% is transport related and is controlled by land use / commuter patterns and the extent to which we move goods locally and around the world. And 25% is associated with industrial production. So to cut carbon we need to reduce commuter distances, and walk more drive less, and we need to dramatically improve the fuel economy of transport systems and we need to enable industry to invest in dramatically more efficient plant. All these things will take time and will not be greatly influenced by tax on carbon – I would say it’s more about simplifying capital allowances than introducing a new system if the focus is on reducing carbon emissions by the consumer. An alternative is to change the way in which power is generated and to develop better ways but solar arrays, hydro, wave, wind and ?nuclear will all take time. Again it is capital allowances which might change big business behaviour.
So what do we do?….. Carbon trading must motivate individual consumers so the system must be accessible to all with minimal /no ‘admin burden’ And taxes must change individual behaviour and reward individuals for carbon friendly choices not just generate revenue from those who carry on as they always have done. I’d suggest the simplest approach will be to create carbon tax credits for business based on certain capital allowances and based on targeted sales tax reductions for consumers. Those changes can be accommodated within the existing fiscal framework and adjusted to suit changes in behaviour any time.
In business practice we should not just be thinking of maximising sales / minimising cost but delivering best value in the long run and that means best value economically, environmentally, socially and politically.
Posted 4 March 2009, 04:45 by Michael Graham
Reducing carbon emissions requires both incentives and penalties. Cap and trade for industry and commerce provides both of these and the cost of carbon is factored into investment evaluations. A broad brush carbon tax is not visible, is indiscriminate, disadvantages the countries which levy it and provides only indirect incentives to reduce carbon emissions. For the domestic sector, the best means of limiting carbon emissions is to prescribe stricter legal minimum standards for new buildings and all electrical and heating equipment, with incentives to insulate older buildings. New vehicles must also meet progressive maximum carbon emission limits.
Posted 4 March 2009, 04:20 by David Bayne
Introduce the tax and ignore the complex cap and trade system.
All carbon emissions should be taxed and the larger the pollution the higher the tax. This tax should increase as the amount of pollution increases, larger corporations will soon think of ways to reduce their emissions.
This carbon tax system should not be considered transferrable, whereby the big polluters can offset their problem by purchasing credits.
Now all you have to do is figure out how to apply that tax globally.
Posted 4 March 2009, 03:58 by Shannow
Thermal power plants are the main source of carbon emission which for obvious reasons are located in the home country. These are huge, legacy technology and high investment plants.
If Tax is imposed these units would easily pass on the excess tax to the end consumers. They themselves have no good reason to relook on the existing systems rather pay tax. Competitive forces does not come to any play in the tax system because thermal plant what is there will always be there and if it is a problem to one plant it is problem for rest of them too. This would easily lead to the further strengthening of the cartel and pass the cost to consumers.
Further what goes out as tax to the government comes back as subsidies, incentives and tax holidays. Carbon tax as a cost would automatically gets figured in projects as tax thereby increase the cost of the project by lenghtening the breakeven rather than the desired effect.
On the other hand if it is a cap and trade system it takes into account a holistic approach. A thermal unit which produces carbon can buy credits produced anywhere in the world from any sources. A thermal power plant using clean technology and generating carbon credit would be able to earn higher revenue than the one which does not, thus encouraging competition.
In cap and trade system the money stays within the industries, it doesn’t reach governments hand. Since it involves immediate players the response and efficiency would be more than if carbon is taxed. In cap and trade as an automatic route an efficient unit would be earning carbon credit from an inefficient unit thus encouraging the inefficient unit to use clean technology.
The only reason government is hesitating to go for cap and trade is carbon credit money moves beyond borders thereby skewing the trade deficit on the other hand a carbon tax stays within the country. But actually it is the western companies that sells the clean technology for other countries. What would go as carbon credit would come as increased foreign earnings.
To have a real effect on climate it is best to have a cap and trade rather than carbon tax.
Posted 4 March 2009, 03:57 by G D VarunKumar
I also think that the two options are available, although I am inclined by carbon tax. However I agree with Ben-Hamida in the way that carbon-tax could benefice to the big companies because they will pay the carbon-tax and still polluted the same. Maybe, the carbon tax should incorporate a percentage for inversions in new technologies less polluted in the way that the company could improve their technology and contribute to environment, like the inversion in I+D.
I also agree with Foran in the way that one of the most important things should be a change in the way we think, because only then people understand the effect of fosil fuels and the importance to reduce pollutants and maybe they willing to pay for it.
Posted 4 March 2009, 03:40 by Almudena
Reducing GHG-e is by nature very complex. In order to achieve this the most comprehensive monitoring system will be required.
Tax will not work, it is like the so called “sin taxes” imposed on cigarettes and alcohol. The users pay the additional penalties without considering reduction measures. The comfortable life style comes at a slight premium.
Measures are required to determine actual pollution rates and then together the whole world will steadily reduce total emmissions. One would be naive to rely on goodwill of many to reduce pollution. It requires strick control to achieve common sense (which is not that common) objectives.
Posted 4 March 2009, 03:11 by Pierrie du Preez
My view – tax is undoubtedly more efficient and streamlined, but will be set in a way that will not greatly influence organisations’ behaviours. A good cap-and-trade scheme, alongside other tools, is more likely to achieve this end.
Tax gathers revenue, hopefully to be used for CO2 emissions reductions, cap-and-trade can change the way organisations understand and work within CO2 emissions targets.
For me, cap-and-trade wins hands-down because I am passionate about CO2 emissions reductions.
Posted 4 March 2009, 03:09 by Ian Salvage
climata change and its effects has now become a global problem.who is responsible for this-developed economies or economies in transition or the developing economies, statistics and numbers show all.
we require a multi pronged approach to tackle climate change. Tax and cap-and trade both are required, both are revelent to mitigate and abate carbon emission. As of now,climate or no climate, corporates are happy with carbon credits and the additional revenue that these credits generate and the concept of additionality.Taxes and cap-and -trade can to an extent limit carbon emission but sustainabitity is a question.we need to make alternative energy available and to every one. we need to make investments in alternative energy resources.
Another sector that also contributes to GHGs is the domestic sector, Domestic consumption in terms of housing,lighting,HAC. in addiiton to this we have domestic waste which is a major contributor to CH4.we require to address this sector too. we have to make lighting(CFL) cheaper so that every one uses and slowly phase out the concept of bulbs. today people donot want to use CFL as it is 18X more expensive than a blub.
we need to educate people/ individuals on the effects of climate change. all these years only governments and corporates are involved in making decisions.
if we want change we have to bring it from the grass root level….we cannot have a strong building on a week foundation
Posted 4 March 2009, 02:05 by vinu
I’ll pile on for Cap & Trade. As several people have mentioned, it focuses directly on the problem and doesn’t rely on guessing what level of taxation will be necessary to generate what level of emissions reductions.
Also, those arguing that a tax is less likely to be gamed should read our current byzantine tax code and note the very healthy industry that exists around both lobbying for tax credits and exemptions and then helping people get around the existing code through crazy schemes!
Fact is that any policy that goes after this problem will generate intense lobbying from many quarters. So, if we’re going to go through that pain, let’s do it for a system that we know is going to impact the problem.
Posted 4 March 2009, 01:17 by Rogers Weed
The science needs to be more thoroughly understood prior to enacting any far reaching legislation that could significantly affect the global economy. While many agree that there is “climate change”, the underlying causes are still not well enough understood. Yes, carbon based emissions are something to be dealt with, but we need to carefully consider the cost-benefit relationship, together with the further restrictions on our liberty before agreeing to new onerous government regulations that likely will have vast unintended consequences. But if a choice must be made between the tax vs. cap & trade, the tax is more directly tied to usage and as stated above, is less likely to be gamed by participants. Furthermore, giving people not government, the final say must be a strong consideration.
Posted 4 March 2009, 01:17 by Steve Beaman