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March 17, 2009
Carbon Tax vs. Cap and Trade
The debate is heating up: Impose a nationwide carbon tax or implement a cap-and-trade system to curb carbon dioxide emissions?
Reforming America's energy policies has become a major concern for businesses and the public alike. With economic and environmental factors in fierce contention among many, finding a comprehensive strategy may seem like a daunting task. Currently, the two prevailing options are either a cap-and-trade system, such as the one currently favored by the European Union, or a carbon emissions tax. Both raise the price for carbon and provide economic incentives to lower emission rates, but supporters of each policy seem deadlocked by opposing arguments.
Unraveling the debate in this framework may be more important than ever before, as United States energy policy appears likely to move forward one path or the other.*
The cap-and-trade strategy is considered a more market-driven approach to handling America's carbon dioxide output. As the Environmental Protection Agency (EPA) explains, under this system the government sets an overall emissions cap while creating allowances that enable businesses to emit a given amount. The allowances can be traded, so companies that reduce their emissions can sell surplus allowances to those who would have to pay to comply. In theory, this method allows companies to achieve their maximum allowable output at the lowest cost.
This approach has gained support in Congress and from the Obama administration, with cap-and-trade provisions appearing in the latest federal budget proposal.
Under President Barack Obama's 2010 budget plan, the government would auction off all emission credits, generating as much as $650 billion in cumulative government revenue between 2012 and 2020, both the New York Times and the Wall Street Journal report (subscription required). The government would then allocate $65 billion from the auction revenue for emission credits toward middle-income tax cuts, as well as $15 billion in funding for "clean air" technologies.
The value of these allowances has spawned further debate over the percentage that should be auctioned and the best distribution policy for auction revenues.
Supporters of the cap-and-trade system, such as Carter Bales and Richard Duke at McKinsey & Company, claim it 1) provides greater investor certainty by enabling businesses to estimate allowance prices needed for their work, 2) offers greater environmental benefits by placing a fixed cap on emissions and 3) may create a "useful economic shock absorber" because carbon allowance prices could be adjusted according to changing economic conditions.
But will an emissions cap hinder U.S. businesses in competing in the global marketplace? In the Bulletin of the Atomic Scientists, Gernot Wagner and Nathaniel Keohane argue that a cap-and-trade system "could promote broad international participation."
Developing countries would most likely become sellers in a global carbon allowances market and could expect to earn substantial profits. "Meanwhile, because advanced economies such as the United States and European Union can set the terms of access to their own markets, they would have considerable leverage to persuade those other countries to take on binding emissions targets," Wagner and Keohane note.
Similarly, the Environmental Defense Fund (EDF) emphasizes the positive effects of linking environmental controls with market forces because "this system creates tangible financial rewards for environmental performance." The EDF claims that turning pollution reduction into marketable assets will also encourage technological and process innovations, citing the success of the acid rain cap-and-trade program of the 1990s to support the new policy.
However, the acid rain cap-and-trade program of the Clean Air Act of the '90s functioned on a much smaller scale than would a nationwide carbon dioxide cap, so its success may not be indicative of the newly proposed policy.
Some critics of cap and trade believe it will have negative consequences for consumers by creating a commodity out of the right to emit carbon dioxide. "Putting a price on carbon is regressive by definition because poor and middle-income households spend more of their paychecks on things like gas to drive to work, groceries or home heating," a Wall Street Journal op-ed claims (subscription required).
The Wall Street Journal piece estimates that the price increases from a carbon cap would cost roughly 3.3 percent of after-tax earnings for lower-income families and 2.7 percent to 2.9 percent for middle-income households. In addition, reductions in employment and output could result in "corporate welfare for carbon-heavy businesses."
The creation of a global carbon allowances market may also produce financial speculation. A carbon tax, by contrast, is a less complex option that involves having carbon dioxide emitters pay a tax for every ton of pollution they produce. The revenue could be used to reduce payroll taxes or lower other tax rates.
According to Gregg Easterbrook at McKinsey's The Debate Zone: Carbon Tax v. Cap and Trade, "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."
Proponents of the carbon tax argue it offers a direct profit incentive for the development of emission-reduction technology and encourages scaling back carbon pollution. Part of this is due to the system's reliance on only two elements, direct participants and the Internal Revenue Service (IRS), rather than abstract market forces, traders and external regulatory agencies.
"The taxpayers may pass the cost of the tax on down the chain of purchasers, and the behavioral effect of the tax will depend on how the price signals influence decisions by the taxpayers and subsequent purchasers, but the mechanism itself is implemented directly just between taxpayers and the IRS," says Janet Milne in the Bulletin of the Atomic Scientists.
Concerns remain about whether a carbon tax would actually reduce emissions or if companies would simply pay the tax and continue to produce the same amount of carbon dioxide. However, as Gregg Easterbrook notes, "[t]his is possible, but unlikely: experience shows that individuals and firms change behavior to reduce taxation."
According to carbon tax proponent the Carbon Tax Center, a first-year tax rate of $15 per ton of carbon dioxide coupled with incremental rate increases of $10 per ton each year would lower emissions to 25 percent below 2005 levels by 2022. These figures reflect a new carbon tax bill recently introduced to Congress.
However, many people have voiced serious doubts about the feasibility of a carbon tax program. "If you were a pure economist, the most logical thing is taxation. It is the simplest. But 'taxation' is a word that makes people choke in normal times. And these are not normal times," the director of the United Nations' climate change program recently told the New York Times.
In addition to the widespread reluctance for additional taxation (in the midst of a recession, no less), critics argue that a carbon tax would not foster international participation due to the difficulty of coordinating global taxation efforts. For a carbon tax to work, Wagner and Keohane argue, "it would be necessary to achieve a harmonized tax structure across countries."
Of the two strategies, cap and trade has greater backing in Washington, while the carbon tax garners most of its support from economists and academics.
The debate, as it is currently taking place among the nation's policymakers, boils down to a preference for a market-driven solution emphasizing self-interest via cap and trade, or a direct incentive system that guards against financial manipulation through a carbon tax. Although some argue that both options represent impractical measures, the time has come for choosing between one or the other, as picking neither is no longer on the nation's agenda.
Resources
Cap and Trade
U.S. Environmental Protection Agency, Aug. 25, 2008
House Panels Seek to Limit Effect of Climate Plan on Nation's Pocketbook
by Darren Samuelsohn
The New York Times, March 9, 2009
Democrats Tangle on Climate Change (subscription required)
by Ian Talley and Stephen Power
The Wall Street Journal, March 12, 2009
The Debate Zone: Carbon Tax V. Cap and Trade
by Carter F. Bales, Richard D. Duke and Gregg Easterbrook
What Matters (McKinsey & Co.), Feb. 12, 2009
A Cap-and-Trade System Would Promote Broad International Participation
by Gernot Wagner and Nathaniel Keohane
Bulletin of the Atomic Scientists, Nov. 7, 2008
The Cap and Trade Success Story
Environmental Defense Fund, Sept. 17, 2007
Clean Air Act
U.S. Environmental Protection Agency, Dec. 19, 2008
Who Pays for Cap and Trade?
The Wall Street Journal, March 9, 2009
The Case for Carbon Taxes: Simple is Better
by Janet E. Milne
Bulletin of the Atomic Scientists, Sept. 5, 2008
New Larson Bill Raises the Bar for Congressional Climate Action
by Charles Komanoff
The Carbon Tax Center, March 6, 2009
House Bill for a Carbon Tax to Cut Emissions Faces a Steep Climb
by John M. Broder
The New York Times, March 6, 2009
*Post updated 3/25
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18 CommentsCap-Trade hasn't worked in the EU, and would be very difficult to internationalize. Carbon taxes are simple, transparent and Border Tax Adjustments would automatically create incentives for our trading partners to price carbon, leading to worldwide incentives to reduce GHG emissions.
See "Imagine: A Harmonized, Global CO2 Tax" at http://www.carbontax.org/blogarchives/2009/03/11/imagine-a-harmonized-global-co2-tax/
March 17, 2009 11:37 AMBoth are simply a bad idea. This is tinkering with economics in a really bad way. We are headed into the economic dark ages and this won't help one bit. I clearly believe picking neither should be on the nation's agenda. How long will it take for the intelligensia to realize they are not as smart as they think they are?
March 17, 2009 12:57 PMCap and Trade OR a carbon tax are both the tail-end of the scam called anthropogenic global warming.
Someone please explain to me why and how the last ice age ended? We don't even know how much the solar cycles control the weather, yet we think that strangling the petroleum and coal industries will somehow help?
I am frankly ashamed of Thomas Register for jumping on this fraudulent bandwagon.
March 17, 2009 1:47 PMIf the powers that be decide that the allowed emissions is zero, Cap+Trade becomes carbon tax... both are promoted by enemies of industry, and gladly taken up by greedy governments that see it as additional revenue. The net effect is a reduction in the standard of living for the globe...
March 17, 2009 3:11 PMIt is hard to trust anything you piblish, with articles such as this. It would be okay to indicate, that those who know nothing about what they try to manipulate from Washington, are running like guilded mares on only two options for what they call a problem. Honest reporting would have presented the real science side as well, indicating that both choices are based on hype and propaganda! There is a myriad of evidence contradicting the man made global warming concept, yet it seems to be ignored in favor of gloom and doom crys from political science majors over real climate scientists.
What is the value of what you publish, if it can not be trusted! Get the real facts and present the whole story, rather than regurgitate the politcal and special intersts propaganda!
March 17, 2009 3:13 PMCarbon tax has done nothing positive in reducing emissions. The money collected has not been applied directly to the sources of the problem plus it does nothing to equalize the playing field of developed nations trading with developing nations.
An equalization/environmental tax would make far more sense. Developing nations that wish to let's say trade in the North American market, the home based companies must comply with certain anti-pollution standards.
The trading nations of less developed countries their short fall of that standard would be taxed by the percentage of the shortfall and applied to the products they are exporting to North America .
That money would be then reinvested in the company of exporting nation and applied directly to installing better anti-pollution equipment.
It levels the playing field for home based countries and it's an added bonus to developing trading nations.
It creates jobs improves working conditions for employees from these countries and is far more proactive when addressing global environmental issues.
The carbon tax is nothing more than guilt tax.
Both tax proposals are without merit because they don't have a measurement of benefit that would solve a known problem with its implementation. If they can't present the problem in scientific/mathematical terms and what measurable benefits will come from the enactment of the tax(es), then who determines how much is needed to obtain an unstated benefit?
Mother nature is bigger than all of us, and if you or anyone else thinks they have an insight into what Mother nature is going to do in the next 1, 10, 100, 1,000 or 10,000 years, raise your hand. If not, don't go around trying to con us into participating in the biggest fraud since Madoff.
We already have the cleanest air of any industrialized nation and cannot force other countries to do the same. We can't change the air and water currents nor keep volcanoes from erupting. We don't need to be wasteful, but to limit our productivity for a elusive concept of protecting our environment beyond scientific facts (ignoring prior earth ice/warming cycles) is irresponsible (even pathetic).
I have already spent over 75 years here and hope some jerks don't ruin this country during the next 25 years. By the way, we polluted the air something terrible 50-75 years ago. We cleaned that up. If you use that data, we should not be in this "cycle".
March 17, 2009 8:19 PMThe concept that humans can somehow manipulate the climate is a massive hoax that has gotten out of control. Activist alarmists with their insidious or misguided agendas have effectively and successfully lobbied our politicians with the idea that we are destroying our earth with conventional energy sources. As engineers and scientists we should be open to considering the views of REAL climatologists who are proclaiming that it is impossible for humans to affect the earth's atmosphere.
They say that our atmosphere consists of roughly 24,000 molecules of water vapor to only one molecule of CO2. Water vapor, then, becomes a purifier agent that scrubs impurities, including CO2, out of our atmosphere. We can see this action after volcanoes or large-scale wildfires spew enormous quantities of impurities into the atmosphere, then after a few weeks or months, the air is back to normal again. These REAL climatologists also say that global warming/cooling is a natural phenomenon that is due to the activity of the sun, not CO2.
In the 1970's my company provided monitoring equipment to various research centers and government agencies for their environmental research programs. At that time, the researchers were pursuing the concept of global cooling, with the alarmists proclaiming that the earth would be covered with ice by the year 2000. When I pointed out to a group of researchers that their data did not support the global cooling premise, they privately admitted that I was right, but, they said, should they publicly report this, all their funding would disappear. When it became very obvious that data was not supporting the global cooling concept, these charlatans quietly slipped into a global warming research mode.
The precise climatological data collected today does not support the activists models that man-made CO2 affects our climate. Unfortunately, the media ignores the REAL climatologists counter-views, but you can find their web sites and read their discussions. This group is led by Dr. Roy Spencer, Dr. William Grey and John Coleman, among other highly dedicated and respected climatological scientists. Sen. James Inhofe has a very extensive bibliography of supportive facts, but he is deemed by the media and activists to be a very evil pawn of the fossil fuel industry.
Unless we change, our nation is headed into a period of high electrical and fuel costs with resulting higher prices in all areas of our lives. Yet, the solution is very simple - our politicians should allow construction of more nuclear and clean coal electrical generating facilities along with expanding our oil and fossil fuel production and refining facilities. We have a pent-up need for these that should provide a full employment spike in our economy that will last for twenty years.
Alternate energy sources, such as wind, solar and bio-fuels are not and can not be cost effective. The hope that technology,with massive amounts of funding, can somehow provide low cost wind, solar and bio-fuels energy alternatives, is a false hope that cannot be realized in the foreseeable future.
March 18, 2009 2:00 AMFine, I'll just move my company to a country that doesn't participate in this non-sense; thereby losing even more American jobs.
The intelligencia are trying to destroy this country, most not realizing it - a few do.
A revenue-neutral carbon tax is the better solution for a myriad of reasons, not the least of which is that it does not unduly hurt the poor. Moreover, a carbon tax is not subject to the gaming and market manipulation inherent to a cap and trade scheme. I encourage anyone interested to take a look at the research done by Dr. Robert Shapiro on the subject: http://www.climatetaskforce.org/images/62008shapiro.pdf
March 18, 2009 11:02 AMAlthough I hate both ideas, a least a tax is more transparent. Cap & Trade is still a tax that the middle class has to pay (by increased prices). But why not simply provide tax incentives for new technology; raise MPG and other efficiency standards, etc. to limit emissions? Because the gov’t simply lacks the understanding to do so.
Cap and trade is a scam. It basically adds a parasitic element (the traders) who in most cases will be the same idiots that just ruined the banking industry. Once reason gas prices fell is the speculators that drive up commodity process temporarily were out of the picture, as global demand did not fall enough to justify the 60%+ drop in fuel process.
It’s sort of like the FCC auctioning off “my” (and your) frequency spectrum… that method may gathered some immediate revenue, but also locked out small business from competing against the big boys. Yet the gov’t would of still earned money (by granting licenses per applicant) through tax revenue.
In the end, unless other countries (such as China) also follow the same exact rules, then this is another incentive to move jobs overseas.
Knowing Washington as well as I do, I'm fully confident they will pick the worst option.
March 18, 2009 2:26 PMOther countries (such as China) also follow the same exact rules, then this is another incentive to move jobs overseas.
March 25, 2009 10:51 AMPlease furnish me concrete data that proves carbon dioxide is a pollutant! That has yet to be confirmed. This is definitely nothing more than a government/corporate backed scheme.
March 25, 2009 2:13 PMIf the primary goal is actual reduction of carbon emissions, then a compulsory fund may be best. Companies would pay x dollars into the fund for each ton of emissions.
The funds would then finance R&D to reduce emissions. Companies could also make withdrawals to buy and install carbon-reduction apparatus.
On another note, what does market driven mean? Is it by the invisible, impersonal hand Adam Smith envisioned? Or is it by the hidden hands of the Manipulators?
March 25, 2009 2:14 PMThe idea that carbon dioxide causes global warming is a hoax. Carbon dioxide is necessary for life. It is not a pollutant. Without it, life would cease. Water vapor is much more potent as a greenhouse gas, yet there is no clamor to regulate it. By the way, global temperatures have been cooler the past few years. How many more years of cooler temperatures before Al Gore's convenient lie is confirmed? Variations in global temperature are likely caused by variations in solar output, not by carbon dioxide. The global warming hysteria is just an excuse to increase taxes. Shame on Thomas for publishing such an article!
March 25, 2009 3:27 PMA Carbon Tax is a straightforward way to address this serious problem. I believe the speculators are drooling over the idea of Cap and Trade as another way for them to make huge profits by manipulating the gigantic new pool of money that Cap and Trade would introduce. Policymakers--please don't allow that to happen!
March 26, 2009 9:31 AMBefore we do something completely STUPID let us estimate the magnitude of the stupidity. We have some models of Ice Melt prepared by NASA personnel since the 1970's when I first had contact.
If the world average temperature rose by 100°F areas around the equator would become uninhabitable and Europe, Russia and North America would become tropical with world wide average rain fall increasing to over 110 inches per year. Plant growth would become lush but melting of glaciers and ice caps would raise ocean levels by between eighteen inches and two feet per Century. (While these conditions may have happened 800 million years ago, they depend on all chlorophyll based surface plants being frozen by the "Snowball Earth" condition for perhaps ten million years or more. Plants life coming back from under ice seaweed took time.) There would be a net rise in the oceans would total around forty feet over four thousand years. This is the worse case computer model and absolutely silly since it requires 15% carbon dioxide by the twenty second century.
Today’s global warming models will not accomplish this melting for at least three hundred thousand years. Until that happens there is no Ecological Catastrophe.
March 26, 2009 11:25 AMIt is true that a carbon tax adds to the cost of domestic goods and thus would have a decided anti-competitive feature. However, just as Larson has proposed making the carbon tax revenue neutral to consumers, the cost impact of a carbon tax on domestic industrial users also can be neutralized. We would “recycle” the carbon tax revenue embedded in their products back to them -- but not in direct proportion to their carbon emissions. That way the anti-competitive cost impact is offset while the incentive for efficiency/alternative fuels remains. This would also save us from the competing idea of imposing fees on imports to offset the carbon tax they did not pay. That would be very complicated and create international furor
April 18, 2009 8:32 AM
