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Carbon Tax Versus Cap-and-Trade

| Wednesday January 28th, 2009 | 2 Comments

tax.jpgIn the debate about climate change, politicians will likely become polarized between cap-and-trade supporters and carbon tax proponents. There’s no precedent for a carbon tax, but it’s definitely a viable alternative to carbon trading.
Last week, Exxon Mobil Corp.’s chief executive officer Rex Tillerson said he’s in favor of taxing carbon dioxide emissions. “[It's] a more direct and transparent approach,” Tillerson said, comparing the tax to trading carbon. Aside from Tillerson, proponents of a carbon tax include Al Gore and Ralph Nader.
The magic words associated with the carbon tax debate are “revenue neutral.” That means the government lowers other taxes in order to generate the carbon tax. In addition to what seems to be consumer central thinking, the carbon tax is supposedly easy to implement on short notice. Proponents also say a new tax is efficient and relatively fraud proof.


What’s more, big countries like China will be reticent to implement carbon trading if current proposals move forward as planned. Any carbon trading platform that’s going to be successful urgently needs the support of major international polluters, according to consumer advocate Ralph Nader. He branded the Lieberman-Warner bill on climate change a ‘disguised effort at protectionism’ in an article in the Wall Street Journal.
Kenneth Green, a resident scholar at the American Enterprise Institute recently explained how incorporating a carbon tax of $15 would be passed on to consumers. He said that revenue neutrality would be achieved by reducing income tax by 13%. Total revenues generated from the $15 levy would amount to $80 billion and would achieve net GHG reductions of 11%, Green explained. Consumers would end up paying 83% more for coal, 11% more for oil, 9% more for natural gas, and they’d pay 14 cents more per gallon of gasoline at the pump. Green added that a carbon tax eliminates the need to legislate all sorts of standards. Because pollution is taxed, the production of polluting products will be automatically reduced. That means there’s no need for green building standards, light bulb standards, or other appliance standards, Green said. That might be a bit naive.
An economist at Tufts University, Gilbert Metcalf, might be a bit more rational, saying that slapping a tax on GHG emissions that raises the price of coal by over 80% will simply force power plant operators to go in search of cheaper and environmentally friendly alternatives for coal. What happens in other industries won’t magically create ‘green’ products. Many of these issues will no doubt feature in the next weeks as climate change becomes a central issue to be tackled in Congress.
The carbon tax bill issued last week by Rep. Pete Stark (D-CA) proposes to tax companies $10 per ton of fossil fuels used. The ultimate cost for the consumer is estimated to be 2 cents-per-gallon. The tax would be doubled in the second year and then raised by $10 per ton every year. Once the emissions are below 80% of their 1990 levels, the tax will be leveled out. The proposal is designed to prevent businesses from gaming the system, Stark said.
Democrat members of Congress as well as President Barack Obama are still mostly in favor of a cap-and-trade system. There are various discussions ongoing about proposals for new legislation to limit the CO2 emissions of large operations like power plants. For an overview of them all, check out this link. Cap-and-trade boils down to limiting pollution at the company level. Companies that emit more GHG than the amount they’re legally allowed can buy “permits to pollute” which fund the efforts of Third World companies to build new production facilities that are “green.” The permits are traded on a market based platform.
Opponents of a market-based carbon trading system say there are operational challenges which will never be overcome. They also warn that it will take years before the new market will run smoothly and before the right carbon price will have been determined. There are ways to achieve this quicker. For instance. governments can set a minimum price. But opponents warn any type of “surgery” will be controversial.
The Europeans, who have been trading carbon certificates since 2005, are perhaps a case in point. They still haven’t succeeded at getting the market to reflect the true cost/benefit picture of offsetting emissions. Another contentious issue is regulation. Who can punish companies for knowingly over-estimating their greenhouse gas emissions initially? Governments themselves are pushed for time to meet international targets. And there’s also a lot of uncertainty about how efficiency is calculated.
There are various proposed carbon trading platforms in the US, but every model has its drawbacks. By comparison, the only government in the world to have a carbon tax in place is the Canadian province of British Columbia. The British Columbian government taxes transportation and heating fuels but the tax is very umpopular with consumers because it was introduced at a time when gasoline prices were already skyrocketing.
In addition to Stark’s carbon tax bill, Rep. John Larson (D-Conn.) is working on similar legislation. Larson is advocating a carbon tax to offset payroll taxes, much like Green outlined. “We can have middle-income tax relief while serving the purpose of cleaning up the environment,” Larson said at a briefing last week sponsored by the Environmental and Energy Study Institute, Carbon Tax Center, the Climate Crisis Coalition, Friends Committee on National Legislation and Friends of the Earth. Larson first issued a carbon tax proposal in 2007 but this initiative failed to muster enough support.


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  • Jaybird

    I urge support for the cap-and-dividend approach. (see capanddividend.org) With a cap on emissions that gets smaller every year (by decreasing the number of allowances auctioned), we make certain that emissions will go down. Something a tax alone does not assure.
    The dividend pays money to every citizen (whether taxpaying or not) since everyone’s energy costs will go higher. It’s simple and fair.
    Let’s make it happen

  • Anonymous

    What happens to the industry loss as companies flee to lower cost locations, ie countries without carbon controls. I just don’t see how the numbers all make sense yet. More work is needed.