Don't Trade Carbon, Tax It

Yesterday Gristmill ran a curious article by Bill Chameides of Environmental Defense, attacking a carbon tax strawman that no one is advocating, least of all the Carbon Tax Center.

Chameides stated that the "government would use additional tax dollars to subsidize the development of selected low-carbon technologies." We invite him to look at CTC’s proposed carbon tax, which is revenue-neutral. Revenues will go to reduce regressive taxes or to finance progressive, equal rebates to all U.S. residents. Contrary to Chameides’ charge, we have never advocated targeting tax revenues to any technology, privileged or otherwise. Nor, to our knowledge, have the Washington Post‘s Anne Applebaum, whom he also took to task, or the dozens of columnists, economists, scientists, and other public figures who support taxing carbon.

Chameides and ED are throwing their weight behind a carbon cap-and-trade system, on the premise that the successful sulfur cap-and-trade model can be extrapolated to carbon. We believe this is flirting with disaster. A model that worked when the parties were limited to a few dozen electric utility companies is ill-suited when the stakeholders — essentially every business and household in the country — number 100 million or more. Moreover, electric generators seeking to reduce sulfur emissions had a variety of technological alternatives available. There are no comparable methods available to reduce carbon emissions other than fuel-switching and, perhaps sometime in the future, sequestration.

Chameides claims that the "marketplace does a better job of developing new technologies, and a tax takes money out of the marketplace." That argument was pertinent when the alternative to cap-and-trade was "command and control" regulation of NOx and SO2 emissions, but it’s irrelevant to a comparison with a carbon tax. Both a cap-and-trade and a carbon tax provide price signals that encourage polluters to look for ways to avoid the cost of emitting CO2.

A carbon tax actually provides more precise price signals, provides them sooner, and provides them in a more understandable and transparent fashion. To attack global warming, every energy-critical decision needs to be predicated on a trajectory of rising energy prices. A phased-in carbon tax allows this, whereas cap-and-trade will do little to mitigate the price roller-coaster that discourages emissions-minimizing investment.

Not only would a carbon cap-and-trade system provide less effective price signals, it would do so only after considerable delay consumed by protracted negotiations, making a mockery of Chameides’ claim that a cap will guarantee climate-stabilizing cuts. Compounding the problem, once a cap-and-trade system is finally implemented, we’re likely to be locked into the approach for years, with industry insisting, "Don’t change it until we see how it works." Carbon taxes will require no new administrative structures, can be implemented now, and can be adjusted as necessary.

Another serious drawback to cap-and-trade is that its inherent complexity leaves it open to exploitation by special interests, not to mention perverse incentives to "bank" pollution now against future credits. Carbon taxes are relatively immune to manipulation.

Ironically, Chameides’ hesitancy about trusting the government with tax dollars applies more aptly to his cap-and-trade proposal. Since the tax proposed by CTC and most other carbon tax proponents is revenue-neutral, there are no tax dollars to spend and potentially misuse. In contrast, even an optimal cap-and-trade system such as the Northeast’s Regional Greenhouse Gas Initiative, in which emissions allowances are auctioned, would saddle end-users with the functional equivalent of a tax, along with the same conundrum Chameides raised about how to spend the money. Except worse, because the cap-and-trade model necessarily requires that a chunk of the "tax revenues" be used to provide market participants with a profit paid by consumers.

And that’s under a relatively benign cap-and-trade, in which the allowances are auctioned. The alternative, giving polluters the
allowances outright, combines the worst of both worlds: a hidden tax on energy users, with all the increased energy costs given to the polluters or other market participants. An explicit tax that offsets other taxes is preferable to a covert tax that goes into someone else’s pocket.

Finally, we reject Chameides’ defeatism over the chances of Congress passing a carbon tax. On the contrary, the stars are aligned as never before to actually do something about carbon emissions. There is now a general acceptance of the need for action (even Exxon concedes there’s a problem), and no less than Wall Street demigod Paul Volcker
called last week for taxing CO2. The question is what will work best. For reasons discussed in more detail on our website, we believe that a carbon tax coupled with progressive tax-shifting can be a winner politically.

The last thing we want to do is lock in a suboptimal solution and then have to wait years before the stars are again aligned. Now is the time to work for a real solution that maximizes environmental gains and minimizes hardships.

This article was written with CTC co-director Dan Rosenblum. It appeared first on Gristmill. Dan and I invite commenters to post there as well as here.