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What Can Replace Faltering Cap-and-Trade?

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Is Waxman-Markey doomed? Revulsion at the special favors and sheer complexity built into the 1,400-page bill that squeaked through the House in June has been building nationwide this summer. Now, a Washington Post editorial signals the impending collapse of not just the bill but of cap-and-trade as the central mechanism for controlling U.S. greenhouse gas emissions.

The Post wrote earlier this week:

The rancorous debate over health reform has given voice to considerable uneasiness among Americans. Many are worried about how a new system will be paid for in an economy that has unraveled, and they are anxious about a kudzu-like expansion of an already unwieldy bureaucracy. Given the herculean effort it will take to get President Obama’s vision of reform through Congress, we’re not convinced that the Senate will have the stomach to tackle cap-and-trade legislation this fall. The growing agitation within the chamber over the creation of another complex system to buy, sell and trade pollution credits only adds to our doubts. (emphasis added)

As the Post editorial noted:

capitol_afagen1The House barely passed the American Clean Energy and Security Act (a.k.a. Waxman-Markey) in June. The 1,400-page bill has a potpourri of measures ranging from new efficiency and renewable energy standards to a cap-and-trade provision that gives away 85 percent of the pollution allowances to various interests. The Senate is proving to be a much tougher sell. Last week, four Democratic senators — Blanche Lincoln (Ark.), Ben Nelson (Neb.), Kent Conrad (N.D.) and Byron L. Dorgan (N.D.) — called on the leadership to strip cap-and-trade completely from the bill that Majority Leader Harry M. Reid (D-Nev.) hopes to start stitching together next month. This comes days after 10 moderate Democratic senators from coal and manufacturing states sent a letter to President Obama warning that they would not go along with any cap-and-trade regime that didn’t “maintain a level playing field for American manufacturing.” (emphasis added)

The fact that the epicenter of discontent is the coal-dependent “heartland” region indicates that Waxman-Markey has been more heavily attacked from the Right than the Left — as the Post itself signaled through its editorial title “Cap and Rage” and subtitle, “The fight over health-care reform could hobble climate-change legislation.” As we see it, the Big Green groups that steered Congress onto the  cap-and-trade path and also failed to insist on 100% permit auctioning and at least near-revenue neutrality share blame for the virulent attacks. Their stance helped turned the House bill into a perfect target for caricature as a “cap-and-tax” bill or “cap-and-trade tax” that would push hard-pressed American families, businesses and industries over the financial edge.

Nevertheless, the Post reports that:

Dropping cap-and-trade from the Senate bill is considered a non-starter by Mr. Reid and environmental advocates for two reasons. First, a long-stated goal of congressional leaders and the president himself is to have emissions-limiting legislation passed and signed into law in time for international climate talks in Copenhagen in December. Second, there is no Plan B. The leadership has put all of its eggs in the cap-and-trade basket.

Fortunately, the Post hastened to remind Majority Leader Reid that there is indeed a Plan B:

Yet there are other options worthy of consideration. Yes, we’re talking about a carbon tax. It would be relatively simple to devise and easy to implement. It would require no new bureaucracy, and the revenue generated could be rebated to the taxpayer in any number of ways — through a payroll tax reduction, for instance. (emphasis added)

The Post editorial acknowledged:

We know we are running counter to Washington’s tax-averse conventional wisdom. But we are not alone in our support of the carbon tax. There were three such bills in the House [including the Larson bill, which is more than 95% revenue-neutral and, with an upward-adjustable tax rate, is the most “cap-like” but without the politically toxic “trade” aspect]. One of the inventors of the cap-and-trade concept, Thomas Crocker, told the Wall Street Journal last week that he favors a carbon tax because he believes it’s easier to enforce.

The editorial concluded:

If Congress fails to pass cap-and-trade legislation, it will rapidly approach a fork in the road in addressing global warming. Members can sit back while unelected bureaucrats at the Environmental Protection Agency follow through on their moves toward regulating greenhouse gas emissions as a pollutant under the Clean Air Act. Or they can entertain a carbon-based tax designed to reduce emissions and give the money back to taxpayers in an equitable manner. A decision on which path to take is bearing down upon us. Not only are the global warming dangers facing the planet reaching the tipping point, but there will also be no climate agreement in Copenhagen without strong leadership in words and deeds from the United States. As the Senate forges ahead, nothing should be off the table.

We agree, of course, that nothing should be off the table. The demise of Waxman-Markey won’t be pretty, but it should spur all who grasp the criticality of the climate crisis to unite behind the quickest, fairest and most effective means to reduce U.S. greenhouse gas emissions: a national, revenue-neutral carbon tax.

Photo: Flickr / afagen.

Imagine: A Harmonized, Global CO2 Tax

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“For more than 20 years, I have supported a CO2 tax, offset by an equal reduction in taxes elsewhere. However, a cap-and-trade system is also essential and actually offers a better prospect for a global agreement, in part because it is difficult to imagine a harmonized global CO2 tax. Moreover, I have long recognized that our political system has special difficulty in considering a CO2 tax even if it is revenue neutral.” — Al Gore, quoted in New York Times, House Bill for a Carbon Tax to Cut Emissions Faces a Steep Climb, March 7.

Let’s examine Mr. Gore’s points:

Harmonization:  Mr. Gore has raised a crucial concern: Any carbon-reduction policies the U.S. enacts must quickly go global. Acting alone or counter to other nations’ efforts will not suffice.

containership_pbo31_1.jpgIn their seminal report last February, “Policy Options for Reduction of CO2 Emissions,” Peter Orszag (now Budget Director) and Terry Dinan of the Congressional Budget Office meticulously compared cap-and-trade with carbon tax options. They concluded that a carbon tax would reduce emissions five times more efficiently, primarily because of price volatility under a fixed cap.

CBO had no difficulty “imagining a harmonized global carbon tax.” Chapter 3 of the Orszag-Dinan report, “International Consistency Considerations,” describes straightforward ways to harmonize carbon taxes. If nations choose different carbon tax rates, border tax adjustments permitted under World Trade Organization rules authorize higher-taxing nations to enact tariffs to equalize tax rates on imported products to the same levels applied to similar domestically-produced products.

Indeed, Rep. John Larson’s new carbon tax bill employs precisely this strategy. In effect, the U.S. would collect and retain the revenue generated by equalizing carbon taxes on products imported from countries that haven’t enacted their own or whose carbon tax rate is lower than ours. That will provide a powerful incentive for our trading partners to follow our lead.

In contrast, under cap-and-trade, harmonization would require determining the implicit carbon price in a system where carbon prices are hidden and fluctuating. The CBO report observed, “Linking cap-and-trade programs would… entail additional challenges beyond those associated with harmonizing a tax on CO2.” The report noted, for example, that linked cap-and-trade programs could create perverse incentives for countries to choose less stringent caps so they could become net suppliers of low-cost allowances.

Or, the report continued, if a country that did not allow borrowing future allowances linked with a country that did, firms in both countries would have access to borrowed allowances. CBO concluded that “[O]ther flexible design features — such as banking, offsets, and a safety valve — would be available to all firms in a linked system should any one country allow its firms to comply in those ways.”

In short, national cap-and-trade systems would be nearly impossible to harmonize globally because different countries are likely to enact cap-and-trade systems with differing features that when linked would tend to defeat or de-stabilize each other. On the other hand, harmonization of domestic carbon taxes using border adjustments is a familiar and straightforward process for international trade and tax law experts under WTO.

Political Feasiblity: Gore also lamented that “our political system has special difficulty considering a carbon tax even if it is revenue neutral.” He has a point. After decades of anti-tax propaganda from the likes of Grover Norquist, Congress is understandably inclined to hide carbon pricing under a name like “cap-and-trade.” But when that first cap-and-trade price spike hits a public that was sold cap-and-trade as the un-tax, won’t its superficial naming advantage evaporate like morning dew? Will “cap-and-trade” still sound better than “revenue-neutral carbon tax” when we’re stuck with a slow, complex, costly and ineffective system?

Moreover, unlike cap-and-trade, a national carbon tax is showing signs of bipartisan support. One reason is that a carbon tax dispenses with the protracted drafting and wrangling inherent in cap-and-trade. British Columbia implemented its carbon tax in five months.

Cap-and-trade is “also essential”: Perhaps to newly-unemployed derivatives traders. But not for the rest of us. The Larson bill assures specific emissions reductions (as surely as with any other system) without the inherent problems of trading carbon derivatives. The bill automatically bumps up the carbon tax rate if emissions stray from an EPA-certified path to cut emissions by 80% from 2005 levels in 2050.

Yes, we can imagine, and yes, we must enact, a harmonized global carbon tax system. Al Gore and Jim Hansen persistently warn us: curbing the menace of uncontrolled climate change requires aggressive world-wide incentives to usher in efficiency and renewables. Price transparency and incentives for other nations to enact carbon taxes are crucial.

Rep. Larson has defied the naysayers; he has put the “t” word back on the table. Not a moment too soon.

Photo: Flickr / pbo31

Hansen Tells Ways & Means: Revenue-Neutral Carbon Tax Needed to Spur Clean Technology Revolution

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A planetary crisis “threatening the young and unborn” compels a “substantial, gradually-increasing carbon tax with all revenue distributed directly as monthly ‘dividends’ to each household,” Dr. James Hansen told Congress today.

Hansen, director of NASA’s Goddard Institute for Space Studies and the unofficial dean of climate scientists, testified that measurements of Earth’s historical climate sensitivity to atmospheric CO2 make clear that rising levels are now driving our climate into ranges that will have lethal consequences. Current concentrations of 385 ppm amplify dangerous feedback mechanisms such as loss of reflective ice surfaces and release of methane gas from permafrost, he said. Atmospheric concentrations must be brought below 350 ppm as quickly as possible, Hansen stressed, specifically rejecting the target of 80% reductions by 2050 advocated by leading environmental groups.

Hansen_World_Development_Movement.jpgHansen testified at a House Ways & Means Committee hearing this morning, kicking off debate in Congress over legislation to help the U.S. achieve deep cuts in carbon emissions through a cap-and-trade system, a carbon tax, or perhaps a hybrid approach. Hansen and Union of Concerned Scientists geochemist Dr. Brenda Ekwurzel both testified in favor of vigorous action, although they differed on the cap vs. tax question. A third witness, University of Alabama professor John Christy, argued for a go-slow approach.

Hansen told the committee that a transparent carbon tax with direct dividend would “spur rapid replacement of our inefficient infrastructure” and lead to an “efficient phase-out of coal.” He strongly criticized cap-and-trade proposals, calling caps “hidden taxes,” contending that they would undermine essential price signals through price volatility while enriching traders and lobbyists at the expense of the public. He predicted that cap-and-trade could lead to "blackmail" by electricity suppliers, who would force the public to choose between meeting emissions targets and blackouts, and pointed out that the European Union’s cap-and-trade system has failed to reduce carbon emissions.

UCS’s Ekwurzel testified that acidification has already diminished the oceans’ ability to absorb more carbon dioxide — a development that will accelerate global warming. She advocated a “cap and invest” program in which emission permits are auctioned and the proceeds used to finance energy efficiency and renewable energy.

Christy’s appearance was sponsored by Republican members of Ways & Means. He testified that cloud effects outweigh human effects on climate, and contended further that any U.S. actions to reduce emissions would be overwhelmed by emissions from China and India, both of which have rejected carbon caps. He suggested that the best way to reduce CO2 emissions is a massive nuclear power construction program.

Committee Chairman Charles Rangel, who represents Manhattan’s Harlem neighborhood and parts of the Bronx, asked Hansen about the effects of a carbon tax on low-income households. Hansen explained that under his proposal to distribute 100% of carbon tax revenues to U.S. residents, a steadily increasing tax reaching $115 per ton of CO2 would result in estimated dividends of $9,000 per two-child household, assuming that adults got one “share” and each of the first two children got one-half. [Ed. note — Using CTC’s carbon tax impact model, we estimate that a $115/ton carbon tax would provide the average family of four with a $7,500 annual dividend.] Hansen noted that because households that use below-average amounts of fossil fuel would receive more in dividends than they paid in higher energy costs, his program would help the vast majority of middle- and lower-income Americans. Hansen also cited Congressional Budget Office findings that carbon taxes are five times as efficient as caps at reducing emissions.

UCS’s Ekwurzel argued that retrofitting homes and  transportation would be a better use of carbon cap revenue than direct dividends. However, she did not address whether “breaching” strict revenue-neutrality on behalf of energy efficiency and renewables might unleash a torrent of less benign uses of the cap or tax proceeds. For his part, Christy seconded Hansen’s view that a carbon tax would be  more transparent than a carbon cap-and-trade system.

Rep. Dave Camp (R-Mich.) and several other Republican members branded carbon caps as hidden taxes. They insisted that the Ways & Means Committee assert jurisdiction over any cap or carbon tax legislation.

Rep. Sander Levin (D-Mich.) responded to Christy’s testimony, saying “nobody is talking about the U.S. acting alone.” Hansen explained that the U.S. could use “average carbon content data” to set tariffs on goods from countries that didn’t enact their own carbon taxes. A U.S. tax with harmonizing tariffs would encourage trading partners to enact their own carbon taxes to negate tariffs and capture tax revenue themselves, he said.

Connecticut Democrat John Larson cited Friends of the Earth’s recent report describing carbon trading as potentially the world’s largest “dark, unregulated” derivatives market and asked why anyone should think that auctioning tradeable permits wouldn’t lead to “a speculative mess.”

During a recess in the hearing, Peter Barnes of Cap and Dividend and Mike Tidwell of Chesapeake Climate Action Network asked Hansen if he would support legislation to cap emissions and recycle revenue via a direct “dividend” to households. Hansen replied, "I don’t see what a cap gets you. We need maximum reductions as soon as possible and a tax gets that."

Committee members asked one cogent question after another. Rep. Jim McDermott (D-Wash.) focused on volatile prices under a cap, which he said would discourage clean energy entrepreneurs. Rep. Chris Van Hollen (D-Md.), a strong supporter of cap-and-dividend, asked about revenue-recycling, noting Hansen’s testimony that a carbon price will need to be high enough to affect behavior and purchasing decisions. Rep. Doggett noted that Exxon now supports a carbon tax after years of climate-change denial.

Hansen stressed the importance of a dividend to ensure continued political support as carbon prices rise. He urged Congress to direct the National Academy of Sciences to report on climate science as a way to end the debate over anthropogenic global warming once and for all. 

After the hearing, I had the good fortune to join Dr. Hansen for lunch. I asked him about clean coal. He said “there is no such thing as clean coal, and there never will be.”

Links to testimony
Hansen: http://waysandmeans.house.gov/hearings.asp?formmode=view&id=7577
Erwurzel: http://waysandmeans.house.gov/media/pdf/111/ekw.pdf
Christy: http://waysandmeans.house.gov/media/pdf/111/ctest.pdf

Photo: Flickr / World Development Movement.

Capitol Hill Briefing on Carbon Taxes Draws Overflow Crowd

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Carbon Tax Center
Pricing carbon equitably and efficiently
www.carbontax.org

News Release / For immediate release
Contacts:  Stephen Kent, skent@kentcom.com, 914-589-5988 / Nick Berning, NBerning@foe.org, 703-587-4454

Making the Case for a National Carbon Tax

NASA Lead Climate Scientist, House Democratic Caucus Leader, Senior Economists and Environmental Leaders Urge Revenue-Neutral Carbon Tax as Best Way to Curb US CO2 Emissions and Boost American Low- and Middle-income Families

[Washington DC – December 9, 2008] At a Capitol Hill briefing today, NASA’s lead climate scientist, senior economists and environmental leaders urged Congress to move swiftly to enact a national carbon tax to reduce carbon emissions before they push Earth’s climate system past its “tipping point” into accelerating ecological and social collapse.

After the resounding defeat of the Boxer-Lieberman-Warner cap-and-trade bill last spring, the carbon tax has emerged as a viable competitor to a cap-and-trade system. As Congress begins to ponder climate legislation widely expected in 2009, advocates at today’s briefing made the case for taxing carbon as a more effective and economically viable way to curb emissions while stimulating the economy. They argued the considerable revenues carbon taxes would raise should be revenue-neutral, and be returned to taxpayers either through direct distribution or cutting taxes such as payroll taxes.

Metcalf2_1.jpgThe public briefing for members of Congress and their staffs was sponsored by the Environmental and Energy Study Institute (EESI), the Carbon Tax Center, the Climate Crisis Coalition, Friends Committee on National Legislation and Friends of the Earth.

“A price on emissions that cause harm is essential,” said Dr. James Hansen, Director, Goddard Institute of Space Studies, National Aeronautics and Space Administration and a leading voice on understanding and redressing climate change. He urged “a carbon tax on coal, oil and gas… applied at the first point of sale or port of entry” to encourage fuel conservation and switching to low-carbon alternatives.

“A Carbon tax with 100 percent dividend [direct revenue distribution to individuals] is needed to wean us off fossil fuel addiction,” Hansen argued.

“Tax and dividend allows the marketplace, not politicians, to make investment decisions. It is also non-regressive. Low- and middle-income people will find ways to limit their carbon tax and come out ahead. Demand for low-carbon high-efficiency products will spur innovation, making our products more competitive on international markets. Carbon emissions will plummet as energy efficiency and renewable energies grow rapidly. Black soot, mercury and other fossil fuel emissions will decline.”

Rep. John Larson (D-CT), recently elected as chair of the House Democratic Caucus and the sponsor of a carbon tax bill introduced into the House last year, hosted the briefing. He said, “Climate change is the great challenge of our time. As we in Congress tackle this challenge it is important that we not just pass legislation, but pass the right legislation. What I have proposed is legislation that would tax bad behavior like polluting and return that money to average Americans through a payroll tax reduction. Any legislation will create winners and losers. In this case, the winners should be the American people.”

Economist Gilbert Metcalf of Tufts University, author of A Green Employment Tax Swap: Using A Carbon Tax to Finance Payroll Tax Relief, recommended a carbon tax just under $17/ton of CO2. This would nearly double the average price of coal, the most carbon-intensive fossil fuel, leading to fuel substitution and process improvements that would reduce coal burning by 32%. Petroleum products would increase in price by nearly 13% and natural gas by just under 7%, he estimates. Metcalf advocates dedicating carbon tax revenues to eliminate the payroll tax on the first $3,660 earned by each worker. He calculates that this would equate to an average 11% reduction in payroll taxes, with greater percentage reductions for lower-paid workers. Payroll tax reduction would stimulate job growth, something the economy now urgently needs.

“In general, taxes on labor supply discourage labor and create economic losses to workers over and above any taxes collected,” Metcalf explaned. “Tax reductions can encourage additional labor supply either on the intensive margin (hours worked) or the extensive margin (the decision to enter the labor force). The Green Employment Tax Swap encourages additional labor supply.”

Robert Shapiro, former Undersecretary of Commerce, now head of SonEcon, a Washington, DC consulting firm, and co-chair of the U.S. Climate Task Force, criticized cap-and-trade proposals as clumsy, complex, volatile and ineffectual ways to tax carbon emissions: “The only reason anyone is talking about cap-and-trade now is because the U.S. (at Al Gore’s urging) insisted on cap-and-trade in Kyoto [in 1997]. Mr. Gore has since abandoned cap-and-trade and is now calling for a carbon tax to replace other taxes. Caps just aren’t working.”

Under the European Union’s carbon cap, CO2 reductions have been “negligible and very costly,” Dr. Shapiro said. Exemptions (e.g., for coal-fired power plants in Germany) “overwhelm the cap.” China and India have strongly rejected cap-and-trade. In contrast, he argued, a U.S. carbon tax would encourage our trading partners to tax carbon themselves to avoid forfeiting revenues on their exports to us (WTO rules would otherwise permit the US to tax imports for carbon).

Like most economists, Shapiro said he strongly prefers price-based policies such as carbon taxes, to quantity-based carbon caps, because the taxes are simple and predictable as well as difficult to evade. A cap on quantity necessarily makes energy prices more volatile, and the resulting price spikes are economically disruptive, harming productivity and undermining support for the system. For example, Shapiro noted that Southern California’s “RECLAIM” cap-and-trade system for smog emissions crashed due to price spikes during the state’s electricity crisis.

James Hoggan, a public policy specialist from British Columbia who chairs Canada’s Suzuki Foundation, outlined the steps leading to British Columbia’s successful implementation of its carbon tax in July, and explained the national dimensions of the carbon tax in Canada. “The Canadian experience with carbon taxes is politically daunting: a federal party that proposed such a tax just lost a fall election, and a provincial party that introduced a carbon levy last summer faces potential defeat next May. But close analysis shows these politicians got in trouble not for what they did, but for how they did it.”

From Canada’s experience, Hoggan drew the lesson that emphasizing “revenue recycling” or the revenue-neutral configuration of the carbon tax helps distinguish it from conventional taxes and garners more public support. He cited polling data suggesting that a majority of Canadians support a transparent revenue-neutral carbon tax as evidence that carbon taxation could be popular with voters.

The Carbon Tax Center was launched in January 2007 to give voice to Americans who believe that taxing emissions of carbon dioxide — the primary greenhouse gas — is imperative to reduce global warming.

The Environmental and Energy Study Institute is a non-profit organization established in 1984 by a bipartisan, bicameral group of members of Congress to provide timely information and develop innovative policy solutions that set us on a cleaner, more secure and sustainable energy path.

The Climate Crisis Coalition was founded in 2004 to create awareness and convey a sense of urgency about the climate crisis and broaden the constituency of the climate action movement. Its approach to climate change links issues of environmental, social and economic equity.

The Friends Committee on National Legislation is the largest peace lobby in Washington, DC. Founded in 1943 by members of the Religious Society of Friends (Quakers), FCNL staff and volunteers work with a nationwide network of tens of thousands of people from many different races, religions, and cultures to advocate social and economic justice, peace, and good government. FCNL is nonpartisan.

Friends of the Earth is the U.S. voice of the world’s largest grassroots environmental network, with member groups in 77 countries. Since 1969, Friends of the Earth has fought to create a more healthy, just world.

NOTE TO EDITORS AND PRODUCERS: Experts quoted in this press release are also available for phone or in-person interviews. Interviews may be requested by contacting Stephen Kent, skent@kentcom.com (914) 589-5988.

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Photo: Nick Berning.
Click here to access Berning’s slide show of the briefing.

Media Buzz Intensifies Ahead of Carbon Tax Hill Briefing

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The Carbon Tax Center’s Capitol Hill briefing is just two days away (Dec. 9), and we couldn’t have choreographed a more turbocharged buildup than the one provided over the past few days by The New York Times and The Wall Street Journal.

Thomas Friedman’s column in today’s Times, The Real Generation X, is his most full-throated call ever
for a carbon tax. It’s a welcome return to his  earlier editorializing in favor of carbon taxing from his recent slight tilt toward cap-and-trade (emphases added):

HappyToPay.jpg

It makes no sense to spend money on green infrastructure — or a bailout of Detroit aimed at stimulating production of more fuel-efficient cars — if it is not combined with a tax on carbon that would actually change consumer buying behavior.

Many people will tell Mr. Obama that taxing carbon or gasoline now is a
“nonstarter.” Wrong. It is the only starter. It is the game-changer. If you want to know where postponing it has gotten us, visit Detroit. No carbon tax or increased gasoline tax meant that every time the price of gasoline went down to $1 or $2 a gallon, consumers went back to buying gas guzzlers. And Detroit just fed their addictions — so it never committed to a real energy-efficiency retooling of its fleet. R.I.P.

If Mr. Obama is going to oversee a successful infrastructure stimulus, then it has to include not only a tax on carbon — make it revenue-neutral and rebate it all by reducing payroll taxes — but also new standards that gradually require utilities and home builders in states that receive money to build dramatically more energy-efficient power plants, commercial buildings and homes. This, too, would create whole new industries.

Demonstrating the bipartisan support for carbon taxes from across the political spectrum, the Friedman op-ed followed two powerful Wall Street Journal columns this week.  A Dec. 3 op-ed by Ralph Nader and Toby Heaps, We Need a Global Carbon Tax, subtitled, "The cap-and-trade approach won’t stop global warming." makes a compelling case for pricing carbon emissions via a tax rather than a trading scheme:

A global carbon tax levied on a relatively small number of large sources can be monitored by satellite and checked against the annual surveillance of fiscal and economic polices already carried out by IMF staff. Thus, the accounting involved is much more precise and much less subject to the vagaries of corruption and conflict over which industries and companies get their free handouts of carbon credits — carbon pork — than in a cap-and-trade system.

Nader and Heaps go on to provide "three reasons why countries, such as China and India, that have traditionally resisted any notion of a common responsibility to make current polluters pay would do well to enlist in this effort (emphases added)."

First, while there is
no limit on the downside for missing a hard cap, with a carbon tax you
just pay as you go. If a fast-growing
country like China accepted an emissions cap and then overshot it, they
would have to purchase carbon credits on the international market. If
they missed their target by a lot, carbon credits would be scarce, and
purchasing them would suck dry their foreign exchange reserves in one
slurp. That’s why a carbon tax is much easier to swallow and, anyway,
through the power of the price signal, it would produce the same
desired result as a hard cap.

Second,
administering billions of dollars of carbon credits in a cap-and-trade
system in an already chaotic regulatory environment would invite a civil war between interest groups seeking billions in carbon credit handouts and the regulator holding the kitty.
By contrast, a uniform tax on CO2 emissions levied at a small number of
large sites would be relatively clear-cut. During the Montreal Protocol
talks in the 1980s, India smartly balked at a suggestion to phase out
CFCs in certain products and not in others because of the chaos that
would result from the ambiguity.

Third, key people in China read
our newspapers. They see the ominous clouds of protectionism under the
guise of environmentalism in bills like Lieberman-Warner and they don’t
want to be harmed; neither should we, given the trillions of dollars of
Treasury bills they hold. Showing compliance with a harmonized
carbon tax at a small number of large bottleneck points would be
child’s play compared to the chaos of cap-and-trade.

That was Wednesday. On Friday, the Journal raised its own profile with an editorial, Some Carbon Candor: A climate guru rebukes his mates on cap and trade.

The "climate guru," of course, is Dr. James Hansen, director of NASA’s Goddard Institute of Space Studies, and headliner of our Hill briefing this Tuesday.
The Journal noted that "Mr. Hansen endorses a straight carbon tax as
the only ‘honest, clear
and effective’ way to reduce emissions, with the revenues rebated in
their entirety to consumers on a per-capita basis. ‘Not one dime should
go to Washington for politicians to pick winners,’ he writes."

The Journal editorial continues with a clear statement of its preference for a carbon tax over cap-and-trade (emphases added):

The
risks of fossil fuels remain speculative, but if they really are the
apocalypse of Mr. Hansen’s prophecies, then the cleanest remedy is a
tax. That would raise energy and all other prices as the incentive for
new technologies and investments. But a tax would be neutral,
eliminating the market distortions caused by subsidies and regulation,
and the proceeds could be used to offset other taxes. The
transition to a world in which growth is not tied to carbon would still
be long and extremely expensive, but a tax would be the least painful
way to get there.

"A tax should be called a tax," Mr. Hansen writes. "The public can understand this and will accept a tax if it is clearly explained and if 100 percent of the money is returned." Clearly the man is not standing for elective office.
Beltway
sachems prefer posturing that disguises the cost of rising energy
prices, such as cap and trade. This "subterfuge," as Mr. Hansen terms
it, shifts the direct burden onto businesses, which then pass it along
to consumers. Congress may flatter itself that it is saving mankind,
but what the Members really want is a cap-and-trade windfall that they
can redistribute in the green pork of Mr. Obama’s "new energy
economy," whatever that means.

To be fair, carbon tax revenues could also end up as green pork. But
the transparency of a carbon tax — from the candor in its name to its frank acknowledgment of its impact on energy prices — militates in
favor of a revenue-neutral outcome in which the revenues are
distributed or tax-shifted to American families rather than skimmed off
by political and corporate rentiers.

Why the carbon tax trifecta this week? While
we can’t know precisely what led Mr. Friedman to go all out today for a carbon tax (rather than cap-and-trade), perhaps the financial meltdown has played a big
part  by opening up political space for bold action and discrediting the notion of creating another trillion-dollar market in
arcane securities. As for The Journal, while it might prefer to to
stifle any move toward carbon emission pricing, its
straightforward arguments for the relative efficacy of carbon taxing
over a cap-and-trade scheme are welcome.

In any event, the setting couldn’t
be more propitious for our carbon tax briefing this Tuesday, which the
Carbon Tax Center has organized along with the Climate Crisis
Coalition, the Environmental and Energy Study Institute, Friends of the
Earth, and the Friends Committee on National Legislation. As a side-benefit, the media buzz might help convince C-Span to provide live
video. The briefing,
featuring not only Dr. Hansen but other climate-policy experts Gilbert
Metcalf, Robert Shapiro and James Hoggan, hosted by Rep. John Larson
(D-Conn.), who was just elected chair of the House Democratic Caucus,
and moderated by FoE president Brent Blackwelder, is in Rayburn House
Office Building B318 and runs from 9:00 a.m. to 11:30 a.m. Tuesday. We
hope to see you.

Photo: Flickr / kakariki.

At Last, It Begins: Real, Substantive Debate on 2009 Climate Legislation

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(This post first ran in the Huffington Post on November 25.)

Before President-elect Obama’s cabinet is named — even before we know who the next Senators from Minnesota or Georgia will be — jockeying for position on 2009 climate legislation is well underway on Capitol Hill. Detailed intellectual cases and functioning coalitions are getting built now, not just for the idea that we need robust climate legislation fast – that’s already widely accepted and anticipated in Washington – but for which specific mechanisms will deliver the biggest, fastest impact on carbon emissions and the economy.

Significantly, these discussions aren’t all taking place behind closed doors, but in full public view, for example at a public Hill briefing December 9 with carbon tax supporters like NASA scientist James Hansen, economists Gilbert Metcalf and Robert Shapiro, Canadian public affairs expert James Hoggan, and Rep. John B. Larson (D-Conn., 1st district), who has just been elected chair of the House Democratic Caucus, and who introduced an early piece of carbon tax legislation into the House. The public can attend, along with Congressional members and staff — details here.

Capitol_dome_lit.jpgIf introducing a new tax on carbon seems like a quixotic political battle in a time of historic economic and fiscal crisis, then you’re out of touch. The economic crisis has in fact given it a big boost, and in this crisis-ridden political environment, the carbon tax is an increasingly formidable competitor to cap-and-trade schemes.

The latter work by creating trillions of dollars’ worth of complex, tradeable instruments, and public faith in market gurus to make such trading efficient, or in government agencies to regulate them, is at an all-time low.

Critics point out lots of places to hide in the cumbersome trading scheme, witness 800-pages of special interest potlatches in the DOA Warner Lieberman bill, whereas a carbon tax is as inexorable as… taxes.

Crisis-driven volatility in oil prices has proven what advocates of gasoline taxes and energy taxes have said all along: price spikes may come and go, but if we don’t somehow tax wasteful use of carbon fuels, the highs will just put windfalls in the pockets of oil producers and do nothing for American interests, either for energy independence or for getting control of our emissions. A carbon tax would put an effective floor under the price of gas, help smooth volatility, cut into the windfall profits of producers during price spikes, and as prices fall off the highs, keep oil consumers from going, as President-elect Obama recently said, from shock back into trance.

Perhaps most appealing of all amid the economic crisis is the fact that a carbon tax could be kept revenue-neutral. That would allow us to pay as we go to curb emissions; and wouldn’t entail any huge government outlays or bureaucracies to get addicted to the revenue. Along with the increase in energy prices, carbon tax revenues would be big, but the money would be given right back to taxpayers, whether in the form of direct payments like Alaskans get for oil production, or in the form of a progressive tax cuts like cutting or eliminating payroll taxes, as progressives like Al Gore and even conservatives like T. Boone Pickens have proposed.

Payroll taxes are the biggest, most regressive taxes 80% of Americans pay, and a big drag on employment since they artificially raise hiring costs. Cutting them would both put money back into the pockets of middle-class and working-class families, and take the self-imposed brakes off job creation.

If you’re President-elect Obama and you’ve promised to create 2.5 million jobs by 2011, and to lower taxes on families making less than $250,000 a year, while finding the means for a meaningful economic stimulus and major reductions in carbon emissions, that has got to sound good.

If you’re a concerned citizen who has been waiting for years for the political static to clear, and some real, productive grappling with meaningful climate legislation to begin, this is your moment. You can weigh in, sign petitions, write letters to Congress, attend that Hill briefing, and generally be part of substantive, small-d democratic debate about serious climate legislation at the Price Carbon Campaign

Photo: Flickr / Afagen.

Is the Moment Ripe for a National Carbon Tax?

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(This post first ran on Gristmill, under the headline,
Can the Promise of a New Political Landscape Include a U.S. Carbon Tax?,
with the subhead, Advocates launch the Price Carbon Campaign.)

What do the defeat of the Lieberman-Warner cap-and-trade bill, the burst of the oil-price bubble, the Wall Street meltdown, the promise of a new political landscape in the wake of the fall elections, and the exigencies of the climate crisis have in common

To the Carbon Tax Center and our partners at the Climate Crisis Coalition, these events together augur for a resurgence of interest in, and potential political support for, the “gold standard” for carbon pricing: a national, revenue-neutral carbon tax.

Tornado_Dash___patrix.jpgConsider:

  • The ignominious defeat of Lieberman-Warner, which collapsed in June under its 800-page weight, made crystal-clear that any carbon cap-and-trade system will be dysfunctionally complex, will take agonizingly long to put in place, and will fall prey to massive special-interest ripoff.
  • Political prospects for creating trillions of dollars’ worth of tradeable carbon emission permits have been further damaged by the Wall Street debacle and the resulting backlash against insider speculation and profiteering.
  • Retreating prices for oil and other fossil fuels strengthen not just the need, but also the political wherewithal for taxing fuels for their carbon content.
  • The success of the movement to elect Barack Obama to the presidency signals an era of new possibilities in which, just possibly, shibboleths such as “no new taxes” may get tossed into history’s dustbin — particularly if carbon taxes are made revenue-neutral via tax-shifting or revenue distribution.

To pivot off this moment, CTC and CCC today, with other allies, have launched the Price Carbon Campaign.

The campaign begins with three elements:

  • an online petition to the Obama administration and Congress calling for serious consideration of a national carbon tax during the first hundred days of the new Washington regime;
  • a letter-writing campaign to members of Congress. Your letter will be directed not only to your Senators and member of Congress (keyed by your zip code), but also to House and Senate leaders who hold sway over climate and tax legislation; and
  • a congressional briefing on carbon taxes focusing on the environmental, economic, economic-efficiency, logistical, and political benefits of a national carbon tax.

The briefing, featuring NASA lead climatologist (and carbon tax advocate) James Hansen, economists Gilbert Metcalf and Robert Shapiro, and Canadian public affairs expert James Hoggan, and hosted by Rep. John B. Larson (D-Conn., 1st district), is set for a House Ways and Means Committee hearing room (Rayburn H.O.B., Room B-318) on Tuesday morning, Dec. 9.

For further details on the briefing, click here.

We hope to generate thousands of signatures and letters between now and Dec. 9, so please visit the Price Carbon Campaign now.

Photo: Flickr / patrix.

Help Make Our Capitol Hill Briefing on Carbon Taxes a Big Success

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CTC’s Special Request for Your Support

On January 20, 2009, less than ten weeks from today, the United States will have a new president and a new Congress. After eight years of obstruction by the Bush administration, and years of delay before that, the United States is finally poised to take action to reduce greenhouse gas emissions.

On December 9, six weeks before Inauguration Day, the Carbon Tax Center is holding a briefing on Capitol Hill to articulate to the incoming Administration and Congress why a tax on carbon emissions must be the centerpiece of a new U.S. climate policy. Headlining the briefing is NASA climatologist James Hansen, a powerful advocate of a carbon tax. Dr. Hansen will be followed by two eminent economists, Prof. Gilbert Metcalf of Tufts and Dr. Robert Shapiro, currently at Sonecon and formerly U.S. Under Secretary of Commerce for Economic Affairs. James Hoggan, chair of the David Suzuki Foundation and a highly regarded Canadian pollster, will speak on public opinion regarding British Columbia’s carbon tax and the impact of the Liberal Party’s carbon tax proposal on last month’s Canadian national election.

The briefing is being hosted by Rep. John Larson of Connecticut, a member of the tax-writing Ways and Means Committee and author of a carbon tax bill introduced last year. Mr. Larson is Vice Chair of the Democratic Caucus, making him the fifth-ranking Democrat in the House, and has been mentioned as a possible successor to Rahm Emanuel, Chair of the Caucus and soon to be chief of staff to President Obama. The briefing will run from 9 a.m. to 11:30 a.m. and will take place in a Ways & Means Committee hearing room, B-318, in the Rayburn House Office Building. The Climate Crisis Coalition has joined us as conference organizer, and Friends of the Earth and the Environmental & Energy Study Institute are serving as co-sponsors.

We are particularly pleased that James Hansen has agreed to be our keynote speaker. For over 20 years, Dr. Hansen has distilled mounting evidence that rising levels of atmospheric carbon dioxide will soon lead to disastrous climate change into urgent calls for action by the United States and other major emitters. Dr. Hansen courageously rebuffed efforts by the Bush administration to muzzle him and has continued to combine world-class research and public education on the imminence of potentially devastating climate change with exhortation for action. At the top of Dr. Hansen’s agenda, and a focal point of his presentation at our briefing, is the need for carbon pricing delivered through steep but equitable revenue-neutral carbon taxes.

Following Dr. Hansen’s keynote address, economists Metcalf and Shapiro will detail the mechanics of carbon taxing, and Mr. Hoggan will share his research findings on public opinion concerning Canada’s experience with carbon taxes.

We invite you to join us at the December 9 briefing. To ensure its success, including vital follow-on work, we ask for your generous financial help.  Political dynamics in Washington have changed dramatically and CTC intends to be fully engaged to ensure that carbon taxing gets a full hearing. Your support will enable us to take full advantage of this long-awaited opportunity to effectively advocate for a U.S. carbon tax.  Please click our Donate Now button or click here for instructions on making a contribution.

Bloomberg, Economists, Greens Tell Ways & Means: Price Carbon Upstream, Distribute Revenues to Consumers

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Reported for the Carbon Tax Center by James F. Handley.

The "fierce urgency" of the climate crisis compels action, said Rep. John Larson (D-CT) at Thursday’s House Ways and Means Committee’s packed hearing on climate change revenue measures. Hurricane Ike’s devastation of coastal Texas imparted deeper meaning to Martin Luther King’s phrase. Witnesses pointed to storm-related damage as one of many ways in which failure to reduce the greenhouse gas emissions that drive global warming will destroy ecosystems and economies alike.

Citing the effectiveness and simplicity of a carbon tax, New York City Mayor Michael Bloomberg urged Congress to tax fossil fuel producers upstream, and distribute revenue downstream to consumers by reducing payroll taxes. A carbon tax would impose a cost proportional to carbon emissions, but because revenue distribution would not be linked to consumption, the system would “use capitalism” to create broad incentives for energy conservation and alternative energy, Bloomberg said.

Ways_Means.jpgWhile reiterating that he favors a “straightforward carbon tax,” Bloomberg said carbon cap-and-auction would also work if revenues were distributed downstream, an idea elaborated later by Peter Barnes of Cap and Dividend. Bloomberg urged the U.S. to avoid competing to become the world’s cheapest producer — a strategy that has thrust China into an environmental nightmare and a downward wage spiral. Bloomberg and Dr. Frank Ackerman of the Stockholm Environment Institute and Tufts University cited Germany’s standing as a world leader in manufacturing high-value products despite high wages and energy prices.

Climate policy, said Dr. Peter Orszag of the Congressional Budget Office, poses the thorny problem of imposing short-term costs to achieve long-term benefits. The Lieberman-Warner cap-and-trade bill would have created $100 billion in carbon emission allowances. Orszag stressed that giving away permits to energy producers, as the bill proposed, would enrich fuel producers rather than protect energy consumers. To avert the extreme volatility experienced under EPA’s sulfur dioxide cap and maximize economic efficiency, Orszag urged that a carbon cap be designed flexibly with banking of permits.

Dr. Dallas Burtaw of Resources for the Future agreed with Orszag that giving away permits to energy producers wouldn’t reduce price increases felt by consumers. A tax with a direct dividend would function as a transparent system, Burtaw said, that would signal to the public that we are addressing climate change as a national initiative that is “not engineered to squirrel away special privileges.”

Tim Regan of Corning Incorporated warned the Committee over the competitive disadvantage to energy-intensive industries such as his own under either cap-and-trade or a carbon tax. But Robert Lighthizer, an attorney with Skadden, Arps’ international trade department, assured the panel that the WTO allows the U.S. to impose tariffs equivalent to domestic carbon prices on imported products to put domestic products on a level playing field. Gary Hufbaur of the Peterson Institute cautioned that the WTO has not ruled on these matters but argued that this need not delay U.S. action to create incentives for our trading partners to join in combating global warming.

The Committee questioned panelists extensively. Rep. Paul Ryan (R-WI) cited the conclusion of the February CBO study that a carbon tax would be five times as effective as a simple cap-and-trade system. Several panelists noted that setting tariffs to harmonize the burden on imported goods would be much simpler under a carbon tax because the exact price of carbon would be fixed while under cap-and-trade the price would fluctuate.

After a recess for floor votes, the Committee began its second panel with Frank Ackerman of the Global Development and Environment Institute of Tufts University. “The debate has shifted at last” Dr. Ackerman declared. “Climate science is no longer debatable and now the serious economic discussion is underway.” He insisted that costs of inaction would be staggering — far more severe storm damage, sea-level rise inundating coastal-area homes, farms and businesses, particularly in Florida and the Caribbean, and endemic water shortages. Ackerman testified that the costs of well-designed policies to cut carbon would be small by comparison, probably only 1% of output.

Daniel Abassi of the emissions trading and investment firm MissionPoint Capital called on Congress to price carbon through a cap-and-trade system, with 25% of allowances given to industry and 75% auctioned, with revenue used to reduce distortionary taxes, for tax incentives, efficiency upgrades and low-carbon energy R&D.

The climate crisis is “a major threat to national security,” declared Jerome Ringo of the Apollo Alliance Having just been in Louisiana and Texas, Ringo said average people aren’t talking about the Wall Street meltdown, they’re asking “why they’ve been hit with so many category 5 storms; climate change comes up in almost every conversation.” Ringo called for Congress to push the U.S. to a green jobs economy by funding public transportation and infrastructure. He warned that emissions trading could mean “rich companies get richer” and asked that carbon revenues be dedicated to training and investment in alternative energy.

Peter Barnes urged Congress to put cap-and-trade auction revenue where it will do the most good both politically and economically — into a direct monthly dividend to each U.S. resident along the lines of the Alaska Permanent Fund. A dividend would offset economic effects on consumers and also build the broad political support needed to support climate legislation, Barnes said.

Expanding on the Apollo Alliance’s call for funding public transportation, Bill Millar of the American Public Transportation Association cited DOE studies showing that transport generates a third of U.S. carbon emissions. [Ed. note: autos and light trucks generate 21-22% of U.S. CO2; air travel and freight add another 10%, approximately.] “If a typical two-car, two-adult household chooses to eliminate one car and take public transportation, walk or ride a bicycle for most of its trips, [its] CO2 emissions can be reduced 30% which is more than if that household went without electricity,” Millar testified. Millar said that spending $1 billion on public transportation would create at least 35,000 jobs. He also called transit a direct way to offset the effects of higher fuel prices on consumers.

David Kreutzer of the Heritage Foundation testified that a U.S. policy capping emissions or a carbon tax would do little to reduce global greenhouse emissions and would not be worth the cost. Ackerman strongly disagreed, “If the U.S. leads, the world will follow, but if we don’t, the worst consequences” can be expected.

Photo: Flickr / HispanicCaucus.

Carbon Revenue Recycling is Focus of Capitol Hill Briefing

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Reported for the Carbon Tax Center by James F. Handley

[Ed. note — two days after the Capitol Hill briefing, on Thurs. Sept. 18, the House Ways and Means Committee heard testimony on optimal pricing of carbon emissions, including a forceful presentation from carbon tax advocate New York City Mayor Michael Bloomberg; watch this space for CTC’s report.]

At least one Washington politician dares to say “tax” out loud — a carbon tax, no less.

Representative John Larson (D-Conn.) headlined a Capitol Hill panel discussion Tuesday and came out swinging for a revenue-neutral carbon tax. Larson, a member of the Democratic House leadership and the tax-writing Ways and Means Committee, called carbon taxing the most effective way to curb greenhouse gas emissions. Addressing a briefing organized by Clean Air – Cool Planet and the Energy and Environment Study Institute, the five-term Congressman invoked his constituents at Auggie & Ray’s Diner in East Hartford: “They know climate protection comes with a price tag — they want transparency up-front so they know what to expect and can plan ahead. And they want a fair, level playing field.”

Both a carbon tax or the auctioning of permits under a carbon cap-and-trade system would generate huge streams of revenue which would come under the jurisdiction of Ways and Means. The Committee has scheduled a hearing tomorrow, Sept. 18, on revenue recycling, and Larson will be on hand, presumably putting the spotlight on the American Energy Security Trust Fund Act he introduced in August 2007.

Sept_16_hearing.jpgSpeaking to an overflowing House banquet room, Larson, shown at right, called a carbon tax “simple, efficient, straightforward and effective” and said it will be a boon to the economy if the revenue is recycled to reduce or eliminate distortionary taxes. Following Larson, a politically diverse panel of economists — Robert Repetto, Robert Shapiro, Terry Dinan, and Ken Green — discussed ways to maximize the “double dividend” — benefits to climate and to the economy from recycling revenue from either a carbon tax or the auction proceeds of cap-and-trade.

Several noted the most egregious flaws of the defeated Lieberman cap-and-trade bill: it would have given away emission permits and auction revenues, mainly to fossil fuel industries, rather than recycling auction revenues downstream to consumers. Panelists noted that energy firms pass their costs downstream to consumers — who will need assistance. Only Repetto, of the UN Foundation, preferred cap-and-trade over a carbon tax, but with either, he wants a tax-shift — auctioning all permits and dedicating revenues to reduce other taxes.

Shapiro, a former Undersecretary of Commerce, warned of the costs and instability from price volatility under cap-and-trade, citing the U.S. acid rain program whose permit prices slosh around as much as 80% and the similarly volatile EU climate program which has achieved zero net greenhouse gas reductions. The morning after a disastrously volatile day on Wall Street, Shapiro called volatility the enemy of rational planning and efficient economic decision-making. Shapiro advocates recycling 90% of carbon tax revenue with the remaining 10% dedicated to R&D on low-carbon alternatives.

Dinan, author of a series of weighty CBO studies on climate policy documenting the advantages of a carbon tax, suggested ways to move cap-and-trade closer in efficiency to a carbon tax, for example by adding safety valves to limit price volatility. She underscored the efficiency advantages of applying revenues to reduce distortionary taxes such as payroll taxes, vs. distributing revenues equally with pro rata dividends. But Dinan and the new RFF study caution that unlike a straight dividend approach, tax-shifting out of payroll taxes would be acutely regressive, mainly because many low-income people, including elderly and the unemployed, don’t pay payroll taxes and thus wouldn’t benefit from payroll tax reductions. In contrast, dividends would go to everyone, equally, thus benefiting a clear majority of less-well-off individuals and households.

Ken Green, AEI resident economist and scientist who has written extensively about the “double dividend” from reducing distortionary taxes with carbon revenues, is rare among conservatives for supporting strong medicine to combat climate change. Because our entire society and every activity in it is built around energy consumption, changing energy prices will have profound effects, he noted, some of which must be offset. Green warned that politicizing climate change legislation or otherwise attempting to favor some constituents over others will “torpedo” the serious effort that is needed. Cap-and-trade hides the truth that we must use prices to change consumption patterns, said Green, and it will breed cynicism and undermine public support for climate protection. The public needs to understand that although fossil fuel prices will rise, they will be “made whole” as a group.

During Q&A an audience member noted the consensus for a carbon tax but asked panelists how a tax would provide the certainty that is often touted as the chief advantage of cap-and-trade. Shapiro suggested that carbon tax levels may need to be adjusted periodically to assure that emissions targets are being met. Green contended that powerful incentives for cheating and market manipulation will render cap-and-trade’s emissions certainty largely illusory. He called cap-and-trade a government-mandated constraint on supply, likening it to OPEC’s mission to limit oil supply to support prices. Just as in OPEC, cap-and-trade will bring irresistible temptation to cheat by selling outside the system and will eventually destroy public confidence, Green said.

Photo courtesy of Clean Air – Cool Planet