TO TAX OR CAP, THAT IS THE QUESTION

McLaughlin: “Some good abstract ideas never make it out of Washington alive.”

To Tax Or Cap Carbon?
Michael McLaughlin, July 24, 2007 (UPI)

WHO
Rep. John Dingell, D-Mich., chairman, House Committee on Energy and Commerce; Charles Komanoff, economist/co-founder, Carbon Tax Center; Bill Wicker, communications director, Senate Energy and Natural Resources Committee; Annie Petsonk, Environmental Defense;
An economist would get a lot out of this graph. Anybody else just needs to understand that it shows how a "carbon" tax would work well under some circumstances and not so well under others. (click to enlarge)

WHAT
The burning of fossil fuels and the resulting greenhouse gas (GHG) emissions extract costs (called externalities because they are external to the market price). These costs are currently being transferred away from emitters. Climate change has revealed some of the damage emissions cause (the cost of the externalities). Leaders are attempting to devise ways to shift the costs of those damages to those responsible. The conundrum: How to do so without inflicting economic harm.

WHEN
Cap-and-Trade is coming. Talk about a “carbon” tax is coming.

WHERE
Washington, D.C., and across the country. The EU runs the world’s most well-established Cap-and-Trade system. Regional systems are in development in the west and New England. Australia/New Zealand are developing another.

WHY
- Dingell’s proposal was a tax on emissions.
- The cost increases would theoretically discourage fossil fuel consumption and incentivize greener technologies. But converting externalities to the market price of the item inevitably makes it cost more. The tax would add to the cost of gasoline, electricity generated by coal-burning plants and agricultural products grown and harvested with fossil fuels.
- For this and other reasons, the carbon tax is politically explosive.
- A Cap-and-Trade system is more popular with legislators because it does not involve a politically divisive new tax and because Big Business generally likes the idea of letting the marketplace control emissions. Business men also like the idea of a new marketplace involving carbon credits. Environmentalists like the idea of strict caps, or limits, on emissions.
- The system: The government would assess all emissions and set limits on how much each business could emit. The government would then give and/or sell permissions to emit called credits. Business would trade the credits, those needing to emit more to sustain their businesses buying, and those effectively cutting emissions with renewable energies and efficiency selling.
- The system incentivizes all effective emission-reducing measures. But the devil is in the details.
Cap-and-Trade is a little like poker: Its as much about the way the hand is played as about the cards dealt. Thats why a lot of big businesses are for it. Of course, it helps to come to the table with a big bank roll.

QUOTES
- Congressman Dingell: "It is my intention to develop a comprehensive, mandatory, economy-wide program to reduce emissions of carbon dioxide and other greenhouse gases…[but] I sincerely doubt that the American people are willing to pay what this is really going to cost them…"
- Economist Komanoff: "You can't be an economist without believing with every fiber of your being that the most direct and effective way of reducing the use of something is to raise the price of the good as high as possible…You want it to reflect the externalities that are not included in the price."
- Bureaucrat Wicker: "I've never seriously thought about it because a carbon tax is so far outside the realm of the doable…It is a good way to discourage consumption…"
- Environmentalist Petsonk: “[Support of cap-and-trade indicates] you're focused on setting a defined level of pollution control."