GOTTA DO SOMETHING: CARBON TAX VS. CAP-AND-TRADE

Congress will do daunting battle this fall over energy and climate change legislation. This issue will be fought out on the frontlines.

Handling Climate Change
Eileen Clausen and Judith Greenwald, July 12, 2007 (Pew Center on Global Climate Change via Miami Herald)

WHO
Eileen Claussen, president, Pew Center on Global Climate Change; Judith Greenwald, director of innovative solutions, Pew Center.

Lots of ideas. What action will result? (click to enlarge)

WHAT
Claussen and Greenwald advocate for “cap-and-trade” over a “carbon tax” in anticipation of a debate in Congress over the best way to incentivize greenhouse gas (GHG) reductions.

WHEN
- With climate change ongoing, the U.S. Congress will finally confront the question this fall.
- The EU system covers 10,000 emitters and a market with millions of credit trades monthly. But its earliest 2002 thru 2007 stage, named Phase 1, was bumpy, as it worked out the complexities of the process rather than focusing entirely on emissions reductions. This allowed detractors to condemn it. Phase 2 starts in 2008, allowing a “reset” moment. The system is exoected to emerge functioning more efficiently and incentivizing significant emissions reductions. No doubt new problems to be sorted out will present themselves.

WHERE
Both the House and the senate are expected to debate “cap-and-trade” legislation and dissatisfied legislators in both bodies are expected to grouse about a “carbon tax.”

WHY
- The “carbon tax” would be a charge per ton of emissions.
- The “cap-and-trade system” would begin with federally-established allowed emissions (credits) to each emitter. If the entity (business, factory, farm, etc.) goes over its limit, it pays a stiff fine. If it stays under its limit, it can sell its excess credits to over-emitters at much lower rates than the fine would be for the same excess emissions. This incentivizes entitities to find low-emission forms of energy and to find the most energy efficient ways to do whatever it does.
- “Tax” advocates say it is simpler. They also claim the EU “cap-and-trade” system shows how bad such a system works.
- Both systems require monitoring and enforcement. Both have complexities. Cap-and-trade needs working out the whole credits scheme and running a market for them. Tax requires working out redistribution of revenues.
- Cap-and-trade is more market-based and more flexible. It can link internationally and stimulates “banking” of credits.
- New taxes are hard to legislate, leaving legislators with the option of cap-and-trade or no anti-climate change measure.

There is NOTHING simple about a carbon tax plan. (click to enlarge)

QUOTES
“But the key difference between a carbon tax and the cap-and-trade approach comes down to the issue of certainty. A tax provides for cost certainty; the cost is fixed because of the tax. Cap and trade, on the other hand, provides for environmental certainty. What's fixed is the cap itself -- and it is based on an assessment of the level of emissions you need to get to in order to protect the climate…In response to a carbon tax, many emitters will reduce their emissions rather than pay the tax, but that result is not guaranteed. With Alaska and Greenland melting, and with droughts and other weather extremes on the rise, environmental certainty would seem to be the more compelling imperative.”