CARBON CAPS: TRICKY; CARBON TAX: TREAT?

These editorials make the case for using a tax over a cap-and-trade system to control US emissions but skim over 2 important points. First, raising taxes is never politically popular so the perfect in this case may be the enemy of the good.

Second, the failures of the EU system may not be as significant as the editorials indicate. That system was designed to discover and work out flaws as much as to produce emissions reductions. Only the next round’s results will reveal the system’s success. And whatever flaws in cap-and-trade systems the EU discovered and continues to discover can only help to make the US system stronger.

What the editorials do make as clear as the Monitor’s preference for the tax is that the tax has its complexities, too.

A tax on carbon to cool the planet
and
Be wary of complex carbon caps
Editorials, October 25/26, 2007 (Christian Science Monitor)

WHO
Conservative and liberal economists (James Connaughton, Al Gore, World Resources Institute); Politicians (Sens. Joseph Lieberman (I-Conn), John Warner (R-Vir)

There are certainly aspects of the tax which make it simpler than introducing a whole trading system, but that does not mean finding the right tax point is a simple matter. And this graph does not include the matter of allocating revenues. (click to enlarge)

WHAT
- Two methods of controlling climate change-inducing greenhouse gas (GHG) emissions, a tax and a cap-and-trade system, are compared in editorials.
- World Resources Institute: A $15/ton tax of carbon-dioxide emissions doubles the cost for coal use and raises gasoline prices ~13 cents a gallon (~5%). Natural-gas prices rise less than 7 %. Net result: 12% emissions decrease.
- The Lieberman/Warner cap-and-trade proposal cuts US emissions 63% (from 2005 levels) by 2050. Environmentalist advocate for 80% (from 1990 levels) cut.

WHEN
The US Congress is expected to act soon.

WHERE
- A tax would cover all uses of oil, coal and natural gas.
- The Lieberman/Warner cap-and-trade proposal would focus on emissions in the transportation, electric generation, and manufacturing sectors.

An Energy Information Administration (EIA) analysis of a cap-and-trade system using a phased permit auction shows it would not be expected to cause an increase in consumer electricity prices. (click to enlarge)

WHY
- Tax PRO:
Economists favor the tax. It is more direct. Lawmakers prefer cap-and-trade. It does not directly impose costs.
Connaughton, President Bush's top environmental adviser, backs the tax. Gore says he's always preached it.
Taxes are direct. The cost of emissions is known.
- Tax CON:
Polls show voters opposed to taxes but rebates of the tax revenues (18% to those earning less than $20,000, 4% at $90,000 earnings) reduces the tax’s burdens while maintaining the incentive to cut emissions and convert to renewables.
- Cap-and-trade PRO:
Caps guarantee limits on emission increases. One business can only exceed its limits if another sells “permits” for doing so. Severe fines would prevent violating this. Lieberman/Warner will cap a company’s emissions and issue permits for a certain amount. Initially, permits will be free. Later, they will be auctioned, creating a trading market in permits incentivizing emission reductions. If a company example: coal-fired power plant) needs high emissions, it buys permits. A company that has invested in clean tech and therefore has lower emissions can sell credits to pay off its investment and reward its choice. Theoretically, emissions are reduced by the free operation of the marketplace and freely made choices by businesses using their own strategies.
- Cap-and-trade CON:
Europe's cap-and-trade system handed out far too many free permits, causing their value to fall from $30+/ton to $1/ton, making the incentive ineffective. Many industries hit by caps moved production outside the EU, polluting elsewhere. Even proponents of the 160 country Kyoto Protocol system set up in 1997 agree its carbon-cutting results have been unimpressive though Phase 2 (2008-2012) will close loopholes.

The same EIA study showed an expectation of decreased emissions from a cap-and-trade system over the long run, despite recent short term failures in the European ETS. (click to enlarge)

QUOTES
The Monitor explains why the carbon tax vs. cap-and-trade debate is important: "Economists agree that the real cost of burning fossil fuels – damage to the environment and health, not to mention the cost of replacing them as they run out – isn't reflected in today's prices… In most uses, traditional fossil fuels (oil and coal) are still far more abundant and inexpensive than cleaner alternatives (solar, wind, etc.), although their prices don't reflect environmental and health damages."