THE CARBON TAX LESSON: INVEST IN NEW ENERGY

There are two general proposals for cutting U.S. greenhouse gas (GhG) emissions. One is for Congress to institute a mandatory national cap-and-trade system, capping all major sources of emissions and charging emitters a price/ton for excess emissions.

The other approach is to tax all sales of emissions-generating products, adding a surcharge on electricity produced by natural gas and coal and adding a surcharge for fuels such as heating oil and auto gas. Refiners and manufacturers would also have to pay for their spew.

Cap-and-trade has been shown to get a reaction from the marketplace. It was key to the mitigation of North America’s acid rain problem in the 1990s. A cap-and-trade system has been evolving in the EU since 2005 with mixed reviews and mixed success.

The tax has been at work in four Scandanavian countries since the 1990s. Emissions have gone up in three, in Norway by 43%. But the tax has led to a significant drop in Denmark’s emissions (now 15% below 1990 levels). What made the difference? What can be learned?

The first thing to learn is that a tax is unlikely in any but the most liberal of western democracies. No matter how good the plan is, any politician campaigning for a tax with even the best of arguments can always be hammered by an opponent warning voters to “beware of anybody who wants to raise your taxes!” That's why in France and Germany, where people are accustomed to gas taxes, leaders considered a carbon tax too polically difficult.

Both the cap-and-trade system and the tax system are only as good as the way they are applied. In the case of cap-and-trade, the EU has discovered the system is sure to fail if the emissions allotments are too freely given. Although the system caps overall emissions, over-emitters can pay for the privilege to spew by buying allotment credits (on trading markets) from under-emitters, who thereby profit from efficiencies and New Energy use. If the allotment credits are not expensive enough, the incentive to reduce emissions isn't there.

In the case of the carbon tax, economist Monica Prasad argued in the NY Times that Denmark’s success was not in getting leaders to like the tax but in getting them to use it's revenues well. Prasad: “The very thought of new tax revenue has a way of changing the priorities of the most hard-headed politicians — even Genghis Khan learned to be peaceful, the story goes, when he saw how much more rewarding it was to tax peasants than to kill them…”

The only way an electorate will accept a carbon tax is if voters understand the revenues will come back to them. This was relatively easier in Scandinavia, where voters are familiar with the trade-off between taxes and services. In the U.S., tax advocates seem willing to promise anything from new toasters to free makeovers.

Prasad: “…Carbon tax discussions always seem to devolve into gleeful suggestions for ways to spend the revenue. Reduce the income tax? Give the money to low-income consumers? Use it to pay for health care? Everyone seems to forget that the amount of revenue is directly tied to the amount of pollution that is still going on…”

Prasad explains that the reason the tax effectively cut emissions in Denmark is that revenues were applied to subsidize the building of New Energy and to incentivize the introduction of efficiencies. Once dependent on coal, Denmark now gets more than 20% of its electricity from wind and expects that to be 25% by the end of 2008. The change happened when the Danish government applied carbon tax revenues to make building and buying wind accessible.

For this reason, tax advocate Prasad objects to a gas tax: “Higher gas taxes would raise revenue but do little to curb pollution.”

By building New Energy and efficient technologies, energy consumption goes down and the externalized burdens from using Old Energy go down. Health gets better, air and water get cleaner. Over time, the electorate reaps the rewards not just of reduced GhG emissions but of a whole new understanding of energy and it's relationship to everyday life. Applying the tax revenues for anything else completely defeats the purpose of the tax.

Prasad: “…a carbon tax has been promoted almost as a panacea — just pop in the economic incentives and watch them work their magic. But unless steps are taken to lock the tax revenue away from policymakers and invest in substitutes, a carbon tax could lead to more revenue rather than to less pollution…”

Bottom line: The only way a carbon tax effectively cuts emissions is to use the revenue to build New Energy and reward those who adopt efficiency measures.

The problem: In the U.S., business and industry have habituated the electorate to bear the burden of innumerable externalized costs. Can that electorate be convinced to overcome its knee-jerk reaction to new taxes by an argument promising to relieve it of a burden it remains only mutteringly aware of?

With respect to the tax, consider THE CASE FOR A CARBON TAX

With respect to cap-and-trade systems, consider Cap and Share

(slide from The Carbon Tax Center/carbontax.org - click to enlarge)

On Carbon, Tax and Don’t Spend
Monica Prasad, March 25, 2008 (NY Times)

WHO
Monica Prasad, assistant professor of sociology/faculty fellow, Institute for Policy Research/Northwestern University and author, The Politics of Free Markets

(slide from The Carbon Tax Center/carbontax.org - click to enlarge)

WHAT
Prasad contends the carbon tax will fail to mitigate greenhouse gas emissions unless the lessons learned from Scandinavian carbon taxes are applied and tax revenues are used to subsidize the building of New Energy and to incentivize the introduction of efficiencies.

WHEN
Following the November 2008 election, a policy measure mandating emissions mitigation through market caps or taxation is expected from the new president and the next congress. Most observers now think a cap-and-trade system is more likely.

By applying carbon tax revenues constructively, Denmark cut its emissions dramatically and now gets nearly 25% of its power from wind. (click to enlarge)

WHERE
- According to Prasad, Denmark, Finland, Norway and Sweden have had carbon taxes in place since the 1990s. Finland, Norway and Sweden’s emissions have increased, Norway’s by 43%.
- Denmark’s per capita GhG emissions were ~15% below 1990 levels in 2005.

WHY
- With all four remaining presidential candidates advocates of stronger emissions mitigation, a carbon tax or cap-and-trade system looks inevitable.
- Denmark has used the carbon tax revenues to subsidize the building of a New Energy infrastructure and to incentivize energy efficiency measures.
- Using the revenues to appease the tax base will fail to mitigate emissions despite the costs of taxation. A gas tax seems to fall into this category.

(slide from The Carbon Tax Center/carbontax.org - click to enlarge)

QUOTES
- Prasad: “Everyone seems to be talking about a carbon tax. It’s probably the most glamorous — and certainly the most unlikely — use of the tax code since Al Capone got hooked for tax evasion.”
- Prasad: “The next president of the United States seems sure to be more committed to environmental policy than the current president is, and a carbon tax is high on everyone’s list of options.”
- Prasad: “…if we want to reduce carbon emissions, then we should follow Denmark’s example: tax the industrial emission of carbon and return the revenue to industry through subsidies for research and investment in alternative energy sources, cleaner-burning fuel, carbon-capture technologies and other environmental innovations.”