05 May 2009

Agree to Disagree: Cap-and-Trade vs. Carbon Tax?

NASA’s leading climate scientist, James Hansen, says he hopes that climate legislation proposed by Democratic Representatives Henry Waxman (CA) and Edward Markey (MA) to introduce carbon emissions trading to the United States fails.

Hansen says lawmakers should abandon cap-and-trade initiatives altogether and implement a simple carbon tax instead, according to Nathanial Gronewold, a reporter at Environment & Energy Publishing.

"Trading of rights to pollute...introduces speculation and makes millionaires on Wall Street," Hansen told an audience at a conference hosted by Columbia University climate policy students on Saturday. "I hope cap and trade doesn’t pass, because we need a much more effective approach."

This may be a nice way to curry favor with student environmentalists, but is it smart? According to Reuters, even the Chinese are considering a carbon tax over cap-and-trade. What's the difference, really?

Under a cap-and-trade program, the government will set the overall emissions cap and issue allowances or credits to businesses to pollute at a set amount. A company that reduces its emissions quickly and cheaply can auction their extra credits to another that, because of the nature of its business or available technology, may find it more difficult to comply with the caps.

This market-based approach helps ensure that overall caps are met at the lowest possible cost. Cap-and-trade has been modeled after the U.S. effort to control acid rain pollution, which saw greater reductions at lower costs than originally anticipated.

Under a carbon tax, such as that proposed by Rep. John Dingell (D-MI), emitters are required to pay a tax for every ton of pollution they produce. Carbon taxes lend predictability to energy prices, according to supporters, who claim that cap-and-trade systems will simply aggravate price volatility and adversely affect consistent investments in less carbon-intensive electricity generation, energy efficiency, and renewable energy.

But, argue cap-and-trade supporters, such a system also provides certainty: it fixes the ceiling on emissions (stepping it down over time) and lets the price vary with demand.

Despite rhetoric on both sides, neither system is really more complex than the other, as each requires often difficult monitoring and enforcement.

Cap-and-trade and carbon tax do share another issue: what to do with the proceeds? The Obama administration seems to favor distributing 10 percent of the proceeds to American citizens; others, including Representative Chris Van Hollen (D-Md.), would return 90 percent to Americans. Still others call that highway robbery.

Now, Jim Hansen says we'll create a bunch of robber barons on Wall Street if we go this route. But a carbon tax will simply create bigger government, or at least help pay for the biggering and biggering the government has done since last fall.

As readers of the green skeptic know, I firmly believe we won't make the shift until one of two things happens: 1.) we can make boatloads of money off of addressing the issue or 2.) oil prices go through the roof and supply plummets to worse than anticipated levels.

Rep. Markey claims his Bill, the Investing in Climate Action and Protection Act (HR 6186), or iCAP, is a cap-and-invest strategy.

President Obama has already included a line item for cap-and-trade in his budget, which clearly signals the Administration's preference for capping global warming pollution, auctioning all the emission allowances, and investing $15 billion per year in clean energy.

Wither a tax? It's probably, as every politician knows, an idea that is dead on arrival. And it is looking less and less likely we'll get a decent cap-and-trade program in place any time soon. So, perhaps we should just focus, as blogger Gar Lipow suggested in Grist, "on pushing for green infrastructure, paid for the moment by 10-year bonds with a 3 percent interest rate."

If time is money and we're running out of time, then why not support an approach that will generate more money and maybe, just maybe, buy us some time?