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Carbon: To Tax Or Trade, Revisited


A couple months ago, I wondered why all the candidates who supported serious measures to abate greenhouse gas emissions -- Democrats, mostly -- seemed so enamored of complicated cap-and-trade programs, rather than a straight-up tax on carbon emissions, which would be a whole easier to administer and account for. (A cap and trade program issues permits to give manufacturers and others the right to pollute -- firms that are able to reduce their emissions can sell their excess permits at a profit to firms that are less successful at curbing greenhouse gasses.) In the Democratic debate on Saturday night, ABC's Charlie Gibson put it directly to the remaining candidates. "Al Gore favors a carbon tax," Gibson said. "None of you have favored a carbon tax. Is it a bad idea? Or is it just so politically unpalatable that you guys don't want to propose it?"

New Mexico Governor Bill Richardson, Energy Secretary in the Clinton Administration, went first. "It's a bad idea because when you have a carbon tax, first of all, it's not a mandate. What you want is a mandate on polluters, on coal companies, to reduce greenhouse gas emissions by a certain target -- under my plan, 30 percent by the year 2020, 80 percent by the year 2040," he said. (I've cleaned up the transcript a bit for coherence's sake -- you can read the original here.) "Furthermore, a carbon tax, that's passed on to consumers. That's passed on to the average person. That's money you take out of the economy. So it's a bad idea. The better way to do it is through a cap-and-trade system, which is a mandate. But it's also going to take all of us here, every American, you know, to think more efficiently about how we transport ourselves, what vehicles we purchase, appliances in our homes."

Senator Barack Obama agreed -- mostly. With emissions trading, "you can be very specific in terms of how we're going to reduce the greenhouse gases by a particular level. Now what you have to do is you have to combine it with a hundred percent auction." (Obama proposes auctioning off pollution permits instead of merely giving them away.) "In other words, every little bit of pollution that is sent up into the atmosphere, that polluter is getting charged for it. Not only does that ensure that they don't game the system, but you're also generating billions of dollars that can be invested in solar and wind and biodiesel."

But, he added, "I do disagree with one thing, though, that Bill said, and that is that on a carbon tax the cost will be passed onto consumers, and that won't happen with a cap-and-trade. Under a cap-and-trade there will be a cost. Plants are going to have to retrofit their equipment, and that's going to cost money, and they will pass it onto consumers. We have an obligation to use some of the money that we generate to shield low-income and fixed-income individuals from high electricity prices, but we're also going to have to ask the American people to change how they use energy. Everybody's going to have to change their light bulbs. Everybody's going to have to insulate their homes. And that will be a sacrifice, but it's a sacrifice that we can meet. Over the long term it will generate jobs and businesses and can drive our economy for many decades."

Senator Hillary Clinton didn't speak specifically about cap-and-trade versus a carbon tax, but she sought to link the environmental issue to a sinking economy. "What we've got to do is use energy as an opportunity to actually jump-start economic recovery. We need to quickly move toward energy efficiency. We should require the utilities to begin to work for energy efficiency and conservation, costs that will be shared and decrease the pressure on families. We need a weatherization and low- income heating emergency program that is out there now helping families in New Hampshire and elsewhere to cover their costs."

Richardson is right that a carbon tax won't necessarily force reductions in emissions. He's also right that consumers will have to "think more efficiently," which might be another way to say "sacrifice." But he might also be more right than Obama when he says that the consumer is more likely to feel the tax than the trade -- and there lies the contradiction, and the problem.

Frankly, we need to feel that bite. A comprehensive campaign against climate change will require new habits with energy producers and end users alike, and it seems to me that the carbon tax is a better mechanism to force those downstream choices. (As I've noted before, most economists prefer the tax over the trade.) Under a cap and trade system, it is the power plant that is issued the permits and so is directly rewarded or punished for energy consumption, not the consumer. Perhaps the utility will find ways to encourage customers to use less energy -- but maybe it won't. If it's easier to focus on energy supply rather than demand, replacing coal with wind or solar, then the consumer won't face the consequences of his consumption. That wouldn't be true of a carbon tax, though -- when he sees that bill, he might opt to replace that energy-sucking dryer with a clothesline. You can imagine that when a driver confronts the carbon tax at the gas pump, she'll think long and hard about that SUV.

Perhaps a trading exchange could account for downstream consumption, but none of the candidates have explained how that would work. The best solution might well simultaneously tax and trade. Senator Christopher Dodd proposed both, but he's not going to be president any time soon.

Last updated: Jan 8, 2008

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