A study by Dr. Robert J. Shapiro, former U.S. Undersecretary of Commerce for Economic Affairs during the Clinton Administration, concludes that a carbon tax may be the better approach to lowering greenhouse gas emissions than the caps and tradable permits (cap-and-trade) legislation currently being advocated by many members of Congress.
The study finds that carbon taxes would provide businesses and industries with incentives to invest in more efficient technologies that actually reduce CO2 output, and achieve the policy objective of lowering emissions.
Other important findings of the report, which is titled Addressing the Risks of Climate Change: The Environmental Effectiveness and Economic Efficiency of Emissions Caps and Tradable Permits, Compared to Carbon Taxes, include:
— Although carbon taxes and cap-and-trade schemes will both result in significantly higher prices for fossil fuels, carbon taxes cannot be manipulated by the markets and would offer the most stable and transparent system for consumers and industry alike.
— Carbon taxes do not create the price volatility and administrative problems associated with cap and trade.
— Carbon taxes are a more effective way to reduce Greenhouse Gas Emissions and provide a more powerful incentive to develop new, climate-friendly technologies.
— The European Emissions Trading Scheme (ETS) shows the ineffectiveness of cap-and-trade schemes. In fact, European CO2 emissions actually increased in 2005, and the EU will miss its Kyoto-targeted reductions by more than 75 percent.
“We have reached a critical point in the policy debate around climate change and now is the time to examine the best legislative solutions,” said ACI President, Stephen Pociask. “A carbon tax deserves equal consideration on Capitol Hill. As Dr. Shapiro’s study highlights, there are serious drawbacks to cap-and-trade schemes, which could harm consumers in the long run.”
According to Pociask, while the findings of the study look at both possible approaches, it concludes that carbon taxes are a more effective way to lower emissions than previously thought. “Unlike the commonly sited ‘cap-and-trade’ schemes, carbon taxes force businesses and the industry to make a choice: reduce carbon consumption and really improve efficiency, or pay a high price,” said Pociask.
See link belwo for executive summary.
Cap-and-Trade – More Effective Than a Carbon Tax:
Gristmill, by David Roberts, February 12, 2007
The following is a guest essay from Bill Chameides, the Chief Scientist at Environmental Defense. He maintains a blog on global warming at climate411.org.
Some folks think global warming is best fought through a federally-imposed tax on greenhouse gas emissions — often called a carbon tax. The government would use the additional tax dollars to subsidize the development of selected low-carbon technologies. Charles Komanoff urged a carbon tax on Gristmill just last Wednesday, and last Tuesday Ann Applebaum did the same in an op-ed for the Washington Post.
A carbon tax is a bad idea.
First, most pundits see the chances of Congress passing a new tax as somewhere between zero and nil. But let’s say it did. Then Congress would have a whole new pot of subsidy money to pass out to industry. Would you trust them to give it the right companies? It’s taking a chance, but again, let’s say they did. Even if the money went to the right places, a carbon tax is not the most effective strategy.
Subsidizing one or two targeted technologies with a carbon tax would discourage investment in others that may turn out to be more effective. Which technologies should receive these tax dollars? No one has a crystal ball that can determine for sure which will turn out to be most useful. (See our blog post “Global Warming Solutions that Work” for more on available technologies.)
History has shown that the marketplace does a better job of developing new technologies, and a tax takes money out of the marketplace. The solution is cap-and-trade. A cap-and-trade strategy provides the incentive for all segments of the economy to compete to discover the best ways to cut emissions.
In a cap-and-trade system, the government plays a small role, and leaves the main decisions to the private sector. The government establishes an overall emissions cap and assigns specific emissions allocations to the different sources of CO2. It does not tell industries and companies what to do or how to meet their allocations. Each company is free to make those choices. It can reduce its own emissions or pay someone else to lower them. Businesses can profit by coming in below their cap and selling their extra carbon credits to others. Even farmers can profit by enhancing carbon storage in soils and trees and selling the extra carbon credits.
The advantages of cap-and-trade are significant. Unlike a tax, it encourages innovation by creating incentives and rewarding those who lower emissions at the least cost. And most importantly, a cap — unlike a tax — guarantees the necessary cuts to stabilize the climate. All a tax does is discourage emissions; it doesn’t specify an emissions target that must be met.
Those who argue that cap-and-trade won’t work are ignoring history. We used a cap-and-trade to lower the sulfur oxide emissions that lead to acid rain, and we were able to do it quickly and cheaply.
Embraced by leaders on climate change from both parties and some our nation’s most influential CEOs (read USCAP’s “Call for Action” [PDF]), cap-and-trade is the proven approach and the right approach.
Gristmill, by Charles Komanoff and Dan Rosenblum, February 13, 2007
Yesterday Gristmill ran a curious article by Bill Chameides of Environmental Defense, attacking a carbon tax strawman that no one is advocating, least of all the Carbon Tax Center (CTC).
Chameides stated that the “government would use additional tax dollars to subsidize the development of selected low-carbon technologies.” We invite him to look at CTC’s proposed carbon tax, which is revenue-neutral. Revenues will go to reduce regressive taxes or to finance progressive, equal rebates to all U.S. residents. Contrary to Chameides’ charge, we have never advocated targeting tax revenues to any technology, privileged or otherwise. Nor, to our knowledge, have the Washington Post’s Anne Applebaum, whom he also took to task, or the dozens of columnists, economists, scientists, and other public figures who support taxing carbon.
Chameides and ED are throwing their weight behind a carbon cap-and-trade system, on the premise that the successful sulfur cap-and-trade model can be extrapolated to carbon. We believe this is flirting with disaster. A model that worked when the parties were limited to a few dozen electric utility companies is ill-suited when the stakeholders — essentially every business and household in the country — number 100 million or more. Moreover, electric generators seeking to reduce sulfur emissions had a variety of technological alternatives available. There are no comparable methods available to reduce carbon emissions other than fuel-switching and, perhaps sometime in the future, sequestration.
Chameides claims that the “marketplace does a better job of developing new technologies, and a tax takes money out of the marketplace.” That argument was pertinent when the alternative to cap-and-trade was “command and control” regulation of NOx and SO2 emissions, but it’s irrelevant to a comparison with a carbon tax. Both a cap-and-trade and a carbon tax provide price signals that encourage polluters to look for ways to avoid the cost of emitting CO2.
A carbon tax actually provides more precise price signals, provides them sooner, and provides them in a more understandable and transparent fashion. To attack global warming, every energy-critical decision needs to be predicated on a trajectory of rising energy prices. A phased-in carbon tax allows this, whereas cap-and-trade will do little to mitigate the price roller-coaster that discourages emissions-minimizing investment.
Not only would a carbon cap-and-trade system provide less effective price signals, it would do so only after considerable delay consumed by protracted negotiations, making a mockery of Chameides’ claim that a cap will guarantee climate-stabilizing cuts. Compounding the problem, once a cap-and-trade system is finally implemented, we’re likely to be locked into the approach for years, with industry insisting, “Don’t change it until we see how it works.” Carbon taxes will require no new administrative structures, can be implemented now, and can be adjusted as necessary.
Another serious drawback to cap-and-trade is that its inherent complexity leaves it open to exploitation by special interests, not to mention perverse incentives to “bank” pollution now against future credits. Carbon taxes are relatively immune to manipulation.
Ironically, Chameides’ hesitancy about trusting the government with tax dollars applies more aptly to his cap-and-trade proposal. Since the tax proposed by CTC and most other carbon tax proponents is revenue-neutral, there are no tax dollars to spend and potentially misuse. In contrast, even an optimal cap-and-trade system such as the Northeast’s Regional Greenhouse Gas Initiative, in which emissions allowances are auctioned, would saddle end-users with the functional equivalent of a tax, along with the same conundrum Chameides raised about how to spend the money. Except worse, because the cap-and-trade model necessarily requires that a chunk of the “tax revenues” be used to provide market participants with a profit paid by consumers.
And that’s under a relatively benign cap-and-trade, in which the allowances are auctioned. The alternative, giving polluters the allowances outright, combines the worst of both worlds: a hidden tax on energy users, with all the increased energy costs given to the polluters or other market participants. An explicit tax that offsets other taxes is preferable to a covert tax that goes into someone else’s pocket.
Finally, we reject Chameides’ defeatism over the chances of Congress passing a carbon tax. On the contrary, the stars are aligned as never before to actually do something about carbon emissions. There is now a general acceptance of the need for action (even Exxon concedes there’s a problem), and no less than Wall Street demigod Paul Volcker called last week for taxing CO2. The question is what will work best. For reasons discussed in more detail on our website, we believe that a carbon tax coupled with progressive tax-shifting can be a winner politically.
The last thing we want to do is lock in a suboptimal solution and then have to wait years before the stars are again aligned. Now is the time to work for a real solution that maximizes environmental gains and minimizes hardships.
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