Why Cap And Trade And Not A Carbon Tax?

YES, a carbon tax is usually preferable to cap and trade.

A carbon tax is preferable to cap and trade unless there are compelling practical reasons a tax won’t work as well.  A tax is simpler and easier to administer. With a tax there is no carbon market to go haywire. With a tax the government collects the revenue automatically, whereas with a cap and trade policy you always have to fight to make sure that 100% of the permits are sold at auction so the government gets the revenue instead of giving away the new wealth the cap creates to the bad guys. For all these reasons almost every progressive economist, including me,  generally prefers a carbon tax over an equivalent cap and trade program, i.e. one that achieves the same overall emission reduction. However, there are some very compelling reasons to favor cap and trade over a carbon tax right now both internationally and within the United States.

International Treaty Policy

Here are three compelling reasons why progressive environmentalists should favor an international treaty that improves upon the Kyoto cap and trade framework, and not succumb to the temptation to call for an international carbon tax instead.

(1) The international community has invested twelve years negotiating a cap and trade format, and given the urgency of the problem as compared to the speed of international diplomacy we don’t want to start all over again. While some propose now switching from cap and trade to an international carbon tax in good faith, the true opponents of doing anything significant to avert climate change are now dangling a carbon tax as a cynical ploy to delay negotiations further. We should not witlessly aid and abet our enemies.

(2) The scientific community has positioned us to win global caps that are a decent deal. Discussion is now centered on caps that would keep the average global temperature from rising by more than 2 degrees Celsius, or stabilize greenhouse gas concentrations in the atmosphere at 350 ppm.  Caps that accomplish this would be a tremendous step forward to prevent climate change before it is too late. On the other hand, there is no way in hell we have any chance of winning political support for an international carbon tax high enough to reduce emissions by nearly this much. In other words, strictly from an emission reduction perspective we are poised to get a much better deal than we could ever hope to get with an international carbon tax.

There is a good reason this has proven to be the case. When tax levels are debated it is economists who are the experts. How high should a tax be? Ask an economist. On the other hand when we ask how low does a cap need to be to keep us safe people sensibly ask climate scientists. We want the political debate to play out the second way – with climate scientists telling us what is safe — not the first way – with economists telling us how high to set a carbon tax based on their estimates of how costly the tax will be to the economy. Economists are the main enemy in this regard and we should not witlessly re-empower them now that climate scientists have seized the microphone.

(3) But neither of these is the most important reason we should prefer a cap and trade international treaty to an international carbon tax. The most compelling reason is there is no practical way to make an international carbon tax nearly as fair as we can make a cap and trade policy. One issue is how effective the treaty will be at averting climate change. That concerns with how much and how fast global emissions are reduced. The second important issue is how the costs of achieving those reductions will be distributed among countries, some of whom bear much greater "responsibility" for current GHG concentrations in the atmosphere than others, and some of which have much greater "capacity" to bear costs of solving any international problems than others. A uniform global carbon tax places a more or less equal burden on all countries principally in the form of higher energy costs in the short and medium run. If the international treaty organization collected this tax from every country, then in theory the treaty organization could redistribute the tax revenue in a way to be fair to poorer countries – e.g. compensate China and the Republic of the Congo for imposing as high a carbon tax as the US. But there is no chance in hell that countries are going to let the UN collect a carbon tax. The only conceivable international carbon tax treaty would direct all governments to impose a uniform carbon tax, and then every government would collect the tax from their own citizens. Having done so, does anyone imagine the US Senate would agree to send tens, if not hundreds of billions of dollars per year collected from US citizens to the government of China?

So, the overwhelming problem with an international carbon tax is there is no way the tax revenues would be distributed back to countries in a way that fairly compensates poorer countries. On the other hand, with cap and trade redistribution is done by giving wealthier countries tighter (lower) caps than poorer countries, and then allowing richer countries to "buy" cap space from the poorer countries through carbon trading. Moreover, Kyoto is already set up this way.

It is increasingly apparent that lumping countries into two groups – Annex-1 MDCs with more or less the same mandatory cap, and non-Annex-1 LDCs with no caps – is not the best way to set caps for both efficiency and equity reasons. But it is easy to fix this problem in Kyoto. Assigning caps for all countries according to the Greenhouse Development Rights Framework formula would follow in the Kyoto tradition and perfect the system of distributing the costs of averting climate change according to "differential responsibilities and capabilities" by assigning very different caps to different countries on a continuum based on their per capita cumulative emissions since 1990 and their per capita GDP. This solves two of the major problems with the Kyoto Protocol. (1) By capping emissions in all countries it prevents any trading of bogus allowances or offsets in international carbon markets from puncturing holes in the cap on global emissions. In other words, it makes the treaty more effective at preventing climate change. (2) By treating countries differently on a continuous instead of a dichotomous basis the treaty would become much more fair. Not all MDCs are equally responsible and capable. More importantly, not all LDCs are equally responsible and capable. China should not be treated in the same way as the United States – contrary to what President Obama and US Senators may think. However, the Republic of the Congo should not be treated in the same way as China either. The Green House Development Rights framework would give the US tighter (lower) caps than China, but would give China tighter (lower) caps than the Republic of the Congo.

Given the alignment of political power one should never underestimate the ability of conservative forces to obstruct progress. Nonetheless, there is as good a chance of winning a really sweet deal for poorer countries through an improved cap and trade post-Kyoto treaty as there is of moving forward on any issue right now. And there is no chance of moving the climate justice agenda forward if we go back to the idea of an international carbon tax. With caps higher than current emissions for poorer countries and caps way below current emissions for richer countries, carbon trading could generate the biggest transfer of resources from North to South the world has ever seen. You would think people fighting for "climate justice" would champion this instead of adamantly opposing it.

Domestic Policy

Any country that does not suffer from "tax-phobia" should go for a domestic carbon tax over a domestic cap and trade program. As I said above, it’s simpler, easier to administer, there’s no need to win the political fight to auction all the permits instead of giving them away for free, and no carbon market to go haywire on you.

Unfortunately in the US we do suffer from acute tax phobia, even though it is irrational for normal people to fear taxes and only rational for the wealthy to do so. So there is no way we can get a domestic carbon tax passed that is high enough to do squat. Again, the bad guys know this and now have come out for a domestic carbon tax instead of a cap and trade law as a cynical tactic to delay and weaken meaningful domestic legislation.

Waxman/Markey/Boxer/Kerry is a cap and trade disaster – where industry interests and drafters who are idiots have made every conceivable mistake possible in designing a good cap and trade policy. Cantwell/Collins is a MUCH BETTER BILL written largely by one of "us" – James Boyce, who has an excellent 5 part series on The Real News Network website everyone should view. Cantwell/Collins is the bill all progressives in the US should get behind. We need to fight to prevent the bad lobbyists from gutting the Cantwell/Collins bill.

We also need to try to persuade misinformed people on the US left from aiding and abetting the bad guys fighting against the Cantwell/Collins bill. Right now many US leftists think "cap and dividend" is different from "cap and trade" so they have not denounced Cantwell/Collins the way they routinely denounce cap and trade policies.  But of course this is not really true. Cap and dividend is cap and trade. It is just a particular kind of cap and trade where the initial distribution of tradable permits is carried out through an auction rather than a give-away, and then the proceeds from the auction  — 75% in the case of Cantwell/Collins — are rebated to citizens on a per capita basis to compensate them for higher energy costs. Once those who oppose all carbon trading and carbon markets discover the truth about "cap and dividend" – which progressives should refer to as "cap and rebate" – they may come out against Cantwell/Collins if we cannot talk some sense into them first.

Leave a comment