Carbon: Tax Not Cap-and-Trade
Tikkun Magazine, July/August 2007
By Dan Rosenblum and Charles Komanoff
A May headline in the Chicago Tribune says it all: "The First Refugees of Global Warming: Bangladesh Watches in Horror as Much of the Nation Gives Way to Sea." Each day's news brings more reminders of the harms that global warming is already causing to people, communities, and nature throughout the world. From Hurricane Katrina and the inundation of island nations to heat waves in Europe and drought in Australia, climate change is wreaking horrific damage.
It's going to get worse, perhaps much worse, before it gets better. According to James Hansen, head of NASA's Goddard Institute for Space Studies www.giss.nasa.gov and the preeminent scientist warning the world about global warming, the Earth has already warmed one degree Fahrenheit over the past thirty years. Another degree is in the pipeline because of gases that are already in the atmosphere, and still another degree is in store because of carbon dioxide emissions that will spew for decades from our growing energy infrastructure of fossil fuel-powered electricity generating plants—largely coal-fired—along with refineries processing petroleum and natural gas to fuel our cars and trucks, planes and homes, factories and shopping malls.
We can't take carbon dioxide and other heat-trapping gases out of the atmosphere, except to a limited extent by leaving forests intact and planting new ones, so some, and perhaps considerable, climate change is inevitable. Melting glaciers and disappearing arctic ice are visible manifestations of what we can expect, but the likely consequences to humans, particularly the poorest people in the poorest countries, are even more horrendous. As Nobel Peace Prize winner Bishop Desmond Tutu noted recently, "Rain or drought, the result is the same: more hunger and misery for millions of people living on the margins of global society." Flooding of low-lying areas, increasingly volatile storms, desertification, spreading famine, disease, and of course, war, as human misery proliferates and intensifies, are the seemingly inevitable consequences of global warming due to humankind's excessive use of fossil fuels.
Tikkun Olam—can we "repair the world?" Is it already too late? The bad news is that Earth's atmosphere has already been burdened with so much carbon dioxide—the principal heat-trapping gas that stays aloft, intact, for roughly a century—that temperatures will continue to rise for some time even if we dramatically reduce our use of carbon fuels. Americans bear major responsibility. On average we use as much energy in a day as people in the rest of the world use in a five or six-day workweek. The good news (yes, there is good news) is that we can limit the damage by taking concerted action to reduce the burning of fossil fuels and the resulting carbon dioxide emissions. But we must start immediately.
What is needed are two parallel, mutually supporting transformations: first, we need an energy supply-side shift from fossil fuels to renewable energy such as wind, solar, and biofuels. Second, we need a demand-side shift to far lower levels of energy use accomplished by making our homes, businesses, cars, appliances, manufacturing processes, and our very desires less energy-intensive and more energy-efficient.
Some steps to save energy are simple. Riding a bike to work, to school or the store avoids the carbon dioxide emissions from driving and is good for your physical and mental health besides. It adds up—eliminate twenty miles of driving a week and the associated gallon or so of gas, and you've cut twenty pounds of CO2 from your climate diet; that's half-a-ton per year. Exchange half-a-dozen traditional, energy-hogging incandescent light bulbs for compact fluorescent bulbs (CFLs) that provide equivalent light with two-thirds less energy, and you've cut out another half-ton. Want another easy step? How about using the sun to dry your clothes? With a clothesline and a sunny day you can dispense with running your gas or electric dryer.
Taking these kinds of steps will save large amounts of energy. But they're not enough—not by a long shot. Unfortunately, too many people ignore the threat and the consequences of global climate change. Furthermore, individual actions, even summed millions of times, only go so far. The choices available to most individuals are too limited, and the psychological and cultural obstacles to embracing energy efficiency in a consumption-based society are, for most of us, too daunting.
We Americans need to reduce emissions by at least 80 percent from 2000 levels to have a shot at holding the further temperature rise to 2 degrees Fahrenheit—the amount that many climatologists view as the threshold beyond which the "monsters behind the door"—the runaway feedback loops such as the release of vast quantities of warming gases now frozen in Siberian permafrost—may be unloosed. To get those types of reductions in emissions and avert the gravest consequences of unchecked climate change will require fundamental changes in how we use energy. A central step in this transformation is to change the economic incentives that shape energy use.
The key to moving our use of energy away from carbon is to put a price on carbon emissions. Why? Because only by making all of us, businesses and individuals alike, pay for the cost of our pollution can we motivate a radically different set of economic decisions that, collectively, determine how much and what kind of energy we use and how much carbon this usage will emit.
Together, the two of us have spent six decades working to reform U.S. energy policy, but the onrushing climate crisis motivated us to sharpen our focus and to found the Carbon Tax Center earlier this year. CTC's mission is to advocate for and advance adoption of carbon taxes that will send accurate and powerful price signals into every corner of the economy and every aspect of life. This, in turn, will accelerate the transformation from a high-carbon fossil fuels-based energy system to a low-carbon society based on energy efficiency, renewable energy and sustainable fuels.
The principle of "internalizing" pollution-damage costs into the prices of goods and services is obvious to professional economists, familiar to most policy-makers, and understandable to citizens—and not just on the Left or Right. On the "Supporters" page of CTC's Web site (www.carbontax.org) you'll see that support for carbon taxes spans a broad spectrum, from conservative economists to The Nation magazine. Nevertheless, the forces arrayed against carbon taxes are many—not just fuel corporations with a massive stake in keeping the United States addicted to fossil fuels, but our own deep-seated assumptions, including faith, that we can pull through with a mix of native ingenuity and advanced technology.
We would love to agree, but our long experience advocating for energy efficiency and renewables convinces us that higher fuel prices are also essential. For example, as much as we support stronger energy-efficiency standards for automobiles, kitchen appliances, and the like, we must be candid that standards alone won't be enough. Standard-setting takes a long time, and standards alone tend to be static whereas energy use is ever-evolving. Carbon taxes working in tandem with efficiency standards will achieve far more than standards by themselves, by encouraging builders, manufacturers and product designers to pro-actively maximize energy efficiency while giving consumers ongoing incentives to make cost-effective choices valuing efficiency in purchasing, traveling, and daily behavior.
Nor will it be sufficient to subsidize renewable energy. Federal incentives that pay wind and solar generators for each kWh produced, and state "Renewable Portfolio Standards" that mandate increased use of renewable power, have been and will be instrumental in jump-starting these essential sectors. Ditto for biofuels such as automotive fuels made efficiently from cellulosic ethanol. Still, the hurdles for renewables remain high. Taxing petroleum, natural gas and, above all, carbon-laden coal according to their damage to climate will provide a more level playing field and help renewables grow rapidly from their 1-2 percent niche to a majority share of U.S. energy.
Suggesting a tax on anything may seem crazy, given the anti-tax ideology that has colored U.S. politics for over a generation; this is particularly true for fuels, given Americans' sense of entitlement to cheap energy. Yet public alarm over the climate crisis is growing rapidly, powered in part by Al Gore's extraordinary documentary film An Inconvenient Truth, and more recently by the fifty-state "Step It Up" mobilizations spearheaded by author Bill McKibben. Polls now suggest that Americans are willing to pay more for energy to combat global warming and reduce dependence on foreign oil, particularly from the Middle East.
In fact, for reasons of both equity and politics, the carbon tax CTC is urging would not increase the overall tax burden. Rather, it would be a revenue-neutral tax-shift. This point is key. While it is tempting to use carbon tax revenues to accomplish any number of worthy societal goals, including subsidizing energy efficiency and renewables, a revenue-neutral carbon tax is the best way, perhaps the only way, to protect the less affluent from the economic burden of a carbon tax. In CTC's view, carbon tax proceeds should be returned to Americans, either through an equal, pro rata rebate or by reducing regressive taxes such as the federal payroll tax or state sales taxes (depending upon whether the tax is imposed at the federal or state level).
We should note that some large corporations and several environmental groups are proposing a cap-and-trade system as an alternative means of putting a price on carbon. A carbon cap-and-trade would impose a cap on all carbon emissions from one or more industry sectors, allocate or auction off emission "allowances" up to the cap and require each market participant to have an allowance for each ton of carbon emitted. Market participants would buy and sell allowances with those who can reduce emissions the cheapest selling their allowances to those who would have to spend more to reduce their own emissions. We compare a carbon tax to a cap-and-trade system in an issue paper on our Web site and provide a brief summary here of the six fundamental reasons why carbon taxes are superior:
* Carbon taxes will lend predictability to energy prices, whereas cap-and-trade systems will aggravate the price volatility that historically has discouraged investments in less carbon-intensive electricity generation, carbon-reducing energy efficiency and carbon-replacing renewable energy.
* Carbon taxes can be implemented much sooner than complex cap-and-trade systems. Because of the urgency of the climate crisis, we do not have the luxury of waiting while the myriad details of a cap-and-trade system are resolved through lengthy negotiations.
Carbon taxes are transparent and easily understandable, making them more likely to elicit the necessary public support than an opaque and difficult to understand cap-and-trade system.
* Carbon taxes offer far less opportunity for manipulation by special interests, while a cap-and-trade system's complexity opens it to exploitation by special interests and perverse incentives that can undermine public confidence and undercut its effectiveness.
* Carbon taxes address emissions of carbon from every sector, whereas cap-and-trade systems discussed to date have only targeted the electricity industry, which accounts for less than 40 percent of emissions.
* Carbon tax revenues can be returned to the public through progressive tax-shifting, while the costs of cap-and-trade systems are likely to become a hidden tax as dollars flow to market participants, lawyers and consultants.
Cap-and-trade proponents have provided a real service in educating Congress and the country that putting a price on carbon is essential. We are convinced that after thorough examination, the inherent flaws in the cap-and-trade approach will become apparent and our elected representatives in Congress will recognize that the most equitable and effective way to put a price on carbon is through a carbon tax. This shift in the tax burden away from work or income and onto pollution and pollution-generating activities will create powerful incentives to use less energy and emit less CO2 into the atmosphere while simultaneously promoting tax equity and minimizing impacts on those with lower incomes.
For far too many years we've treated the atmosphere as a free waste dump and ignored the costs of carbon pollution to society. We're now learning, belatedly, but perhaps just in time, that the climate costs can't be ignored any longer. We cannot bow to the inevitability of climate change and its devastating consequences. We all share a moral obligation to people around the world and the generations to come to do as much as we can to reduce our destructive energy use.
Taking responsibility for our own energy use decisions is essential. But it's equally vital that we not pretend that personal actions alone will suffice. Collective action at the level of national policy is imperative if we are to have any hope of repairing our world. The place to start is with a carbon tax.
The authors are co-directors of the Carbon Tax Center. They invite you to view their Web site (www.carbontax.org) and contribute your ideas, energy and money to build nationwide support for a tax on carbon emissions.
Rosenblum, Dan & Komanoff, Charles. 2007. Carbon: Tax Not Cap-and-Trade. Tikkun 22(4): 52.