Enjoyed a delicious lunch with economist Ken Green at the (conservative) American Enterprise Institute two weeks ago. Green and his AEI colleagues published a terrific analysis: "Climate Change, Caps vs. Taxes" concluding that a carbon tax would be a "no regrets" economic policy creating a level and stable playing field. A tax would avoiding the scramble for polluting rights inherent in a "cap and trade" system and would provide incentives for everyone to reduce greenhouse gas emissions. And it would not handicap the US compared to our trading partners as a "cap" would.
While Green is most concerned about damage to the economy, I'm most concerned about run-away climate change. But we agree from both perspectives that a carbon tax would be far better than "cap and trade," the only approach most politicians and environmental groups even mention.
Last month, in "Policy Options for Reducing CO2 Emissions" the Congressional Budget Office concluded that emissions reductions under a tax would be roughly five times as high as those under inflexible cap. Incentives for innovation are one of the key benefits of pricing emissions. CBO found that a tax would create the needed incentives better and sooner than cap and trade.
Cap and trade systems are a (complex) way to create new markets to trade the right to pollute. A carbon tax is a (simple) way to use EXISTING markets to create incentives to reduce carbon emissions and to maintain the resources (rainforests, for example) to sequester carbon. Both will increase fossil fuel prices. A tax would increase fossil fuel prices predictably and gradually, emissions trading would add volatility and unpredictabilty to prices.
So why aren't the mainstream environmental groups and the politicians even talking about a carbon tax? They seem afraid we'd hang them for mentioning the "T" word.
But this "tax" is more like a user fee. When we pay our water bills, we pay for disposal and treatment of the waste water-- a sewer fee for every gallon of water we use. It reminds us not to waste water-- because there are costs of bringing the water to us, and there are costs of taking the waste away. Similarly, carbon tax (or fee) is a way to build in some of the cost of disposal of greenhouse gases into the atmosphere and would put non-fossil fuel energy sources, like wind, on a more equal footing. (A very small carbon tax would very quickly make wind cheaper than coal as a source for electricity generation.) We could use carbon tax funds to provide incentives for preservation of tropical rainforests, the biggest carbon sinks on Earth, which are now being burned to clear land for (government-subsidized) biofuels and beef.
A carbon tax can be revenue-neutral. The Carbon Tax Center suggests a "progressive tax shift" -- distributing an equal share of the carbon tax revenue to every tax payer. Those who use more than the average of fuel would pay more tax than their share (refund) payment. Those of us who use less than average would get a bonus. Everyone who spends money would have incentives to choose less carbon-intensive products and services because prices would reflect carbon footprint.
How to break the sound barrier on carbon taxes? If the Carbon Tax Center, the CBO and the AEI all agree that they'd work so much better than cap and trade, can't we at least start a political discussion about carbon taxes? The silence is deafening, and at least to me, a bit maddening.