Carbon Tax "Vastly Superior" to Cap and Trade

Economist Gary Hufbauer testified to the Senate Finance Committee this morning:

"Climate change is a serious problem that must be addressed by the United States and other countries. To reduce greenhouse gas (GHG) emissions, a carbon tax system would be vastly superior to a cap-and-trade permit system. Carbon taxes would be more transparent, more uniform across all GHG sources, raise more revenue, easier to administer, and more readily adjusted at the border. The Waxman-Markey draft legislation illustrates the enormous complexity, opacity, and rent-seeking inherent in a permit system."

If, like me, you think global scorching could become a plague of biblical proportions, it's pretty important to get the policy right. And even if you're not that concerned about the climate crisis, you might like the idea of tax reform: reducing taxes on our pay, encouraging employment while replacing the revenue with taxes on global warming pollution, discouraging energy waste and encouraging renewable energy. Unlike the 946-page Waxman-Markey bill, most people can understand that.

Why isn't Congress going for a revenue-neutral carbon tax? They seem to think we're too brow-beaten to understand that cap/trade is a hidden, volatile and regressive tax, and they're afraid we won't accept an explicit, predictable, progressive tax shift, just because it's called a "tax."

I won't be shedding any tears when the Waxman-Markey bill goes down in flames, either on the House floor or in the Senate. Then, maybe we can have a mature discussion about what Dr. Hufbauer was describing-- a system that actually works and that would lead other countries to follow.

Magical "Caps" Make Global Warming Go Away?

All you need is a "cap" and climate change will be "all better." That's the heart-warming story that EDF, Pew and the rest of the USCAP crowd have sold to their members, the public and the House Energy & Commerce Committee. Coming Attractions: the "magical cap" fairy tale will soon be playing to the full House.

The Washington Post reported today on very heavy lobbying of the Waxman Markey climate bill. But, the Post says cap/trade advocates are not concerned about handouts of free allowances:

Supporters of the bill say its key component is an iron-clad cap on the nation's emissions that drops over time. They said it doesn't matter how allowances are distributed.

"The environmental goals depend on having a strong cap and a time horizon to encourage innovation," said Nathanial Keohane, an economist at the Environmental Defense Fund. "That's what we see in the bill."

The biggest chunk of free allowances, worth $500 billion, would go to local electricity and natural gas distribution companies, with strings to make sure the firms use them to shield consumers from higher costs. [Emphasis added.]

So the magical "iron clad" cap does it. No need to bother anyone with higher fossil fuel prices...

Fred Krupp of EDF: "You’ve heard a thousand times that the whole point is to send a price signal. The whole point is really a declining cap [for greenhouse-gas emissions]. The cap drives innovation which lowers the costs. As an environmentalist, I’d like to see the costs at the lowest level possible, because that creates the political will to keep going, or even ratchet down the cap." (Wall St. Journal, March 19)

Contrast this with what economists say: Prof. Nordhaus: "Economic participants—thousands of governments, millions of firms, billions of people, all making trillions of decisions each year—need to face realistic prices for the use of carbon if their decisions about consumption, investment, and innovation are to be appropriate... without a strong price signal, there is simply no hope for making the vast number of decisions in a remotely efficient manner... Raising the price of carbon is [thus] a necessary condition for implementing carbon policies in a way that will reach the multitude of decisions and decision makers over space, time, nations, and sectors." [Emphasis added.]

And maybe the best part of the magical cap fairy tale: no need to regulate anything and hardly any need to even to enforce anything.... and we can feed the hungry sharks on Wall Street a new market in carbon trading while we're at it.

So why don't I believe in caps? There are two ways to reduce pollution:

1) Regulation: Prohibit or limit pollution by specifying equipment or performance, for example of power plants, appliances or buildings. And then police and enforce those rules every single day. Intrusive, bureaucratic, inefficient and requires heavy enforcement.

2) Prices: Raise the cost of pollution. That can be done directly with a tax, or indirectly with a cap which (if enforced) would raise prices. A cap says: Here's the amount of pollution we're going to allow, now bid for the limited right to pollute. But if there's a way out of the cap called an "offset" then there's really no cap at all -- the price of polluting becomes the price of the cheapest offset you can find.

Here's what the cap/trade advocates say in defense of offsets:

Offsets reduce costs to the U.S. economy by allowing firms to purchase emission reductions that occur outside the cap when they are more cost-effective, just like a cap-and-trade program allows firms to purchase allowances from other capped firms that can reduce emissions more cheaply.

And here's an example from Friends of the Earth's the "Subprime Carbon" critique of offsets:

[O]ffset projects may be simply disingenuous. Perhaps the most well-known controversies relate to offset projects designed to destroy HFC-23, a chemical byproduct of refrigerant production that is more than 11,000 times more potent than carbon dioxide. Widespread reports of companies purposely creating these very powerful greenhouse gas chemicals — just to destroy them and make money off of the credits — prompted the Kyoto Conference of the Parties to take up this issue at their December 2008 meeting in Poland.

Still believe in magical caps?

How about a revenue-neutral carbon tax instead?