Monday, May 25, 2009

Update: Cap 'n Trade vs. Carbon Tax

Recently, I wrote a post for explaining the difference between a cap and trade system and a carbon tax to reduce carbon emissions. As action in Congress has heated up, this topic has been receiving much attention in the blogosphere. Here is a rundown:

The Miami Herald reported on a bill introduced by two Republicans, Jeff Flake (AZ) and Bob Inglis (SC), and one Democrat, Dan Lipinski (IL), that would tax carbon emissions. They offered it as an alternative to the Democratic leadership's cap and trade bill that passed out of the House Energy and Commerce Committee on May 21, 2009. Their bill would be tax neutral by lowering the payroll tax by whatever amount is raised through the carbon tax. In explaining his support, Flake says, "The first axiom of economics is if you want less of something, you tax it. Obviously, we want less carbon, so we tax it."

Phil Levy at Foreign Policy has a good summary of the cap and trade versus carbon tax debate. He also writes:
For ease of use and immunity from political meddling, the carbon tax is the clear winner. Taxes can be applied early in the fuel distribution process, which makes the logistical task much easier. That sort of upstream application would make attempts at political interference much more transparent, as well. So what about uncertainty? The big critique of a carbon tax is that it cannot guarantee a country will come in under a pre-set emissions cap. If the desire to pollute is really, really high one year, we could find that a given tax won't serve as a sufficient deterrent, and we'll blow past our limits.
The House cap and trade bill shows clearly that Levy's concerns about "political meddling" are justified. As John Broder at the New York Times reports, several exceptions have already been included in the bill to get the support of members from energy producing states. He writes:

When Mr. Waxman first unveiled his plan in late March, at least a dozen of the panel’s 36 Democrats had qualms of it. These so-called Brown Dogs were mainly from states dependent on coal for power and manufacturing for jobs, and needed assurance that their constituents would be protected.
In weeks of closed-door negotiations with these Democrats, Mr. Waxman doled out billions of dollars worth of free pollution permits, known as allowances, to cushion any price shock caused by imposing a cap on emissions of heat-trapping gases.

I wonder how many more "allowances" will be added to the bill by the time it goes through three, or more, additional committees and the House and Senate floors?

Meanwhile, Joshua Tucker at The Monkey Cage uses a rational choice approach to try to discern why most congressional Republicans are supporting the status quo over either of these two approaches.

As both Levy and Tucker point out, industries that emit carbon are backing cap and trade because they see it as a preferable alternative to a carbon tax. It gives them more flexibility, plus, they may be hoping for one of those "allowances." So, if Flake and Inglis were to get their fellow Republicans to join them in backing a revenue neutral carbon tax, we would have the unusual situation of the Democrats on the side of the polluters while the Republicans oppose them.

Finally, if you are still confused about what cap and trade actually is, here is a helpful video from the public radio program Marketplace.

1 comment:

Skydaemon said...

What is amusing is that even oil companies are in favor of the carbon tax over cap and trade. Mainly because they see that coal is going to get political hand outs that they will have to subsidize. The only thing more disgusting than being taxed, is being taxed extra to subisize worse offenders that compete with you.

The other major downside to cap and trade is the trade portion of it. Goldman Sachs buys a coal company and they can use it to own the market in carbon credits. If you think the oil spike to $148 was nasty you haven't seen anything yet. A carbon cap is basically a predictable, certain worsening (as it tightens) supply shock which is intended by design. Put control of the price of that in the hands of hedge funds and you are in serious trouble.