How Do We Curb Carbon: The Debate Over an Emissions Cap or a Tax

Yale Environment 360. Posted May 19, 2009.

The crisis of global warming is so urgent that we can't wait for lawmakers, industry, and the American people to spend years hashing out the details of an entirely new system. We have to act now to reduce emissions, and a declining cap is the way to do it.

Jeffrey D. Sachs, director of the Earth Institute at Columbia University.

Cap-and-trade emissions trading seems to politicians to be the ideal solution. It is "market-based," does not require the T-word (taxes), and can be worked out with special-interest groups in back-room negotiations. For the rest of us, however, cap-and-trade seems a funny way to do business.

A straightforward carbon tax has vast advantages. It can be levied upstream at a few dozen places -- at the wellhead, the mine face, and the liquid natural gas depot -- rather than at thousands or tens of thousands of businesses. A carbon tax covers the entire economy, including automobiles, household use, and other units impossible to reach in cap-and-trade. A carbon tax puts a clear price on carbon emissions for many years ahead, while a cap-and-trade system gives a highly fluctuating spot price. A carbon tax raises a clear amount of revenue, which can be used for targeted purposes (R&D for sustainable energy) or rebated to the public in one way or another, while the revenues from a cap-and-trade system are likely to be bargained away well before the first trade ever takes place.

It's sometimes claimed that cap-and-trade will lead to more certain emissions reductions than a tax. In theory this could be true, but in practice it's likely to be false. In fact, a cap-and-trade system can be more easily manipulated to allow additional emissions; if the permits become too pricey, regulators would likely sell or distribute more permits to keep the price "reasonable." Since the long-term signals from cap-and-trade are less powerful than a multi-year carbon tax, the behavioral changes (e.g. choice of the type of power plant) brought about by cap-and-trade could well turn out to be far fewer, as well.

Let me be clear, though. Cap-and-trade is a big improvement over the do-nothing status quo<, even if it's less desirable than a carbon tax. If politicians insist on cap-and-trade, we shouldn't let the best be the enemy of the good.

Fred Krupp, president of the Environmental Defense Fund.

President Obama got it exactly right when he called on Congress for a market-based cap on greenhouse gas emissions "to truly transform our economy, to protect our security and save our planet from the ravages of climate change."

From an environmental point of view, the advantage of an emissions cap over a carbon tax is clear: A cap puts a legal limit on pollution. A tax does not. Guessing what level of tax might drive the pollution cuts we need to avert runaway climate change is a risk we simply can't afford to take. Only a cap with strong emissions reduction targets — and clear rules for meeting them -- can guarantee that we achieve the environmental goal.

Cap-and-trade also has the upper hand on the economics. When we create a market that rewards emissions reductions, we put the vast know-how, manufacturing base, and investment capital of the private sector to work. Nothing can match the immense resources that the private sector can bring to bear -- and nothing beats a cap when it comes to driving sustained investment in the jobs and technologies that will solve the problem.

We know from the EPA that cap-and-trade will mean as little as $98 a year -- about a dime a day -- for American households. Those costs are small, but they are real. Fortunately, Congress has options for ensuring that the cap is equitable and that consumers are treated fairly as the country makes the long-term transition to a low-carbon economy. President Obama has proposed putting revenue generated by the auction of emissions allowances back into Americans' wallets. The U.S. Climate Action Partnership, of which the Environmental Defense Fund is a member, has a blueprint for legislation that would enable regulated energy suppliers to offset costs for consumers.

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