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

Yale Environment 360. Posted May 19, 2009.

The bottom line is that cap-and-trade gives us an affordable environmental guarantee that you can't get with a tax. The dime a day we'll spend is the hardest working dime in America: It cleans the air, reduces our oil dependence, creates jobs, and averts a looming environmental crisis.

Roger A. Pielke Jr., professor of environmental studies at the University of Colorado.

Cap-and-trade is doomed to failure. It might lead to some new and substantial revenues for the government, but it can never succeed at limiting carbon dioxide emissions. The reason is very simple: A hard cap on emissions would inevitably lead to increases in the costs of energy, which will lead to increasing costs throughout the economy. If these costs are felt by consumers (which is of course what such a policy is designed to do) then they will complain. No elected official will want unhappy constituents, so they will work hard to help people avoid the increasing costs. This fundamental political reality will consequently turn the theory of a hard cap into the practice of a very soft cap that has backdoors and safety valves that allow the cap to be evaded in order to reduce the effect on costs, ultimately defeating the purpose of the policy.

Putting a price on carbon, however, makes good sense. A straight carbon tax -- at whatever level would be politically acceptable -- is a far better place to start than with a fully gamed cap-and-trade system. The point of such a tax would not be to change behavior, but to start the process of pricing carbon directly and to raise some significant revenue for clean-energy investments. Some experts suggest that $5-per-barrel oil tax would not be noticed by consumers but would raise $500 billion over five years to fund investments in a new green economy.

With progress in de-carbonizing the economy, a steadily rising carbon tax should be politically possible, thereby creating a virtuous circle where the price of carbon rises with -- and reinforces -- progress made in increasing energy efficiency and expanding the role of carbon-neutral energy sources. With Exxon Mobil supporting a low carbon tax, I reject the contention by some who argue that a carbon tax is politically impossible.

Cap-and-trade is a big, fat political mess that cannot succeed in reducing emissions, but can lead to lots of benefits to many special interests. Hence it has many champions. A straight carbon tax, applied upstream in the energy economy, is a much preferable approach to help bring about the long-term de-carbonization of the global economy.

Robert N. Stavins, Albert Pratt Professor of Business and Government at Harvard University and the Director of the Harvard Environmental Economics Program.

While there are tradeoffs between the two principal market-based instruments targeting CO2 emissions -- cap-and-trade and carbon taxes — the best and most likely approach for the short- to medium-term in the U. S. is a well-designed cap-and-trade system.

There are differences between taxes and cap-and-trade that need to be recognized. First, environmental effectiveness: A tax does not guarantee achievement of an emissions target, but it provides greater certainty regarding costs. On the other hand, political and economic forces strongly point to less severe targets if carbon taxes are used, rather than cap-and-trade -- this is not an acceptable tradeoff, and this is why environmental NGOs are opposed to the carbon-tax approach.

In principle, both carbon taxes and cap-and-trade can achieve cost-effective reductions, and -- depending upon design -- the issue of who ultimately pays for the higher price placed on carbon can be similarly resolved in both approaches. But the key difference is that political pressures on a carbon tax system will most likely lead to exemptions of sectors and firms, which reduces environmental effectiveness and drives up costs, as some low-cost emission reduction opportunities are left off the table. Political pressures on a cap-and-trade system will lead to different allocations of allowances, which affect distribution, but not environmental effectiveness and cost effectiveness.

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