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

Yale Environment 360. Posted May 19, 2009.

A broad spectrum of people concerned about global warming and U.S. energy independence agree on one basic truth: Sooner or later, emitting planet-warming greenhouse gases is no longer going to be free. Whether it comes this year, or next, or in five years' time, legislation imposing a price on burning fossil fuels seems all but inevitable.

Any law that places a price on carbon must achieve two basic and interrelated goals: discouraging -- with increasingly painful economic consequences -- the use of oil, coal, and natural gas, and encouraging the development of renewable sources of energy. Two paths to this end have been proposed. The first is a cap-and-trade system, which would place progressively stricter limits on fossil fuel use; require power plants, industries, and other major sources of greenhouse gases, to purchase permits to discharge carbon dioxide; and establish a market in those permits. The second is an outright tax on fossil fuels. Proponents of both methods say the economic hardship created by higher energy prices could be offset by rebates to taxpayers.

The cap-and-trade option has attracted far more attention and has many more supporters, including President Obama, key Congressional leaders, and an influential coalition of environmental groups and big businesses, including General Electric, Dow Chemical, Shell Oil, and Duke Energy. Congressional leaders say they hope to pass a cap-and-trade bill by year's end, but whether they can achieve that goal remains a major question.

Supporters of cap-and-trade argue that it has two main strengths. It sets a steadily declining ceiling on carbon emissions, and, by creating a market that rewards companies for slashing CO2 (corporations that reduce emissions below their allotment can sell them on the open market), it uses the free enterprise system to wean the country off fossil fuels and onto renewable energy. Proponents of a carbon tax say their plan has one overriding benefit: Its simplicity. They contend that by imposing a predictable and steadily increasing levy on fossil fuels, the carbon tax will also drive development of alternative sources of energy.

Yale Environment 360 asked a number of environmentalists, economists, and academics to explain which approach – cap-and-trade or a carbon tax – they preferred. There was disagreement on many points, but on one issue most concurred. As Jeffrey D. Sachs, director of the Earth Institute at Columbia University, said, imposing some sort of price on fossil fuels "is a big improvement over the do-nothing status quo."

Here are their responses:

Frances Beinecke, president of the Natural Resource Defense Council.

A carbon cap is a more effective approach to solving global warming than a tax. First and most importantly, it sets a clear goal for emissions reductions. With a tax, we are guessing about how much it will reduce carbon emissions, and it may not be sufficient to change the course of global warming. A declining cap gives you firm reduction targets and a system for measuring when you hit them.

Second, we have on-the-ground experience in curbing global warming pollution from cap programs, while the tax model remains entirely untested. Caps are already being used in the European Union and in 10 Northeastern states. They are underway in California. Both the President and Congressional leaders are focused on cap-and-trade. Despite the bubble of pundit interest, there is very little support for a carbon tax among our nation's legislators.

Some advocates claim that a tax would be simpler than a cap. But Congress does not write simple tax bills. When it gets converted into reality, any tax legislation will be complex and vulnerable to loopholes. In 1993, the BTU tax was killed after industry lobbied successfully for a bunch of exemptions, and then cynically lobbied to end the whole thing because it was full of loopholes. One clever lobbying firm went as far as sending blocks of Swiss cheese to members of Congress.

In the end, the discussion about a carbon tax is a distraction, because it frames the debate in fiscal policy terms -- How high should the tax be? What should be done with the revenue? -- instead of focusing on how quickly we need to reduce global warming pollution.

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