August 02, 2007

Who's ready for a carbon tax?

As I was driving back from New York to DC last weekend, I couldn’t help but notice the dismal industrial landscape that spoils the New Jersey foliage. Dilapidated, rusting buildings and machinery spewing pollution line the highway, the tools of coal-powered energy production. I couldn’t help but think at that moment, why would anyone prefer this scene to a simple white wind turbine?

But alternative energy usage is just one part of a multi-pronged solution to curb our country’s excessive carbon emissions. John Dingell writes a good article in the Washington Post today stating that, while alternative sources and new fuel standards for cars or appliances are a good start, they aren’t enough. Our solution must include a market instrument to raise the cost of emitting carbon. A carbon tax or fee would “be the most effective way to curb carbon emissions and make alternatives economically viable” Dingell writes.

He’s absolutely correct. Market forces will work, they have in the past. Taxes or fees on emissions-intensive energy producers mean higher costs to consumers, a powerful signal to reduce consumption. Taxes on carbon emissions would also encourage research and investigation into cost-effective alternative energies and investment in fuel-efficient items as a response to high energy costs.

Dingell furthermore argues that we must be ‘ambitious’ and challenge the political system to adopt a carbon tax instead of settling for the more palatable cap-and-trade program. But unfortunately he fails to address the fact that a cap-and-trade program could have the same effects as a tax, and at lower costs. In economic terms, the cap and trade system is just as efficient as a tax and is more flexible in allowing firms to trade pollution permits based on their ability to reduce emissions. Firms that emit heavily will have to buy permits to do so, raising costs and sending the same price signals to consumers to reduce consumption. Revenue could be raised in a cap-and-trade program by auctioning permits.

Most importantly, a cap-and-trade program sets a concrete limit on the amount of CO2 that can be emitted by all firms, guaranteeing a reduction if well-monitored. A tax merely encourages reduction, it doesn’t mandate it. In the very long run, a carbon tax may end up the most efficient option, but this doesn’t mean a cap-and-trade system should be overlooked because it has its merits.

And, of course, Dingell entirely overlooks the vital fairness questions that have dogged the carbon tax idea since the Clinton administration discussed a “BTU tax” more than a decade ago. Any carbon tax, as well as any cap-and-trade program, will hit low-income consumers hardest—and would come at a time when both federal and state taxes are already hitting low-income families harder, and letting wealthy families off easier, more so than at any time in recent memory. To meet even the most modest standards of fairness, a carbon tax or cap-and-trade program would have to provide low-income tax rebates, possibly through the federal payroll tax.

It’s nevertheless heartening to know that support is growing for the types of market tools necessary to cause a clear reduction in carbon emissions. Personally, I’m more than ready for the wind turbines.


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