"A carbon tax is the best, cheapest and most efficient way to combat cataclysmic climate change. [F]or all its benefits, cap-and-trade still isn't the most effective or efficient approach. That distinction goes to ... a carbon tax. While cap-and-trade creates opportunities for cheating, leads to unpredictable fluctuations in energy prices and does nothing to offset high power costs for consumers, carbon taxes can be structured to sidestep all those problems while providing a more reliable market incentive to produce clean-energy technology... Carbon taxes avoid ... [the] price volatility which has been endemic to both the American and European cap-and-trade systems. A carbon tax simply imposes a tax for polluting based on the amount emitted, thus encouraging polluters to clean up and entrepreneurs to come up with alternatives. The tax is constant and predictable. It doesn't require the creation of a new energy trading market, and it can be collected by existing state and federal agencies. It's straightforward and much harder to manipulate by special interests than the politicized process of allocating carbon credits. And it could be structured to be far less harmful to power consumers. While all the added costs under cap-and-trade go to companies, utilities and traders, the added costs under a carbon tax would go to the government -- which could use the revenues to offset other taxes. So while consumers would pay more for energy, they might pay less income tax, or some other tax. That could greatly cushion the overall economic effect."

On Carbon Dioxide, a Better Alternative (complete)

By Keith Crane and James Bartis
Special to washingtonpost.com's Think Tank Town
Thursday, November 29, 2007; 12:00 AM

Fossil fuel combustion and the consequent release of carbon dioxide continues as the dominant cause of increasing amounts of greenhouse gases in the atmosphere. Each year the United States releases into the atmosphere over 6 billion tons of carbon dioxide, roughly a quarter of global emissions. After years of inaction on this problem, Congress now appears poised to seriously debate legislation designed to reduce greenhouse emissions.

The only effective way to begin reducing greenhouse gas emissions and slow global climate change is to make it more expensive to emit carbon dioxide. Unless businesses and consumers pay a price for carbon dioxide, neither will make the investments in technology and changes in energy use needed to dramatically reduce emissions.

Most of the climate change legislation currently before Congress proposes a complicated "cap-and-trade" system. This would set a limit on emissions below current levels and then allocate permits to pollute that could be bought and sold. The alternative would be to impose a direct tax on carbon dioxide emissions.

In either case -- tax or trade -- electricity and gasoline prices would rise. A tax of $30 per ton -- a level MIT suggests would make clean coal technologies an attractive investment to power companies -- would raise gasoline prices by 35 cents per gallon and household electricity bills by 20 to 30 percent. Under cap and trade, prices would have to rise by the same amount to get the same result.

The attraction of cap and trade for its supporters is that the cap sets a limit on emissions of carbon dioxide. But it's difficult to get the limit right. The cap may be set too high to induce firms to make the large investments needed to reduce emissions. Or it may be set so low that costs skyrocket and political support to combat climate change falters.

The major disadvantage to cap and trade is that the price tag for reaching the target is highly uncertain. In contrast, a tax on emissions provides businesses and consumers with certainty about costs, while leaving the size of the reduction less certain.

After the failed attempt to pass the Clinton administration's 1993 proposal to tax energy, energy taxes have become a highly partisan issue, and Congress has shunned the mere mention of a carbon dioxide tax ever since. But times have changed. For compelling environmental and economic reasons, it's high time to put a tax back on the table.

Putting a price on carbon dioxide creates winners and losers. All of the cap and trade bills before Congress would award permits to energy companies. But any cap on energy use will cause fuel prices to rise. So consumers will pay for this through higher prices for electricity and gasoline.

Instead, we suggest a tax on carbon dioxide in which all the proceeds collected by the government would be returned to Americans each year when they file income taxes. In contrast to current congressional proposals for cap and trade, a tax on carbon dioxide refunded directly to individuals would cut emissions while cushioning the impact on the pocketbooks of American families. For example, a $30 tax that reduces emissions by 20 percent would provide a refund of about $500 for every American: a family of four would get back $2,000.

A carbon dioxide tax with refund is fair because the people responsible for the most emissions would pay the most. The tax would also be progressive. Many Americans with lower incomes would find the refund would more than defray the higher costs of gasoline and electric power.

A tax is simple and can be phased in quickly. It encourages individuals and businesses to make long-term decisions with confidence, rather than trying to guess what the future price of permits will be. With a tax and refund, consumers would only pay the extra costs associated with carbon abatement measures.

A carbon dioxide tax with refund can be implemented easily. It can be collected at a few key links in the supply chain: refineries, power plants or pipelines. As shown by last year's refund of excess telephone taxes, the Internal Revenue Service can efficiently refund payments to all taxpayers. If passed by this Congress, taxpayers could see their first refunds in the Spring of 2009.

A carbon dioxide tax can be easily adjusted as lower-cost means of reducing emissions are tapped and new technologies become available to tackle more difficult sources. The tax could be started low, but with a clear schedule of increases so that individuals, local governments and businesses will begin now to make the changes and investments required to dramatically reduce emissions within 15 years.

Partial refunds could be targeted to U.S. producers in industries like petrochemicals, steel and aluminum so that they remain competitive with imports, while pushing them to invest in reducing emissions. These targeted refunds would prevent highly polluting foreign plants from destroying efficient energy-intensive industries in the United States.

U.S. consumers and industry need to reduce carbon dioxide emissions. A refunded carbon dioxide tax is the best way to achieve reductions. It is simple, good for the planet, and imposes the least additional costs on the American economy as compared to any other policy alternative. Most importantly it can be crafted to ease the burden on families and protect industries from unfair competition in the global marketplace.

Keith Crane is a senior economist and James Bartis is a senior policy researcher at the RAND Corporation, a nonprofit research organization.

CTC volunteer James Handley, commenting on Gristmill, June 17, 2008

Dividend makes Carbon Tax Environmentally Just
To reduce carbon emissions, a carbon tax (on coal, oil and gas entering the economy) must be high enough and increase steeply enough to broadly affect consumer and business behavior -- encouraging conservation and alternative energy.

As Joe Bongiovanni suggests, revenue from a carbon tax COULD be doled out for "good works" such as alternative energy projects.  

Lieberman's cap-and-trade bill attempted this: auction (some) carbon emissions permits and dole out auction revenue to a long list of technological and political favorites.  (It was "deficit neutral"-- a tax that would have SPENT ALL of the revenue.)    

Three flaws, Joe:

1. Congress tends to dole out money to powerful corporations. (Lieberman's bill included subsidies for ethanol, nukes, "clean coal" research, as well as "adjustments" for the very fossil fuel industries that would have paid for pollution permits. Every fat corporate pig you can think of was bellying up to the trough.)

2. It's early in the race: neither Congress nor anyone really knows which technologies will work the best for reducing greenhouse gas emissions.  A tax on carbon pollution sets the market to work on finding, developing and marketing those technologies.

3. A carbon tax has a disprortionate effect on lower income people UNLESS linked to a dividend to distribute the revenue to everyone equally. We'd all pay higher prices for fossil fuel but we'd all get the same dividend.  So those who use less than their share of fuel (lower income folks and those who learn to reduce carbon impacts) would pay less in increased prices than their dividends. We'd be PAID to conserve the carbon recycling capacity of the atmosphere while the wasters at the top would be penalized.

The Carbon Tax Center figures that the bottom 3/5 of income would be net gainers under a carbon tax with dividend.  Only the top 1/5 would pay more carbon tax than their dividend.  Why?  The top 1/5 uses a LOT more fuel: flying, driving big vehicles and living in huge houses.  

So, yes a carbon tax would push everyone to reduce fossil fuel use.  Recyle the revenue through a divident and we can do it WITHOUT hammering the poor.  

That's MY idea of environmental justice.