The Carbon Tax Center applauds President Obama’s proposal to cap emissions, use market forces to reduce emissions, and return revenues through payroll tax credits. The proposal, as outlined this week, is a huge step forward from the Lieberman-Warner pork-barrel cap-and-trade fiasco last year and moves the discussion closer to the “gold standard” of a revenue-neutral carbon tax. We hope other carbon tax advocates join us in building upon the proposal; blanket opposition would be counter-productive to our common goal of reducing greenhouse gas emissions.
How do we build upon the President’s initiative? We believe carbon tax advocates should:
- Agree with the need to cap emissions, but advocate implementing the cap through a cap-and-tax rather than a cap-and-trade program. We need to recognize and endorse the political value of a "cap" and recommend that any carbon tax include specific emission reduction goals to be implemented through periodic adjustments to the carbon tax rate.
- Agree with the concept of using market forces to reduce emissions, but continue to argue that carbon taxes are simpler, more transparent and efficient than trading. Carbon taxes will provide a powerful price signal promoting more efficient use of energy and the substitution of renewable energy for high-carbon fossil fuels.
- Agree with the general concept of returning revenues through payroll tax credits, but suggest improvements such as ensuring that lower-income families are adequately protected and returning all or a far larger percentage of the revenues through payroll tax reductions or dividends.
- Continue to stress the importance of imposing a tax, or obligation to obtain permits, upstream in order to reduce administrative complexity and ensure comprehensiveness.
- Recognize that a well-designed and implemented cap-and-auction program, one that is as close to a carbon tax as possible, is far better than nothing and would also be better than a poorly designed and implemented carbon tax. We should not hesitate to point out the superiority of carbon taxes, but not in ways that might aid those who want to delay effective action on climate change.
We support a well-designed carbon tax because it is the most efficient, equitable and certain means to reduce greenhouse gas emissions significantly— and soon. Our future demands that we advocate for nothing less.
Photo: Flickr / Annie Oakley.
James Handley says
Caps are "price instruments" that lead to costly volatility and the opportunity for speculation and manipulation. Economists at the Brattle Group concluded last month that under cap and trade, "CO2 price volatility will cause CO2 abatementtechnologies to be deferred for 10 years or more, until CO2 prices are perhaps double the levels needed to justify these investments, absent the volatility." Instead of cap-and-trade, they say, "The most direct way to mitigate CO2 price volatility would be to avoid it by using a carbon fee approach." I hope the Administration remains open to price instruments like carbon taxes. Last week, a senior Budget office official said,“We’re just beginning the conversation,” calling the climate provisions in the budget “a placeholder.” New Budget Director Peter Orszag previously headed the Congressional Budget Office which similarly concluded that a carbon tax would be five times as efficient as cap-and-trade. Hope he’s getting the word to the President and Congress.
Daniel Rosenblum says
Thanks, James. As you advised me in a separate note, I understand your first sentence should have read "Caps are ‘quantity-based" controls which lead to very large volatility and opportunities for speculation and manipulation."
When a cap is used as part of a cap-and-trade program, it is certainly a "quantity-based" control which can lead to the type of volatility you describe in your note. You failed to note in your comment that the Brattle Group described how volatility can be mitigated through either a carbon fee or "a safety valve mechanism that includes a slowly evolving price floor to protect investors as well as the more commonly discussed ceiling to protect customers."
Of course, it should be clear from the post that it does not endorse a cap as part of a cap-and-trade program. The post calls for a carbon tax, which will provide the price signal necessary for market forces to effectively and efficiently reduce carbon emissions. The cap, in cap-and-tax, does not turn a carbon tax into a "quantity-based" instrument. All it does is act as a check on the effectiveness of the carbon tax; with "specific emission reduction goals to be implemented through periodic adjustments to the carbon tax rate."
James Handley says
Dan, You’re welcome. Seems like we’re differing on terminology, not substance here. The term "cap," especially in conjunction with "market forces" (trading) implies a quantity instrument to me. The economics papers I’ve read by Orszag & Dinan, Nordhaus, Shapiro, Metcalf, Mankiw, Green, Brattle Group… compare quantity instruments ("caps") with price instruments ("taxes" or "fees"). All conclude that price instruments work far better. (No volatility, less gaming, no hidden prices… ) The advantages of transparent price instruments, I daresay, are the raison d’etre of the Carbon Tax Center. I like the idea you advance: a price instrument periodically adjusted to meet an emissions limit or target. Again, our difference is terminology: you’re calling that a "cap" but to me, it’s a targeted price instrument ("fee" or "tax"), not a quantity instrument. Caps (quantity instruments) don’t guarantee reductions unless we are willing to shut off coal-fired power plants (or other emitters) when caps are exceeded. Cap proposals include many escape hatches from the much-vaunted "emissions certainty": free allowances to polluters, banking, borrowing, offsets, safety valves (price ceilings) and so forth. So, no, I do not applaud "caps" (quantity instruments) using "market forces" (trading) to reduce emissions because I view them as fundamentally flawed and their advocates’ claims of "emissions certainty" as either sadly misguided or fraudulent. I think it’s confusing to use their terms for our much more effective proposal. I guess I’m finally over my aversion to the term "tax". I now have a reflexive aversion to the term "cap" — I tend to assume its proponent is trying to hide the price and pretend a "cap" is a guarantee of emissions reductions.
David Ocampo G says
Like Mr Handley, I get a feeling that I gotta go to the bathroom, real bad, real soon, when I hear "Cap’n Trade". The reasons are pretty much what I read on this website here. But there is one reason that affects me most, nowdays: some kind of order, some kind of predictability, in carbon fuel prices. As things are now, if the Carbon Tax is passed and signed next month, to go into effect in 2011, we will begin to see benefits almost immediately: not just in reduced greenhouse gas emissions, but in emission-reduction investments of all kinds, because we will have a good idea of what carbon fuel prices will be in 2011, and we will know that those prices will keep going up in the years to follow. However, if Cap’n Trade is passed and signed next month, to go into effect in 2011… we’ll have to Wait’n-See what carbon fuel prices will be. Investment and life-style changes will be on hold as we play Wait-n See. This has nothing to do with whether the formerly yellow-suspendered ex-yuptile escapees from the banking fiascos are sliming their way into carbon trading or other worries concerning Cap’n Trade.
Joel Wendland says
What is your assessment of cap-and-trade models that already exist, e.g. on SO2 here in the US.