E.U. Appeals to U.S. to Join Common Carbon Trading Market (NY Times)

For too long the conventional wisdom has been that while carbon taxes may be superior to cap-and-trade schemes, there is no way that politicians would ever support a new tax, even one that was revenue-neutral. Environmentalists who might otherwise be supporting a carbon tax because it could produce real reductions in greenhouse gas emissions far more rapidly than cap-and-trade have dismissed carbon tax advocacy as naive and have rallied behind cap-and-trade.

Just as conventional wisdom was consistently proven wrong in the 2008 presidential election, it’s also proving wrong about the political infeasibility of a carbon tax. Just look at events over the past two days.

On Saturday, the lead editorial in the New York Times, The Gas Tax, made a compelling case that the president-elect and Congress should impose a “gas tax or similar levy to keep gas prices up after the economy recovers from recession.”

On Sunday, two prominent Republicans, Congressman Bob Inglis of South Carolina and supply-side economist Arthur Laffer, unequivocally endorsed a U.S. carbon tax in a New York Times op-ed, An Emissions Plan Conservatives Could Warm To, that concisely summarized the politics of climate change and the rationale for a carbon tax from a conservative perspective:

Conservatives don’t support tax increases that are veiled as “cap and trade” schemes for pollution permits. But offer us a tax swap, and we could become the new administration’s best allies on climate change.

The Inglis/Laffer summary of why the Liberman-Warner cap-and-trade bill failed is short and to the point:

A climate-change bill withered in Congress this summer because families don’t need an enormous, and hidden, tax increase. If the bill’s authors had instead proposed a simple carbon tax coupled with an equal, offsetting reduction in income taxes or payroll taxes, a dynamic new energy security policy could have taken root.

Inglis/Laffer cogently present the economic basis for a carbon tax:

We need to impose a tax on the thing we want less of (carbon dioxide) and reduce taxes on the things we want more of (income and jobs). A carbon tax would attach the national security and environmental costs to carbon-based fuels like oil, causing the market to recognize the price of these negative externalities.

They recognize that “the costs of reducing carbon emissions are not trivial” and the concomitant need for revenue-neutrality in carbon pricing:

It is essential, therefore, that any taxes on carbon emissions be accompanied by equal, pro-growth tax cuts. A carbon tax that isn’t accompanied by a reduction in other taxes is a nonstarter. Fiscal conservatives would gladly trade a carbon tax for a reduction in payroll or income taxes, but we can’t go along with an overall tax increase.

Inglis/Laffer directly address concerns that putting a price on carbon (whether through a carbon tax or cap-and-trade) would put Americans at a competitive disadvantage:

If China and India join the United States in attaching a price to carbon, their goods should come into this country without a carbon adjustment. But if they do not, every item they place on our shelves should be subject to the same carbon tax that we would place on our domestically produced goods, again offset by a revenue-neutral tax cut.

If World Trade Organization rules entitle members to an unwarranted exemption from such a carbon tax, then we should change them. Outliers should not be allowed to frustrate the decision-making of the countries that are trying to prevent the security and environmental train wrecks of this century.

Although other conservatives including George W. Bush speechwriter David Frum and the American Enterprise Institute’s Ken Green have made similar arguments, Inglis and Laffer are the two most prominent Republicans to publicly articulate such a clear pro-carbon tax position.

The same day as the Inglis/Laffer op-ed, conservative pundit Charles Krauthammer published his own strong endorsement of a gas tax. Though his Weekly Standard article, The Net-Zero Gas Tax – A Once-in-a-Generation Chance, begins by describing Americans’ “deep and understandable aversion to gasoline taxes,” Krauthammer quickly presents what he refers to as the “blindingly obvious” energy independence and other benefits of an increase in the federal gas tax, and proposes what he calls:

Something radically new. A net-zero gas tax. Not a freestanding gas tax but a swap that couples the tax with an equal payroll tax reduction. A two-part solution that yields the government no net increase in revenue and, more importantly — that is why this proposal is different from others — immediately renders the average gasoline consumer financially whole.

Krauthammer envisions the simultaneous enactment of a carbon tax and an offsetting reduction of payroll taxes, with the payroll tax reduction kicking in a week before the gas tax takes effect. He notes as a “nice detail” the fact that the payroll deduction would be “mildly progressive” and follows with a constructive analysis of some of the nitty-gritty details of implementing his net-zero gas tax.

Finally, Times columnist Thomas Friedman weighed in with yet another strong call for a gasoline and/or carbon tax in Win, Win, Win, Win, Win. Echoing the previous day’s Times editorial, Friedman states what should be obvious:

It makes no sense for Congress to pump $13.4 billion into bailing out Detroit — and demand that the auto companies use this cash to make more fuel-efficient cars — and then do nothing to shape consumer behavior with a gas tax so more Americans will want to buy those cars. As long as gas is cheap, people will go out and buy used S.U.V.’s and Hummers. (emphasis in original)

Friedman follows with a geopolitical argument very similar to that made by Inglis, Laffer and Krauthammer:

A gas tax reduces gasoline demand and keeps dollars in America, dries up funding for terrorists and reduces the clout of Iran and Russia at a time when Obama will be looking for greater leverage against petro-dictatorships. It reduces our current account deficit, which strengthens the dollar. It reduces U.S. carbon emissions driving climate change, which means more global respect for America. And it increases the incentives for U.S. innovation on clean cars and clean-tech.

The weekend explosion of support for carbon and/or gas taxing followed by just three weeks a similar confluence, also described here, in which Thomas Friedman called for a carbon tax, the Wall Street Journal stated its clear preference for a carbon tax over cap-and-trade and Ralph Nader and Toby Heaps made a compelling case for pricing carbon emissions via a tax rather than a trading scheme in a Wall Street Journal op-ed.

This convergence of opinion from Left and Right signals an extraordinary opportunity to obtain bipartisan support for a revenue-neutral carbon tax. As Congressman Inglis and Mr. Laffer conclude:

As president, Barack Obama, by working with conservatives as well as the members of his own party, can at once clean the air, create jobs and improve the national security of the United States — a triple play for the next American century.

Will the environmental community unite to actually help pass climate change legislation? That remains to be seen as environmental groups continue to be split between carbon tax and cap-and-trade camps. I’ve worked closely with some of the groups supporting cap-and-trade, have tremendous respect for them and know they understand how important it is to put a price on carbon and to make very large reductions in greenhouse gas emissions as soon as possible. I know that some cap-and-trade supporters are genuinely convinced that a carbon tax is simply not possible politically. Will that change as bipartisan support grows for a revenue-neutral carbon tax? 

It’s time to recognize that 2008’s conventional wisdom is wrong. If we join together in a bipartisan alliance, Congress can adopt and implement a carbon tax in 2009.

Photo: Valerio Schiavoni / Flickr.

Today’s lead editorial in the New York Times, The Gas Tax, increases already growing momentum to put a price on carbon by making a compelling case that the president-elect and Congress should impose a “gas tax or similar levy to keep gas prices up after the economy recovers from recession.”  The Times warns that the multi-billion dollar aid package for the Detroit auto manufacturers doesn’t address the danger that there will be little interest in buying the fuel-efficient cars the American auto industry is expected to build if gasoline prices remain low, noting that sales of SUVs, pick-up, vans and similar vehicles increased when gas prices declined between 1981 and 2005 and decreased substantially as gas prices peaked earlier this year.   The bad news, correctly noted by the Times, is that sales of gas-guzzlers are increasing now as gasoline prices have plummeted.

The editorial describes two ways to tax gas: a variable consumption tax that would create a floor of $4 or $5 in 2008 dollars, an idea we’ve previously supported, and a variable tariff on imported oil that would have the same effect and also “stimulate the development of domestic energy sources.”

The Times concludes:

A bitter recession is not the most opportune time to ratchet up the price of energy. But if the Obama administration is to meet its twin objectives of reducing the nation’s dependence on foreign oil and cutting its emissions of greenhouse gases, it needs to start thinking now about mechanisms to curb the nation’s demand for energy when the economy emerges from recession in the future.

This also would serve as a signal to American automakers and American drivers that the era of cheap gasoline is not going to last.

We do have a few serious concerns about the Times editorial.  First, an upstream and revenue-neutral carbon tax that comprehensively addresses all fossil-fuel combustion would be far superior to a gas tax, particularly since coal has a higher carbon content per Btu and reduced use of coal for electricity generation and other uses would be a more effective means to reduce greenhouse emissions than a gas tax alone. Second, a tariff on imported oil might stimulate the development of domestic energy sources as suggested by the Times, but would undercut the objective of reducing greenhouse gas emissions; an upstream tax on all oil, imported and domestic, would reduce greenhouse emissions, reduce dependence on foreign oil AND encourage the purchase of the fuel-efficient cars that might save the American auto industry. Third, unlike the Times we believe this is a most opportune time to ratchet up the price of energy, provided that, as we recommend, a carbon tax or gas tax is revenue-neutral. 

Finally, we’re sorry the Old Gray Lady prefaced its powerful rationale for a gas tax with the weak “it might be time for the president-elect and Congress to think seriously about imposing a gas tax or similar levy to keep gas prices up after the economy recovers from recession.” Emphasis added.  For at least the last two years the Times has powerfully editorialized on the need to put a price on carbon.  For example, in November of 2006 it stated:

Since the dawn of the industrial revolution, the atmosphere has served as a free dumping ground for carbon gases. If people and industries are made to pay heavily for the privilege, they will inevitably be driven to develop cleaner fuels, cars and factories.

Today’s editorial describes specific mechanisms to make people and industries pay heavily for the privilege of dumping carbon gases in the atmosphere. It might be time?  No, it’s been time for a long time to put a price on carbon.

News Release / For immediate release
Contacts:  Stephen Kent, skent@kentcom.com, 914-589-5988 / Nick Berning, NBerning@foe.org, 703-587-4454

[Washington DC – December 9, 2008] At a Capitol Hill briefing today, NASA’s lead climate scientist, senior economists and environmental leaders urged Congress to move swiftly to enact a national carbon tax to reduce carbon emissions before they push Earth’s climate system past its “tipping point” into accelerating ecological and social collapse.

After the resounding defeat of the Boxer-Lieberman-Warner cap-and-trade bill last spring, the carbon tax has emerged as a viable competitor to a cap-and-trade system. As Congress begins to ponder climate legislation widely expected in 2009, advocates at today’s briefing made the case for taxing carbon as a more effective and economically viable way to curb emissions while stimulating the economy. They argued the considerable revenues carbon taxes would raise should be revenue-neutral, and be returned to taxpayers either through direct distribution or cutting taxes such as payroll taxes.

The public briefing for members of Congress and their staffs was sponsored by the Environmental and Energy Study Institute (EESI), the Carbon Tax Center, the Climate Crisis Coalition, Friends Committee on National Legislation and Friends of the Earth.

“A price on emissions that cause harm is essential,” said Dr. James Hansen, Director, Goddard Institute of Space Studies, National Aeronautics and Space Administration and a leading voice on understanding and redressing climate change. He urged “a carbon tax on coal, oil and gas… applied at the first point of sale or port of entry” to encourage fuel conservation and switching to low-carbon alternatives.

“A Carbon tax with 100 percent dividend [direct revenue distribution to individuals] is needed to wean us off fossil fuel addiction,” Hansen argued.

“Tax and dividend allows the marketplace, not politicians, to make investment decisions. It is also non-regressive. Low- and middle-income people will find ways to limit their carbon tax and come out ahead. Demand for low-carbon high-efficiency products will spur innovation, making our products more competitive on international markets. Carbon emissions will plummet as energy efficiency and renewable energies grow rapidly. Black soot, mercury and other fossil fuel emissions will decline.”

Rep. John Larson (D-CT), recently elected as chair of the House Democratic Caucus and the sponsor of a carbon tax bill introduced into the House last year, hosted the briefing. He said, “Climate change is the great challenge of our time. As we in Congress tackle this challenge it is important that we not just pass legislation, but pass the right legislation. What I have proposed is legislation that would tax bad behavior like polluting and return that money to average Americans through a payroll tax reduction. Any legislation will create winners and losers. In this case, the winners should be the American people.”

Economist Gilbert Metcalf of Tufts University, author of A Green Employment Tax Swap: Using A Carbon Tax to Finance Payroll Tax Relief, recommended a carbon tax just under $17/ton of CO2. This would nearly double the average price of coal, the most carbon-intensive fossil fuel, leading to fuel substitution and process improvements that would reduce coal burning by 32%. Petroleum products would increase in price by nearly 13% and natural gas by just under 7%, he estimates. Metcalf advocates dedicating carbon tax revenues to eliminate the payroll tax on the first $3,660 earned by each worker. He calculates that this would equate to an average 11% reduction in payroll taxes, with greater percentage reductions for lower-paid workers. Payroll tax reduction would stimulate job growth, something the economy now urgently needs.

“In general, taxes on labor supply discourage labor and create economic losses to workers over and above any taxes collected,” Metcalf explaned. “Tax reductions can encourage additional labor supply either on the intensive margin (hours worked) or the extensive margin (the decision to enter the labor force). The Green Employment Tax Swap encourages additional labor supply.”

Robert Shapiro, former Undersecretary of Commerce, now head of SonEcon, a Washington, DC consulting firm, and co-chair of the U.S. Climate Task Force, criticized cap-and-trade proposals as clumsy, complex, volatile and ineffectual ways to tax carbon emissions: “The only reason anyone is talking about cap-and-trade now is because the U.S. (at Al Gore’s urging) insisted on cap-and-trade in Kyoto [in 1997]. Mr. Gore has since abandoned cap-and-trade and is now calling for a carbon tax to replace other taxes. Caps just aren’t working.”

Under the European Union’s carbon cap, CO2 reductions have been “negligible and very costly,” Dr. Shapiro said. Exemptions (e.g., for coal-fired power plants in Germany) “overwhelm the cap.” China and India have strongly rejected cap-and-trade. In contrast, he argued, a U.S. carbon tax would encourage our trading partners to tax carbon themselves to avoid forfeiting revenues on their exports to us (WTO rules would otherwise permit the US to tax imports for carbon).

Like most economists, Shapiro said he strongly prefers price-based policies such as carbon taxes, to quantity-based carbon caps, because the taxes are simple and predictable as well as difficult to evade. A cap on quantity necessarily makes energy prices more volatile, and the resulting price spikes are economically disruptive, harming productivity and undermining support for the system. For example, Shapiro noted that Southern California’s “RECLAIM” cap-and-trade system for smog emissions crashed due to price spikes during the state’s electricity crisis.

James Hoggan, a public policy specialist from British Columbia who chairs Canada’s Suzuki Foundation, outlined the steps leading to British Columbia’s successful implementation of its carbon tax in July, and explained the national dimensions of the carbon tax in Canada. “The Canadian experience with carbon taxes is politically daunting: a federal party that proposed such a tax just lost a fall election, and a provincial party that introduced a carbon levy last summer faces potential defeat next May. But close analysis shows these politicians got in trouble not for what they did, but for how they did it.”

From Canada’s experience, Hoggan drew the lesson that emphasizing “revenue recycling” or the revenue-neutral configuration of the carbon tax helps distinguish it from conventional taxes and garners more public support. He cited polling data suggesting that a majority of Canadians support a transparent revenue-neutral carbon tax as evidence that carbon taxation could be popular with voters.

The Carbon Tax Center was launched in January 2007 to give voice to Americans who believe that taxing emissions of carbon dioxide — the primary greenhouse gas — is imperative to reduce global warming.

The Environmental and Energy Study Institute is a non-profit organization established in 1984 by a bipartisan, bicameral group of members of Congress to provide timely information and develop innovative policy solutions that set us on a cleaner, more secure and sustainable energy path.

The Climate Crisis Coalition was founded in 2004 to create awareness and convey a sense of urgency about the climate crisis and broaden the constituency of the climate action movement. Its approach to climate change links issues of environmental, social and economic equity.

The Friends Committee on National Legislation is the largest peace lobby in Washington, DC. Founded in 1943 by members of the Religious Society of Friends (Quakers), FCNL staff and volunteers work with a nationwide network of tens of thousands of people from many different races, religions, and cultures to advocate social and economic justice, peace, and good government. FCNL is nonpartisan.

Friends of the Earth is the U.S. voice of the world’s largest grassroots environmental network, with member groups in 77 countries. Since 1969, Friends of the Earth has fought to create a more healthy, just world.

NOTE TO EDITORS AND PRODUCERS: Experts quoted in this press release are also available for phone or in-person interviews. Interviews may be requested by contacting Stephen Kent, skent@kentcom.com (914) 589-5988.

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