Published on July 17th, 2009 | by Timothy B. Hurst12
6 Reasons a Carbon Tax is Better than Cap and Trade
Just when you thought no more ink could be spilled about the merits or political viability of a carbon tax versus a cap-and-trade, it has. With the House passage of the American Clean Energy and Security Act (ACES), also known as Waxman-Markey, a version of the bill is now being considered by the Senate. And while there are certainly things to both love and hate about Waxman-Markey, it may be the only hope we currently have for meaningful climate change legislation. But are there other options?
Now, I’m not saying in all cases a carbon tax is superior to a cap-and-trade, in fact, I may just write a “7 Reasons a Cap-and-Trade is Better than a Carbon Tax” post after this one. But in some instances, the straight tax does have its advantages.
1. A carbon tax provides more clarity and certainty of cost than does carbon trading. Whereas a cap-and-trade provides greater certainty in terms of capping emissions, it provides far less certainty in terms of revenue generation. The question I’m left with is: which is more important in the long run? If we just generate tons of revenue for the public or the state without controlling greenhouse gas emissions, then the policy is a failure. However, if we engage in some big carbon trading scheme, generate revenue for private interests and do nothing to control GHGs, then the policy goes well beyond failure.
2. Call it what it is. Both mechanisms — cap-and-trade and carbon tax — are essentially a tax. Republicans and other opponents of cap-and-trade are have taken a liking to calling it a “cap-and-tax” anyway. At least the carbon tax is up front about it.
3. Potential risk of a carbon market bubble bursting under the weight of “sub-prime carbon.” The US Commodity Futures Trading Commission estimates that the cap-and-trade market could grow to $2 trillion in five years. This system would create whole new classes of financial assets, which financial firms could securitize, derivatize, bundle, and who knows what else. A large carbon market would likely attract speculators, driving up the price of carbon permits and creating risky or low-value carbon credits. Writes Matt Taibbi at Rolling Stone: “the next bubble, is in carbon credits — a booming trillion- dollar market that barely even exists yet, but will if the Democratic Party that it gave $4,452,585 to in the last election manages to push into existence a groundbreaking new commodities bubble, disguised as an “environmental plan,” called cap-and-trade.
4. We have no idea how to regulate a carbon market. Existing financial regulations, as well as those in major cap-and-trade bills, are inadequate to govern carbon trading, creating a potentially huge regulatory gap, according to a report by Friends of the Earth.
5. A carbon tax may actually be more politically viable than cap-and-trade. Except for the fact that it has the word, ‘tax’, in it, from liberals to libertarians, the carbon tax mechanism is preferred by people from across the ideological spectrum who support action on climate. While they may accept the theory of a cap-and-trade, environmental groups like Friends of the Earth and Greenpeace bemoan Waxman-Markey for handing out permits to the biggest polluters. Even Mr. Inconvenient, Al Gore, has been a vocal supporter of a revenue-neutral carbon tax. “I have long supported a sharp reduction in payroll taxes with the difference made up in CO2 taxes. We should tax what we burn, not what we earn,” Gore has said. But then again, citizen Gore is in a position to come out in support of a carbon tax, as John Laumer at Treehugger explains.
6. The carbon cap-and-trade in Europe has not performed well (the one that doled-out in stead of auctioning off carbon permits to the biggest polluters) has not been effective at lowering carbon emissions. Not only that, but the price of carbon has fallen precipitously on the European Climate Exchange.
By no means is this document intended to be the definitive argument in favor of a carbon tax. Rather it is intended to spark some debate and critical thinking. Since Congress is behaving like it is predestined to go with a cap-and-trade, it seems that critical thinking and debate is exactly what is needed at this juncture.