This is a guest post from David Hawkins, director of the climate program at NRDC.
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In the Odyssey, Odysseus had to be tied to the mast to resist the call of the Sirens, who tried to lure his ship onto the rocks. These days the siren song of a carbon tax fills the ear of many commentators who urge us to recognize its beauty and steer our ship in its direction. A Washington Post editorial is a recent example.
The premise of the Post editorial is that cap-and-trade regimes are complex and vulnerable to special pleading, and they do not guarantee success in reducing emissions, while a tax is simple and sure in its effects. But this is grass-is-greener thinking. The Post compares a flawed version of one approach (cap-and-trade) to an idealized version of the other (tax) and not surprisingly, the idealized approach wins.
The fallacy in this argument is that the same political body (our Congress) that, we are assured, will insist on putting special interest features into a cap-and-trade bill, but when presented with a tax approach, will vote only for the purest proposal, firmly rejecting all lobbyists’ pleas. Those who argue that a tax approach is less likely to be designed for special interests than a cap approach simply are ignoring the tax code. We have decades of empirical evidence in the U.S. that when Congress designs tax policies it rarely resists the entreaties of special interests.
It is worth reading the history of recent (Nixon onward) energy tax proposals done by the group Tax Analysts. It is hard to see anything in that history that suggests a carbon tax would be successful (or if something called a carbon tax were enacted that it would actually accomplish anything).
The fate of the 1993 BTU tax proposal by Bill Clinton is instructive.
It had its origins with then Vice President Gore’s support for a carbon tax. That idea never got out of the administration because of the impact it would have had on coal. Instead the administration proposed a tax based on BTUs so that the tax on coal was the same as on natural gas per unit of delivered energy even though coal’s carbon emissions were twice as high. Before the administration bill was introduced, further concessions to coal were made. The BTU tax just squeaked through the House, thanks to the addition of lots of exemptions required to get the votes.
The Washington Post summarized the exemption feeding frenzy in David Hilzenrath’s May 28, 1993 piece ($ub. req’d):
Some opponents of the energy tax have already been accommodated with exemptions proposed by the administration itself or the House Ways and Means Committee.
For example, Clinton proposed exempting grain alcohol used as fuel, a concession to grain growers, and the House tax-writing committee proposed exempting much of the electricity consumed in the production of aluminum. But such concessions seem to have fueled the demand for even more changes in the tax.
Both Boren and Breaux come from states with considerable oil and natural gas production. For Breaux, however, the greater concern may be Louisiana’s energy-intense industrial base, including chemical, glass and plastics makers that export products.
But the BTU tax was stripped completely in the Senate, being replaced by a small gasoline tax that had only modest revenue raising benefits and almost no carbon or energy security benefits. More on this cautionary tale can be found in this New York Times news analysis and this paper [PDF] from the Center for a New American Security.
A major public policy problem with the tax approach is that the debate quickly becomes all about money. A proposal that is initially designed to achieve another purpose like energy efficiency or greenhouse gas reduction is analyzed over and over again by every interest group and member of Congress based almost entirely on its economic impact on constituents. Economic impacts will be an important topic in a cap approach to be sure but the supporters of a cap proposal have something that tax advocates do not have: the ability to keep the focus on the direct and intended effect of the legislation—how much does it cut pollution? In a tax bill, the effects on pollution are indirect and run a much larger risk of being submerged in the more easily calculated impacts of the tax provisions on various fuels, consumer energy expenses, and different regions of the country.
The Post editorial also cites results from the European Union emission trading system (EU ETS) to argue that cap approaches do not work. What about that? Well, phase one of the EU ETS was intentionally a pilot program: it was short-term, lasting only a few years, and it was put in place quickly, before either the government or industry had a good idea of what actual emissions were. Since it was a pilot, governments decided to err on the side of being generous with allocations and spent no time seriously considering longer-term allocation policies. Allowances were not allowed to be carried forward from the pilot phase to the later phases, making them almost worthless as the end of the pilot phase approached. None of these flaws is inherent to a cap system and none of them is being ignored as real cap programs are being designed.
Politicians certainly can design a flawed version of a cap, though the one example of a national cap enacted by Congress (the 1990 acid rain program) fully achieved its emission reduction objectives. It was flawed in giving away all allowances for free but because reduction requirements were substantial, continuous emission monitors were required on all sources, and most power companies were still operating in regulated markets, the windfalls and market distortions that occurred in the pilot phase of the E.U. emission trading system did not happen here.
There are some issues that are unavoidable with either a cap or a tax approach that is designed by real-world politicians. One of them is an awareness of regional and interest-based impacts. There is nothing magic about a tax frame that makes these issues of distributional politics disappear. A cap program will be not be immune to these considerations, to be sure. But there is no evidence that a tax approach has a greater potential to avoid special interest deals.
Meanwhile, the now solid awareness of the importance of allowance allocation design is causing special interests to retrench in major ways from their earlier positions seeking free allocations of allowances. For example, while just a year ago, many firms in the coal power sector were arguing for free allowances for all coal generators based on the "model" of the acid rain law, they have abandoned that and are now proposing allocations to electric distribution companies with a stipulation that all of the value of those allowances be passed through to customers. This is the approach proposed in the USCAP Blueprint. An exception for unregulated coal plants is proposed only for the portion of compliance expenses that cannot be passed through to customers. Even the Edison Electric Institute has proposed [PDF] that nearly all allowances for the power sector be provided to distribution companies with the same requirement of pass-through of benefits to customers. Similarly, the USCAP Blueprint (joined in by three major oil companies) does not call for any free allowances to oil and gas fuel providers to cover the emissions from the fuel they sell, a departure from what the oil industry has proposed in the past.
Cap proposals are criticized for allowing offsets and there are real problems with many offsets proposals. But offsets are in cap proposals to deal with claims that the cost of a reduction program will otherwise be "too high" for certain interests. Those same interests are not going to say "never mind" just because the cost is imposed in the form of a tax rather than an allowance price. No serious observer thinks a tax bill that moves through Congress would forbid offsets. The carbon tax bill introduced by Rep. John Larson (D-Conn.), H.R. 3416 [PDF], includes a wide open offset provision, creating a tax rebate for firms that implement offset projects. The bill also provides for tax proceeds to be dedicated for purposes similar or identical to those found in cap-and-trade bills ("clean" energy investments; negatively affected industries). These provisions reflect the political realities that are recognized by the drafters of such bills but are typically ignored by commentators who laud the apparent simplicity and certainty of hypothetical tax approaches.
What about the claim that a tax will enjoy broader political support? It’s a statement of historical fact, not a partisan comment, that Republicans in Congress, particularly when a Democratic President has been in the White House, have overwhelmingly opposed taxes put forward for energy or environmental policy purposes. In 1993 not a single Republican voted for the Clinton BTU tax bill in the House, nor in the morphed gas tax version in the Senate. These materials on the RNC website from the 2006 [PDF] and 2008 [PDF] campaigns make for interesting reading by those forecasting a post-partisan embrace of a carbon tax. The unfortunate fact is that such tax policies are red meat for demagogues. It is very likely that a decision to actually attempt a tax approach to climate protection would be walking into a political trap. That is too big a risk to take when so much rides on enacting climate legislation without further delay.
It is perfectly possible for Congress to craft a good climate bill that relies on a cap and includes complementary policies to drive carbon intensity improvements in the key sectors of electric power, vehicles, fuels, and buildings. The fact that it is possible does not guarantee it will happen. But rather than dismiss a cap as an inherently flawed approach, is it too much to hope that commentators would resist the calls of the tax sirens and recognize that both approaches can be implemented well or poorly? Then we could focus on the real issues that we need to address to achieve a good policy result in time to protect the climate.
Obama administration may (finally) offer greenhouse-gas targets
John McCain’s troubles are the world’s troubles
Comments
View as Flat
ids Posted 10:59 am
19 Feb 2009
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Max8806 Posted 10:59 am
19 Feb 2009
Like Congress can't figure out how to write exemptions for special interests into a tax and covertly shovel money to extractive industries? (Even if the tax were transparent, which I don't concede, is the capital depreciation rate for each different type of energy investment so transparent? Will it be?)
These gimmicks are not a problem of cap/trade, they are a problem with politicians and special interests.
Max Epstein
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ids Posted 11:21 am
19 Feb 2009
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GRLCowan Posted 11:22 am
19 Feb 2009
So the revenue must not stay in government hands. The best alternative is dividing it out equally to each citizen. (Or, in a cap-and-trade system, issuing an equal emission permit to each citizen.)
But government ALREADY has many billions in annual fossil fuel revenue in its hands. The first step, therefore, is to divide out EXISTING coal, oil, and gas income.
When this is done, and only then, we'll know that all-important return of the revenue has, at least in the first, easiest step, come real.
(How fire can be domesticated)
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ids Posted 12:10 pm
19 Feb 2009
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GreenMom Posted 1:45 pm
19 Feb 2009
Meanwhile the author of this post, who has spent a career actually working the system to positive ends (you could look it up), is making an important point about which policy is likely wring more carbon reduction from the political system. He's also providing some important arguments to those who can help get something worthwhile passed.
You can choose to throw stones at people fighting the good fight within the system, while you sit on the sidelines taking potshots. Or you can get in there and fight smart.
Who's more useful, you or David Hawkins?
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amazingdrx Posted 1:57 pm
19 Feb 2009
How can anyone fail to appreciate our hosts here, wether we agree with them or not? A more tolerant and diligent crew doesn't exist anywhere on the internet.
Plus they really scoop just about everyone else on the latest green news.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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GreenMom Posted 2:52 pm
19 Feb 2009
Or maybe it's all that plus the continued mass banality and stupidity of the mainstream media, which totally doesn't get climate change - still.
Which is why I, too, love this site, despite the righteous ranters. Because it delivers the substance.
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Jeff B Posted 3:15 pm
19 Feb 2009
The points raised in the Washington Post article were reflected in the responses from several elected officials.
It boggles the mind that a Washington Post opinion would have an effect on policy in Washington State. It is also difficult to understand why policy makers would give more creditibility to a journalist who has only briefly surveyed the situation rather than their own state's economic and executive staff who've been engaged for years in formulating the proposed legislation.
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BILL HANNAHAN Posted 3:24 pm
19 Feb 2009
The real solution is a set of toxic waste dumping fees with 100% rebate. The fees would be set to recover the best estimate of the damage done by CO2, particulates, mercury, sulfur, cadmium arsenic etc. now being dumped free of charge into the atmosphere.
People would get all that money back to spend on better technology that could be competitive on a more level playing field.
Things Everybody Should Know About Energy
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Russ Posted 9:22 pm
19 Feb 2009
It seems to me that's precisely what c&t advocates often do: pit some ivory tower, politically impossible romantic vision of c&t vs. a hypothetical real-world carbon tax, warts and all.
And yet, we constantly hear cap/trade "is" (not has been, not will be if we're not careful) too complex, with offsets and free allocation.
It's true that, since a carbon tax has never been enacted, we're forced to hypothesize, and advocates are bound to emphasize the putative good features, detractors the possible flaws.
But we have had real world enactments of carbon emissions c&t (in Europe) and serious legislative attempts, and every case so far has demonstrated in reality the abuses which were at first feared in the abstract - overissuing of permits, emphasis on giveaways instead of auctions, recipients of permit handouts still treating these as "costs" and passing the phantom costs on in the form of raised rates, the whole offset scam, "safety valves" meant to ensure the cap is abolished the moment it actually starts doing its job, nuke and CTL boondoggles being smuggled in..
By now, some of these look more like features than abuses.
It seems to me the critics of c&t are describing it as it "has been", which is always the measure of what something "is".
As for what it "will be", since political viability is so often used as a cudgel around here, I can swing that club too. I don't see any conceivable way the American Congress is ever going to pass a c&t bill which isn't pretty much the same as the highly flawed, doomed-to-fail model we've seen before.
These are guys who, under the best political circumstances they're ever going to get, can't even pass a real stimulus! And a stimulus is something everybody except a handful of hardcore zealots understands and supports.
How on earth are they going to pass a real cap and trade?
That's why everybody wants to kick the ball down the field to next year, hoping some way, somehow, things are going to get better politically.
How is this supposed to happen? Nobody can say. It's alot like the GM/Chrysler situation, where they threw some money at the problem, set a later date, and apparently assumed some god was going to come down from the clouds to solve everything by magic. Now that later date has come, and no magic happened, and everything is exactly as it was two months ago, except that the taxpayers have had $15 billion more stolen from them, and the beggars are back, as wretched as ever.
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ids Posted 12:45 am
20 Feb 2009
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racc Posted 1:56 am
20 Feb 2009
More at:
http://everyoneforever.org/blogger/2008/12/provide-soluti ...
It is not about us, it is about everyone.
http://www.everyoneforever.org/
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zFacts Posted 3:19 am
20 Feb 2009
the permit price (cap tax rate) is set by the market so it's more volatile than the stock market (even with banking). Not a problem with a tax.
The main reason for offsets and safety valves is not stupidity it's that the permit price can go crazy. (see #1).
The reason tax & cap loopholes are a problem is because of the stupid cap design (based on SO2) that tries to cap every little emitter. Just tax or cap the mines, wells, and refineries, and you won't get a million loopholes. Thank you EDF for not updating your thinking after SO2.
Now the Big One: Caps Kill All Other Approaches
A cap means any extra you do to reduce carbon is counteracted by the traders. Not true with a tax.
The German Greens found this out. Their emails were exposed, and it's in Der Spiegel. All the money spent on Germany's huge wind/solar program has not saved 1 gram of Carbon due to the EU cap. Wind saves carbon for Germany; German companies have extra permits. They sell them to Poland and Slovakia. They burn more coal. Carbon emissions for the EU remain unchanged.
This will be true for all our programs except the cap. RPS, CAFE, Appliance standards. And it will be true for you if you buy a plug-in. That will just help someone else by an SUV. The SUV owners will be laughing at anyone who buys a plug-in. A Cap mean No One Can Change Total Emissions = Cap.
You can read more here: Cap-and-Trade Secrets
On top off all this, China and India are not going for a cap that does anything. Listen to what they say, then read Stiglitz, who will tell you they are right. For them to accept any reasonable cap would be just stupid. But they have said they would make a binding commitment. They will not commit to anything that keeps them from catching up with us. An effective cap would do that, a carbon tax would not.
This is not about Congress being stupid. The differences are fundamental. --Steven Stoft
Steve at zFacts
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SallyVCrockett Posted 3:26 am
20 Feb 2009
Look, we both want the same thing: to curb emissions and protect the climate (among other things). I think we can have a debate about which is best without villianizing the other.
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amazingdrx Posted 3:28 am
20 Feb 2009
I see it drawing a huge fever of anger from the right, we'll see. It is swiftboating gold.
Would renewable electric miles be tax exempt? Or would per kwh subsidies for powering up your plugin be considered?
I think the electronic tracking necessary to count the miles would be a huge waste of time and money. Better to put the internet technology funding into smart grid metering so per kwh subsidies could go to solar and plugin car users.
Efficiency must be considered, as with WW II war production time is of the essence here. it is much more efficient to simply divert subsidies from fossil, nuclear, and agribizz industries to per kwh subsidies (a few pennies per kwh) for farm biogas producers, home solar owners, and industrial wind and solar on factories.
Complicated tax schemes that light up the right like a torch aren't going to work in time to head off climate disaster.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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Max8806 Posted 8:39 pm
20 Feb 2009
Alberta, CA has a carbon tax. Of $15/ton, only to be paid on emissions above a certain limit, and the limit is set in terms of GHG intensity (emissions per output, not gross emissions). And there are offsets allowed on top of all that. Sounds an awful lot like the kind of "loopholes" and "gaming" that supposedly is the domain of cap/trade.
In 1991 Norway and Sweden instituted green taxes, and each have seen CO2 emissions rise, even on a per capita basis. In Norway by >43% (again, per capita).
http://www.sociology.northwestern.edu/faculty/prasad/Taxa ...
The idea that offsets, free allocation, complexity and the like are inimical to cap/trade, while somehow a carbon tax would be impervious to political pressures just doesn't make any sense to me. I certainly won't defend EU's cap/trade, but suffice it to say it is very far from optimal.
Max Epstein
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Russ Posted 9:21 pm
20 Feb 2009
Thanks for the tax examples, which I wasn't aware of. For obvious reasons I'm suspicious regarding whether or not anything done in Alberta, a hard-core petrostate, could have been done with any real mitigatory intent. I wonder if offering that as an example isn't like offering a company union as an example of unions in general.
Ah well, I'm getting sick of the whole "politically possible" mindset. Maybe it's just wishful thinking, but I wonder if maybe for once the people really are out ahead of all the elites.
All I know is, the people voted for "Change", and they seem to viscerally want it, but Obama and every elite clearly don't see things that way.
So all we see everywhere are paltry "reform" proposals. (I'm talking about alot more than just environmental issues.)
I wonder what would happen if someone who was president said, "You said you want real Change: Now let's go for it!", and set a goal for the ages.
I wonder if something revolutionary, by truly inspiring people and tapping into a real will to Change, wouldn't actually have better political prospects than mucking around in the same old picayune policies and procedural pits, which could never inspire anyone to do anything.
One thing's for sure: Everyone always says Bush missed a big chance following 9/11. But now we know he wasn't the only one capable of missing a big chance.
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Max8806 Posted 10:24 pm
20 Feb 2009
If Obama announced tomorrow that Summers and Chu convinced him a carbon tax is the more efficient medium for getting this done, I personally would drop cap/trade and just try to insist that the carbon tax is as good as possible.
Max Epstein
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Sam Carana Posted 1:17 pm
02 Mar 2009
Such a feebate policy merely needs to insist that, to be applicable for rebates, alternatives should be clean and safe. That would more genuinely allow market mechanisms to sort out what works best, and would also optimize consumer choice and opportunities for local jobs and for investment. Feebates can be self-funding and budget-neutral, thus avoiding unnecessary bureaucracy and political turmoil.
Feebates are the most effective policy. Fees on a polluting product can be tied to rebates on alternatives that compete directly with that very polluting product. So, fees could be imposed on gas guzzlers, funding local rebates on electric cars. Furthermore, fees on fossil fuel could fund local rebates on clean and safe ways to produce electricity. Combined, such feebates would make electric cars even more attractive. For more, see FeeBate.net.
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