Carbon Tax vs. Cap and Trade

Congressional debate on climate change has revealed division among politicians on how to best regulate carbon emissions. From NPR’s Marketplace, we get a report on the sharp difference between leading Democrats in both houses, Sen. Barbara Boxer (CA) and Rep. John Dingell (MI)

Boxer is quoted as preferring cap and trade, which seems to be most favored among politicians and big corporations as a way to leverage market forces to address climate change.

"I think cap and trade makes the most sense. When we pass legislation to combat global warming, we will not be hurting this economy. We will be helping it."

Dingell, however, favors a carbon tax as a more direct, visible and predictable means of reducing carbon emissions. He says,

To be fair, the economic pain must be shared all the way down to the consumer. And he says the way to do that is to tax anything that produces too much CO2. "This is going to be tough. And it’s gonna cost, and its gonna hurt. In my view, probably the only thing that will really work. In all honesty, I’m not convinced that if you don’t change people’s behavior, you’re going to change the way they behave."

The Carbon Tax Center has a page that explains why it thinks a carbon tax is the way to go. CTC co-director and Streetsblog contributor Charles Komanoff recently published a piece in favor of a carbon tax over at Gristmill. On the other side of the issue is the US Climate Change Action
Partnership, a group of major corporations and environmental
organizations in favor of a cap and trade system. Environmental Defense chief scientist Bill Chameides, wrote a piece in Gristmill as well laying out the case for a cap and trade system.

The debate between Carbon Tax and Cap and Trade is an important one that could lead to new federal legislation by the end of the year.

(Editor’s note: Why do I always want to write it, "Cap’n Trade?")

  • Ian Turner

    All of this debate is missing the point. Both cap and trade and carbon taxation systems will serve to raise the consumer price of high-carbon items. I think most of the resistance to the idea of a carbon tax is simply a fear of the word “tax”, but if the cap and trade credits are issued by auction the end result is effectively the same. The main issue with cap and trade is if credits are /not/ issued by auction — if they go to existing polluters, for example, then the result is like a carbon tax where the tax monies are paid to existing consumers.

    These issues aside, there are a few minor differences between carbon taxation and cap-and-trade systems:
    1) Carbon taxation makes it much easier for industry planners to predict the future price of carbon. Since tax rates will be less volatile than the price of pollution permits, it makes it easier for example for a utility company to build a new natural gas plant over coal-fired with the knowledge that the price difference will be the same in several years.
    2) Cap-and-trade, on the other hand, guarantees a particular level of emissions, which is important from an environmental perspective. Unless the carbon tax is set higher than the cost of carbon sequestration under current technologies, it’s possible that the tax would have to be raised or environmental needs compromised.

    The main things to look for in carbon legislation, though are completely unrelated to the trade vs cap debate, and are:
    1) A regulatory trial that lasts a long time — at least 15 years — to ensure that the regime can affect long-term capital investments.
    2) Open regulations that do not discriminate based on the pollution source (e.g., coal carbon emissions should be taxed/capped to the same degree as truck carbon emissions)
    3) Any assistance offered to those affected by carbon regulations should be made directly to the affected individuals, on a needs-tested basis, and not in cash. No corporate handouts should accompany the scheme in any form.

    Sadly, I expect all three of these criteria to be compromised in any federal regime. These are the things nobody is talking about (because they create clear losers) but failure in these areas will likely result in a carbon regulation scheme that, much like our tax and campaign finance regulations, is broken by design.

  • To diffuse political oppostion, it should be called a “carbon tax shift,” not a “carbon tax.” The idea is to tax co2 emissions and give all the revenues back to taxpayers in the form of income tax credits or other tax reductions (as Charles Komanoff suggests), so total taxes remain the same.

    The differences between cap-and-trade and a carbon tax shift are:

    In cap-and-trade, the caps are subject to political pressure. As a result, Europe set its caps so low that its cap-and-trade has little effect. Instead, we should have a carbon tax that increases each year, without being subject to these political pressures.

    With cap-and-trade, the higher prices that people pay are given to businesses that do more to reduce emissions, who sell credits to other businesses. With a carbon tax shift, the higher prices are given back to everyone equally in the form of tax rebates.

    The pro-business bias is why most politicians support cap-and-trade. If we emphasized the fact that cap-and-trade gives the money to businesses and a carbon tax shift gives the money to all taxpayers, then we could build broad public support for a carbon tax shift.

  • It’s not a “carbon tax” at all. It’s an “income tax reduction.”

  • Charlie Peters

    My what an interesting opinion

    I’de prefer to share my opinion

    * NO on “car tax” AB118 (Nunez)

    * NO on AB616 (Jones) unless amended

    * NO on SB23 (Cogdill) unless amended

    * Clean Air Performance Professionals (CAPP) supports a Smog Check inspection & repair audit, gasoline oxygen cap and elimination of dual fuel CAFÉ credit to cut car impact over 50% in 1 year.

    * Some folks believe corn ethanol in gasoline increases oil use and oil profit

    * Ethanol uses lots of water

    * A Smog Check audit would cut toxic car impact in ½ in 1 year. Chief Sherry Mehl, DCA/BAR, has never found out if what is broken on a Smog Check failed car gets fixed, never

    * A corn ethanol waiver would stop a $1 billion California oil refinery welfare program coming from the federal government @ $0.51 per gallon of ethanol used

    * About 60,000 barrels per day of the oil used by cars is allowed by the “renewable fuel” CAFE credit

    Clean Air Performance Professionals

  • Larry Littlefield

    I think if we had more leadership, we could do something about oil and gas right now, as I wrote on Room 8 (It’s the Price Stupid).

    That’s because right now the price of oil and gas is high enough to encourage conservation, alternative energy, and additional oil and gas exploration. But (as in the past) if the demand for oil and gas drops the price will plunge, and anyone who invests in conservation, alternative energy or even more oil and gas exploration will be the loser.

    What we need is for the federal government to impose a tax on 90% of the savings from importing or producing oil for less than, say, $75 per barrel, and it’s gas equivalent, adjusted upward for inflation, with a 30-year sunset provision.

    Thus, the government would NOT be increasing the cost to the consumer from what it is today. It would just be guaranteeing the cost would not fall. The (future) President could point out that we are over an economic and foreign policy barrel (forget the environment) because every time the price of energy goes down, Americans take the lazy, easy, stupid way out. So let’s not do this again.

    Politically, this proposal would be in the interest of states supporting conservation, solar, ethanol, AND expensive domestic oil and gas exploration (for the refiner and marketer, the imported supply net of tax would be little cheaper than drilling here).

    The only battle, and the only solely environmental (rather than economic or foreign policy) objective, would involve coal, since coal is cheap and domestic and putting in a BTU-equivalent tax would raise the price of electricity in dirty states. This could be offset by remitting to the coal consumer parts of the tax in proportion to the extent to which pollution controls prevent pollution and carbon from getting in the air.

  • Wanda Miller

    Has everyone just totally missed the big picture on this issue or what? Cap and trade, carbon tax?? Why is it that the very people who are hurt by the polluting corporations are the same ones who have to pay a price to live? The whole intention of evironmental protection was to protect the environment from harmful pollution that kills ecosystems and ultimately sickens and kills the innocent people who live in close proximity of the polluting corporations. Why should citizens (users of the products manufactured) pay the price for the corporations actions? Now, these corporate big-bodies are capatilizing on polluting with cap and trade, and activist of the carbon tax are hollering to make the people pay due to the customer’s user mentality with a need to change their behavior, none of this makes any sense to me. Are you just missing the forest for the trees – oh wait, there isn’t much of the forest left to miss. Get it together people. Educate yourselves on this stuff before you start voicing your opinions.

  • Ian Turner

    Wanda,

    It sure sounds good to say “make the corporations pay”, but it doesn’t really mean anything, because no matter how you tax them, the added costs will in fact be passed on to consumers — unless you add in price ceilings, but one need only look at Zimbabwe to see why that’s a bad idea.

    It doesn’t (or shouldn’t) really matter where you apply a tax on an economic transaction; the result will be to reduce the frequency of that transaction, to the detriment of all participants — but possibly to the advantage of anyone experiencing a market congeniality.

    You spoke in generalities and so I’m forced to do so in return, but if you’re willing to drop the paternal attitude and make a concrete proposal I’d at least be willing to discuss it.

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