Some folks think global warming is best fought through a federally-imposed tax on greenhouse gas emissions — often called a carbon tax. The government would use the additional tax dollars to subsidize the development of selected low-carbon technologies. Charles Komanoff urged a carbon tax on Gristmill just last Wednesday, and last Tuesday Ann Applebaum did the same in an op-ed for the Washington Post.
A carbon tax is a bad idea.
First, most pundits see the chances of Congress passing a new tax as somewhere between zero and nil. But let’s say it did. Then Congress would have a whole new pot of subsidy money to pass out to industry. Would you trust them to give it the right companies? It’s taking a chance, but again, let’s say they did. Even if the money went to the right places, a carbon tax is not the most effective strategy.
Subsidizing one or two targeted technologies with a carbon tax would discourage investment in others that may turn out to be more effective. Which technologies should receive these tax dollars? No one has a crystal ball that can determine for sure which will turn out to be most useful. (See our blog post "Global Warming Solutions that Work" for more on available technologies.)
History has shown that the marketplace does a better job of developing new technologies, and a tax takes money out of the marketplace. The solution is cap-and-trade. A cap-and-trade strategy provides the incentive for all segments of the economy to compete to discover the best ways to cut emissions.
In a cap-and-trade system, the government plays a small role, and leaves the main decisions to the private sector. The government establishes an overall emissions cap and assigns specific emissions allocations to the different sources of CO2. It does not tell industries and companies what to do or how to meet their allocations. Each company is free to make those choices. It can reduce its own emissions or pay someone else to lower them. Businesses can profit by coming in below their cap and selling their extra carbon credits to others. Even farmers can profit by enhancing carbon storage in soils and trees and selling the extra carbon credits.
The advantages of cap-and-trade are significant. Unlike a tax, it encourages innovation by creating incentives and rewarding those who lower emissions at the least cost. And most importantly, a cap — unlike a tax — guarantees the necessary cuts to stabilize the climate. All a tax does is discourage emissions; it doesn’t specify an emissions target that must be met.
Those who argue that cap-and-trade won’t work are ignoring history. We used a cap-and-trade to lower the sulfur oxide emissions that lead to acid rain, and we were able to do it quickly and cheaply.
Embraced by leaders on climate change from both parties and some our nation’s most influential CEOs (read USCAP’s "Call for Action" [PDF]), cap-and-trade is the proven approach and the right approach.