James Hansen vs. cap-and-trade
NASA climate scientist James Hansen has a new book out about climate policy, with excerpts in this month’s issue of The Nation. And in my view, he’s got a pretty good policy idea: tax carbon, and use the revenue to give out rebates in equal, per capita shares to every U.S. citizen. It’s a twofer — the carbon tax helps drive down emissions, and the rebate makes sure that it’s fair to middle- and lower-income folks who’d otherwise bear the brunt of the tax.
If I were the globe’s climate czar, Hansen’s tax-and-dividend plan is one of the top 5 to 10 ideas I’d give serious consideration.
That’s the good news. The bad news is that Hansen has opted for the tone of a zealot: he doesn’t merely extol the virtues of his favored policy, he actually lashes out at anyone who prefers a slightly different alternative to his policy. Die-hard environmental champions in Congress who support cap-and-trade instead of Hansen’s carbon tax are, in Hansen’s view, merely representatives of a government that’s lying to the people. Environmental advocates who’ve fought for decades to protect the climate “have been in Washington a little too long.”
You get the drift. Rather than turn his fire at the REAL enemies of a sound climate policy — the fossil fuel industries that have stymied progress for decades – Hansen trains his fire at his potential allies. The result: a circular firing squad that reminds me of the scene in Monty Python’s The Life of Brian, where the People’s Front of Judea declares its undying enmity for the scoundrels in the Judean People’s Front. I’m sure the coal industry is watching the spat that Hansen’s set in motion, and yucking it up big time.
But what’s especially nettlesome here is that Hansen opposition to cap-and-trade is based on two fundamental misunderstandings. First, Hansen implies cap-and-trade and carbon taxes are completely different systems. But (yes, I’ll say it for the thousandth time) — they’re not!!! Economically, they’re really two peas in a pod. Second, Hansen talks as if his carbon tax idea were completely bulletproof — capable of passing both houses of Congress without getting watered down. But that’s bunk!! For every potential weakness in a cap-and-trade system, there’s a way to mirror that weakness in a carbon tax regime. The problems that Hansen finds in the cap-and-trade bills being considered in Congress are almost all about politics, not any “inherent” flaws in cap-and-trade.
Let’s look at Hansen’s two misunderstandings in greater depth.
First, economists are pretty unanimous in their belief that cap-and-trade and carbon taxes have very similar effects. In their ideal forms, they both put a price on carbon, which gives incentives for every actor throughout the economy to reduce carbon emissions. Economically, a carbon tax of $20 per ton has the exact same effect as a cap-and-trade system in which carbon permits sell for $20 per ton. More generally, at any given carbon price, there’s essentially no difference in the effect the two systems have on emissions. (To put us on record: we like both cap-and-trade and carbon taxes, in large part because the systems are so similar — and can even complement one another.)
The real difference between carbon taxes and cap-and-trade — again, in their ideal forms — is in where they concentrate uncertainty. With carbon taxes, the government locks in the price of carbon, and the market decides how much carbon to emit. If fossil fuel prices fall, or the economy surges, or inflation runs hot, emissions can rise despite the tax. With cap-and-trade, on the other hand, the government locks in the carbon emissions, and the market decides what price carbon needs to be; ideally, emissions fall, slowly and steadily, no matter what happens to the rest of the economy. I tend to think of cap-and-trade as a variable tax: one that fine-tunes the price to guarantee a certain level of emissions.
Of course, there are ways of implementing cap-and-trade that make emissions uncertain. Price caps, poorly regulated “offsets,” and other loopholes can poke holes in the cap, weakening the guarantee of steady emissions reductions.
But that brings us to the Hansen’s other core misunderstanding: his apparent belief that his tax-and-dividend policy is immune from political compromise or troublesome loopholes: that somehow, both houses of Congress would agree to Hansen’s “perfect” policy, without any of the compromises that Hansen believes render current cap-and-trade legislation too weak to be worthwhile.
I have three responses to that: Bull-pucky, the IRS, and France.
Bull-pucky first. Virtually every problem that Hansen critiques in cap-and-trade could be injected into a carbon tax system. Worried that favored industries will get special treatment under cap-and-trade? Well, congress could exempt big swaths of the economy from a carbon tax, or use tax revenues to create subsidies for favored industries. Worried about risky carbon “offsets” — like reforestation or sequestration projects that might not live up to their promise? Well, a carbon tax system could include refundable tax credits for risky carbon storage projects too. Worried that the cap is going to be set too high? Well, Congress could always set the carbon tax too low, or increase it too slowly, or not increase it at all. I could go on, but there’s no point: carbon taxes and cap-and-trade are such similar systems that even their loopholes match up.
IRS second. In their ideal form, carbon taxes are a bit simpler than cap-and-trade. By the same token, the ideal income tax form takes 3 minutes to fill out. But as anyone who’s tried to navigate an IRS instruction booklet knows, the tax code has a tendency to grow in complexity — sometimes for good reasons, but mostly because of the political impulse to provide special tax treatment to favored constituencies. I see no reason to believe that carbon taxes are magically immune from that impulse.
France third. It may not have made much news here, but the French supreme court just rejected France’s proposed carbon tax. The reason: according to Bloomberg News, “93 percent of all industrial carbon emissions in France would have avoided paying the full tax.” The French carbon tax was so riddled with loopholes that it ran counter to the principle of tax equality — and the French supreme court felt they had no alternative but to sink it. And if that sort of thing can happen in France, then it certainly can happen in the U.S. France’s experience suggests that carbon taxes are no more immune from politics than any other climate-protection system. Internationally, British Columbia’s carbon tax comes pretty close to being a model of transparency and comprehensiveness. But as Alan Durning argues, most of the globe’s carbon taxes — as important as they are — are actually quirky, and full of loopholes and favoritism. (Sigh.) That doesn’t make those taxes bad ideas, but does point out that carbon taxes are hardly immune from politics.
I have no idea if Hansen’s tantrum will have any effect on the prospects for climate legislation in the next year. But I’m going to try to set a good example here, and put an end to the circular firing squad: carbon taxes are a good idea!! Hansen’s version of a carbon tax is a great one!! Congress should consider it!! If they were to pass it, the world would be a better place!!
But let’s not kid ourselves that scrapping cap-and-trade legislation now will automatically open up the field to Hansen’s pristine, un-game-able tax system anytime soon. The same federal legislators will still be there, with the same interests, and the same propensity to poke holes in any good idea that comes along — whether it’s cap-and-trade, a carbon tax, or any other awesome concept that a scientist-turned-policy-dabbler could come up with. In my view, the more energy we put into trashing our allies and their integrity, the more likely we are to end up in 2011 where we are today: with no federal climate pricing system whatsoever, and a fossil fuel industry that’s laughing all the way to the bank.
This post originally appeared at Sightline’s Daily Score blog.