Rebutting some common criticisms of the carbon tax
Charles Komanoff’s excellent work on carbon taxes vs. emission trading tends to attract certain frequent objections. This is an attempt to answer some of them:
Cap and trade is the way we do things now. Politically, we can never win a carbon tax.
Answer: Cap and trade has political heft mainly because it was instituted at a low level over a long period of time — thus it did not require very high emission reductions. Further, because the emission cap was confined to a few nations, but emission credits can be bought from nations without such caps, the emission reduction as a percent of total emissions in countries taking part in the Kyoto negotiations is even lower than the nominal target.
In addition, emission reductions are measured against a 1990 baseline, which has been increased by 3% due to various revisions (subscription). And while there is room for argument over just how many, there is no question that a fair percentage of Kyoto credits are fraudulent — excessive credits were granted to EU utilities, and many of the CDM credits sold in China are bogus.
Put a tight enough cap on the number of credits, with stricter controls to prevent fraud, and you will find political resistance is as great as resistance to a carbon tax.
What about elasticity? You need high prices indeed to lower carbon use.
Answer: Elasticity is as much a problem for cap and trade systems as for carbon taxes. Carbon prices have fallen under cap and trade because the system is producing extremely small emission drops, and because of fraudulent credits. A cap and trade system that actually resulted in the main signatories dropping their emissions the percent originally agreed to would have raised credit prices exactly as high as a carbon tax (or perhaps slightly less — at the expense of delaying technology improvements, resulting in higher costs at later stages).
The answer to the elasticity problem, which is essentially the same under both systems, is to add regulation and public initiatives that compensate for it.
Cap and trade is the only way to guarantee a given reduction.
As Kyoto performance has shown to date, cap-and-trade does not guarantee that goals will be met.
If you want something close to a guarantee, a carbon tax could have a built-in escalator that would raise taxes if emission reductions were lower than expected. Politically difficult — but so is a cap and trade system with an 80% reduction.
What will stop import of goods from nations without a carbon tax?
First, the usual answer applies: same problem with a carbon trading system — and the same solution. France has proposed that the EU start taxing goods from the U.S. if we don’t do something about our carbon emissions. Under either a carbon tax or a trading system, that is the solution for non-cooperators — charge a tariff (or require carbon permits) from non-cooperators.
Carbon Taxes are regressive! They cost the poor more than the prosperous, the prosperous more than the wealthy.
Answer: So are emission caps. The price of emission credits gets passed along to consumers, one way or another. There is a simple solution that will work with both carbon taxes and cap and trade systems — use the revenues for the benefit of ordinary people, either by dividing the revenue equally among those ordinary people or by using them for beneficial purposes such as education.
I favor dividing the revenues, for a number of reasons. It will win more popular support. Also, there is a real problem with funding essential services with a revenue source that is meant to discourage consumption of the thing taxed. In Washington State, where I live, we saw a once-dedicated environmentalist end up supporting clear cutting because of the revenue it would produce for Washington State schools. Similarly, a number of states are proposing substituting per-mile taxes for per-gallon gasoline taxes, because hybrids and other efficient vehicles are costing them highway revenues.
This is not my invention. Peter Barnes proposed this year ago in Who Owns the Sky, though “cap and share” seems to have reinvented this particular wheel.
I’ve read proposals for refundable carbon taxes directed towards industries rather than individuals.
Answer:One problem here is that industries, as with German utilities under cap and trade, won’t necessarily pass along refunds to customers. But really, refunding to individuals meets most of the goals anyway. A polluter has to pay a carbon tax or buy emission credits and raise prices to cover this. Consumers receive the revenue raised and use it to pay the extra prices. Both consumers and polluters have incentives to do what they can to lower greenhouse emissions, because they can save much more by doing so than in the pre-tax situation. But neither is in a position of immediate bankruptcy if they don’t reduce in the next thirty minutes.
Pollution taxes provide revenue to the big bad government. Permit trading is purely private system with no nasty taxes.
Answer: Both pollution taxes and emission trading systems require massive government intervention. (You don’t get trading without a cap.) Further, it is perfectly possible to auction permits, rather than give them away — which makes permit trading a kind of carbon tax. Even when we give permits away, it is still a tax system — just a tax system where the taxes are collected by private institutions for their private benefit. There is an old, old term for selling or giving away the right to tax to third parties: tax farming.