carbon policy: the state of debate on cap or tax

policies for stopping co2 emissions

As promised, here's a quick summary with reference links on the merits of choosing a carbon tax versus a cap-and-trade system.

Bear in mind that the objective is to most effectively and quickly reduce CO2 emissions in the least disruptive or corruptible way.

Upfront, it should be noted that there are no clear winners in this debate, although the taxers are currently gaining momentum while the cappers are waning, due in part to recent reportage on perverse outcomes in the EU's brief track record with cap-and-trade.

The smart money (see RMI and Gore, below) seems to be on a combination of both approaches.

The current tenor in the national press and the blogosphere suggests that

In case it matters, two leading economists (both former chairs of the Bushies' Council of Economic Advisors) have planted their flags on opposite poles of this debate. Surprised?

On the one hand, Glenn Hubbard has come out in favor of using tradable permits to control carbon emissions, as recommended by the National Commission on Energy Policy (NCEP)--a bipartisan group of 20 of the nation’s leading energy experts.

On the other hand, Greg Mankiw champions a carbon tax as "the most direct and least invasive policy to address environmental concerns".

Meanwhile, John Whitehead at Environmental Economics argues that we should be indifferent between these two proposed approaches:

"In the most basic model, there is no difference in the efficiency aspects of a carbon tax and cap-and trade. I simply don't think the tweaks make much practical difference, once we have adopted economic incentives over command and control regulation."

You can read Mark Thoma's review of the state of debate from Economist's View. Says Thoma:

"Looks like it's time for two former chairmen of the Council of Economic Advisers for the Bush administration, Glenn Hubbard and Greg Mankiw, to settle this tradable permit versus carbon taxes issue once and for all. I propose an Econoduel. Mankiw versus Hubbard, whiteboards only, any theory goes, and you cannot be saved by the end of period bell. We'll need a referee, so I'll suggest John Whitehead at Environmental Economics as he seems relatively unbiased - he doesn't think there's much difference between the tradable permits and carbon taxes and doesn't really care which one we put into place, as long as we do something."

Oh, and did I mention that Al Gore seems to support both sides? Gore's proposals are rather radical, which some take as evidence that, indeed, he's not running for any political office.

On the least-harm, most-good framework, here's a story problem first floated by Hubbard:

"If you smell smoke at home, it would be silly to do nothing until you actually see flames, but you also should not hose down the house after one whiff of what might be smoke."

In other words, "near-term actions should not impose greater risks than the problem they seek to address".

Now, wonders Thoma:

"Should we soak the house at the first whiff of smoke? The answer given above is no, but it depends on how you set up the scenario. Suppose that once you smell smoke, if you don't respond with full force and soak the house immediately and there is a fire, it will spread rapidly and burn down all 25 houses in the neighborhood (picture houses in a heavily wooded, dry and windy canyon). Thus, at the first whiff of smoke you have two choices, soak one house and suffer the associated losses with certainty, or, do nothing and risk losing all 25 houses if there really is a fire. Now, add that your experts are telling you there's a darn good chance there is in fact a fire, what should you do? Be prudent and wait until you know for sure?"

Good fun, eh?!

BTW, if you're interested in fine points, Thoma notes that Hubbard wants to use a cap as a tax cut (say wot?). Says Hubbard, "revenue from the auction of a portion of these permits could be used to reduce the corporate income tax". Says Thoma, "other ways to use these revenues come to mind." (heh)

For the record, here are six principal arguments from Charles Komanoff on why carbon taxes are superior:

  1. Carbon taxes will lend predictability to energy prices, whereas cap-and-trade systems will aggravate the price volatility that historically has discouraged investments in less carbon-intensive electricity generation, carbon-reducing energy efficiency and carbon-replacing renewable energy.
  2. Carbon taxes can be implemented much sooner than complex cap-and-trade systems. Because of the urgency of the climate crisis, we do not have the luxury of waiting while the myriad details of a cap-and-trade system are resolved through lengthy negotiations.
  3. Carbon taxes are transparent and easily understandable, making them more likely to elicit the necessary public support than an opaque and difficult to understand cap-and-trade system.
  4. Carbon taxes can be implemented with far less opportunity for manipulation by special interests, while a cap-and-trade system’s complexity opens it to exploitation by special interests and perverse incentives that can undermine public confidence and undercut its effectiveness.
  5. Carbon taxes address emissions of carbon from every sector, whereas cap-and-trade systems discussed to date have only targeted the electricity industry, which accounts for less than 40% of emissions.
  6. Carbon tax revenues can be returned to the public through progressive tax-shifting, while the costs of cap-and-trade systems are likely to become a hidden tax as dollars flow to market participants, lawyers and consultants.

And, for the record, here's the (largely political) case for cap-and-trade, posted by Tony Kreindler of Environmental Defense:

"A cap is the only way to guarantee the emissions cuts scientists say we need to avert the worst impacts of climate change. No one knows what level of carbon tax will produce what level of emissions cuts -- and the science is pretty clear that we need to cut emissions by 80% from current levels by mid-century or we're in trouble. Guess wrong on a tax and we're all co-starring in a big-budget disaster movie.

Finally, a carbon cap can pass Congress and a tax can't, so if we agree climate change is extremely urgent, we don't have time to waste. Which brings us to the big corporations in USCAP. I'm sure they've all got a mix of reasons for pushing strong action on climate, but their motivations aren't important -- getting something passed into law is. There's little doubt that the USCAP companies can help us get something passed."

Charles Komanoff rebuts:

"Cap-and-trade seems a curiously unpromising way to put a price on carbon. Making fossil fuels cost more portends a radical overhaul of the American way of life: people will drive and fly less, industries will rise and fall, cities will redevelop and suburbs will stop sprawling. To make that transition requires a pricing mechanism that's simple, transparent, and equitable. A straightforward, ecumenical carbon tax meets that standard; devilishly complex cap-and-trade does not. The old Hollywood maxim that a story line can't exceed 25 words should disqualify cap-and-trade systems from the get-go. And as Americans get wind of the legions of legal and financial functionaries swarming around carbon trading, they'll likely feel disillusioned if not hoodwinked -- and ripe for a reversion to unfettered carbon-burning."

In rejoinder, Kreindler notes that "Komanoff is worried about the process; we're worried about cutting carbon emissions enough to avert a real environmental, economic, and human disaster. Top-down, side-to-side, stand-on-our-heads-till-we're-blue -- however it happens, the important thing is getting it done."

Finally, Komanoff brings us up to the minute on one of the cruel ironies of this debate: dueling environmentalists. Says Komanoff:

"When we resolved late last year to create the Carbon Tax Center, we thought our big battles would be fought with climate-crisis deniers, plus occasional skirmishes with doctrinaire leftists decrying attempts to graft carbon taxes onto an unjust social and economic structure. Little did we dream that our most contentious disputes would be with fellow environmentalists who had made up their minds that carbon taxing is a political no-sale and that cap-and-trade is the only feasible way to put a price on carbon emissions. So it's with some surprise and dismay that we find ourselves debating "tax vs. cap" with the most outspoken Big-Green member of the U.S. Climate Action Partnership, Environmental Defense."

For the record, you might note this interesting exchange between Curtis Beck (HECO) and Joel Swisher (Managing Director, Rocky Mountain Institute)-- bearing in mind that this is a representative from our largest electric utility questioning Governor Linda Lingle's chief advisor on state energy strategy (at a stakeholder meeting last December):

Beck: You mentioned that a carbon tax is going to become a reality in the next ten years?
Swisher: Yes, we anticipate that the next administration will institute national GHG emissions regulations in 2009, regardless of which party is in power. We anticipate that a cap-and-trade system will be put in place as opposed to a carbon tax, which tends to be less politically palatable.
Beck: So if a cap-and-trade system were in place nationally would that mean Hawaii would need to purchase credits?
Swisher: The key to whether Hawaii would be a net buyer or seller is in the allocation of the GHG emissions. It may not be the best way, but many programs allocate emissions based on the grandfathering of historic emissions, which makes past emissions an asset even as they seek to make future emissions a liability—essentially rewarding past bad behavior. Other programs allow for the auctioning of credits or combine a system of auctions and allocations. Such allocation schemes have not been used to date, but auctioning is being considered for the Northeast Regional Greenhouse Gas Initiative (RGGI). Both RGGI and the emerging California GHG scheme will likely provide for the purchase of GHG offsets, which could become an opportunity for Hawaii to make money while reducing emissions."

Inneresting that Swisher (RMI) echoes Gore: it ain't either or, it's both.

Oh, and, for those who missed the confab at the Capitol, here's the soundbite from Robbie Alm's (HECO) speech, specifically referencing the NIMBY challenge in developing new energy generating facilities: "A windmill is more beautiful than a barrel of oil."

And, here's the key bit from a presentation by Henry Curtis (Life of the Land), specifically referencing the methods used to measure real progress: "If you don't look at other factors besides just the fossil fuel component, you'll get the wrong answer."

So, there you have it, folks. (Note: there will be NO quiz this week.)

Now, then, which way should Hawaii go? (...And remember to vote early and often.)

Published by Ken on June 17th, 2007 tagged Climate Change, HI-specific

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