Tax or Trade? The Debate Heats Up

By Adam Brock

There’s no getting around it: if we want to avoid cooking up a fat slice of Earth pizza, the US government needs to enact some kind of carbon emissions legislation, and soon. But while everyone from corporate executives to state governors to the Chinese are calling on Congress to start regulating greenhouse gases, that’s where the consensus ends: the details of just how that regulation should be enacted have been the subject of intense debate in the past year or so. Most business leaders and politicians have come out in favor of some form of cap-and-trade system, whereby the government sets a cap on national emissions and polluters are issued tradeable permits. But there’s a vocal minority, one that includes Al Gore and Mayor Bloomberg, that rejects the market mechanism in favor of a tax on greenhouse gas emissions.

To shed some light on the tax/trade split, the NYC Bar association hosted a debate Tuesday morning on the issue, bringing policy experts from both sides of the fence to weigh in. Advocating for a cap-and-trade system were Jon A Anda, president of the Environmental Markets Network of Environmental Defense, and Billy Pizer, an IPCC member and senior fellow at Resources for the Future. Speaking in favor of the tax, meanwhile, were Carbon Tax Center cofounder Daniel Rosenblum and James P Barrett, the executive director of Redefining Progress.

The panelists explained that the most basic distinction between the two concepts lies in a tradeoff between price uncertainty and emissions uncertainty : a tax would provide a consistent price on carbon, but it wouldn’t be clear how much it would reduce emissions, whereas a cap-and trade system would guarantee the level of reductions but also create volatility in the price of permits.

The real meat of the debate, though, was in the details. With legislation this complicated, each and every provision will have profound ripples – this is, after all, the entire U.S. economy we’re talking about here. Whether it’s a tax or a carbon market, crafting the law carefully, in order to make sure that those ripples are positive, is what matters.

Pizer argued that that cap-and-trade regulation is can be constructed with more flexibility than a tax, and can thus be tweaked to give the best of both worlds. There’s a big difference, for instance, between implementing an “upstream” trade system, where permits are issued to fuel suppliers, or a “downstream” one which regulates the power plants. There’s also the issue of how to distribute the permits. Some versions currently being discussed in Congress give the first round away – essentially compensating polluters for the right to pollute. Both Pizer and Anda, though, favored auctioning off the permits, and returning the resulting revenue to low-income households or using it to fund investment in renewables.

Yet another controversy revolved around whether or not to set limits on the maximum and minimum trading price. This would serve to ensure that the economy isn’t hit with sudden shocks, with the downside that such a “safety valve” would prevent all the targeted emissions reductions from taking place.

In theory, then, a carbon market could be constructed that has just the right combination of incentives and protections to reduce emissions without destroying the economy. But with all these complications, it’s easy to see how a cap-and-trade scheme could get almost everything right and still fail miserably – just check out the EU’s toothless carbon market. Rosenblum and Barrett argued that any kind of market-based approach is prone to loopholes and exemptions that erode the system’s effectiveness.

In comparison, a carbon tax would be refreshingly transparent, as well as quick to implement and manage. An effective trade system would need to function much like a carbon tax anyway, covering the entire economy and allowing for some protection against price volatility – so why not cut to the chase? “It’s like making one right turn instead of three left turns,” explained Bloomberg in a speech to the US conference of mayors earlier this month. “You end up going in the same direction, but without going around in a circle first.”

Bloomberg might have a point, but in Congress, lawmakers are going around in circles like it’s their job. Besides John Dingell’s stiff-as-nails proposal that is, for all intents and purposes, a sad joke, each one of the bills being considered is some variation on a cap-and-trade scheme. For now, anything involving the t-word is considered politically impossible – although, as one of the audience members at the debate pointed out, “it’s only politically impossible until it becomes politically possible.” Given the rapidly shifting political landscape, getting a carbon tax proposal off the ground in the next couple years might just be a matter of savvy framing and a sympathetic President.

Still, if Congress can come up with a trading system that’ll get the job done, perhaps pushing for a tax is counterproductive. I came out of Tuesday’s debate feeling like it’s possible to make either a tax or trade system workable – the important thing is to get the details right. No matter what form it takes, carbon regulation is likely to be one of the most complicated and expensive pieces of national legislation ever crafted; it’s no exaggeration to suggest that the long-term viability of both the US economy and the global climate rest on its success. If the bill is too weak on greenhouse gas reductions, we risk sending the climate into a frenzy of feedback loops, warming the planet to unmanageable proportions. If, on the other hand, it creates too much of an economic disturbance, the backlash might lead to the whole thing being weakened or even repealed. As Barrett quipped at the close of the debate: “if we screw this up, we could end up with a revolution – but not the one we were hoping for.”

Tax or trade? It doesn’t matter to me anymore. I’m just hoping Congress thinks this one through. If they don’t, the planet might be in a sorry state by the time I’m John Dingell’s age.

Photo credit: flickr/captkodak

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2 thoughts on “Tax or Trade? The Debate Heats Up

  1. Kira says:

    Thanks for the detailed overview of the debate…when I’ve talked with Jon Anda I’ve always walked away with an overflowing brain, so good job capturing so much!

    One thing I want to correct, though, is the misconception that the EU market isn’t working. Most people who criticize it miss a crucial point:
    It’s in the pilot phase now, and starts for real in 2008. The basic structure is sound, and we’ll see results in coming years. More from our international counsel, Annie Petsonk: http://environmentaldefenseblogs.org/climate411/2007/06/27/eu_carbon_market/

  2. Darrin Mish says:

    You can guarantee if the government (U.S. or U.N) meddles in this, corruption will be rampant and the system will collapse under it’s own weight. It happens time and again. On the other hand, if the market runs the system….corruption will be rampant and the system will collapse under it’s own weight. What is answer? No one really knows.

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