Friday, February 22, 2008

Diverse Interests Calling For Carbon Tax Consideration

Feb 14: Following the release of the Congressional Budget Office (CBO) report entitled, Policy Options for Reducing CO2 Emissions [See WIMS 2/13/08], there has been some interesting reactions from diverse interests. Among other things, the CBO report said that carbon taxes are the “most efficient” means of reducing global warming pollution.

Friends of the Earth (FOE) President Brent Blackwelder responded to report with a statement saying, “Yet again, another group of experts has concluded that a corporate carbon tax is the most efficient way to reduce global warming pollution. This underscores the fact that a carbon tax is a serious policy option that should be considered alongside other ways of fighting global warming. A majority of Californians already support a corporate carbon tax, and with leadership from top elected officials, the majority of Americans might ultimately feel the same way -- especially if revenue from such a tax were returned directly to middle class voters through tax rebates or other mechanisms.

“Today’s report also has implications for the current debate about cap-and-trade legislation in the U.S. Senate. Any cap-and-trade system should include 100 percent auctions of carbon allowances -- making polluters pay for all pollution, as a carbon tax would do. As the CBO director has previously testified, ‘Giving the allowances away … would largely prevent the government from using the allowance value in ways that would lower the cap’s total cost to the economy.’ A cap-and-trade system with 100 percent auctions would be better for the economy and could yield financial benefits for low and middle income Americans.”

Senator James Inhofe (R-OK), Ranking Member of the Environment & Public Works Committee, commented report saying it shows that carbon taxes are the “most efficient” way to regulate CO2 emissions and “could offer significant advantages” over the cap-and-trade approach. Inhofe said, “This groundbreaking CBO report validates what I have been saying all along: Cap-and-trade approaches are the wrong way to go. The report is unequivocal in finding that cap-and-trade approaches are inefficient compared to a straightforward tax. The report reveals that no matter how a cap-and-trade approach is modified, on a ton-for-ton basis of emission reductions, it is worse for the American economy."

Inhofe continued, "If we are going to impose enormous costs to our economy, a carbon tax would be a much more efficient and transparent approach. While I do not support either a tax or a cap-and-trade approach, I do strongly believe that we should be having an honest debate. . . Not only is the entire cap-and-trade approach fatally flawed, a cost-benefit analysis of the upcoming Lieberman-Warner cap-and-trade bill reveals it is simply all economic pain for no climate gain. Numerous analyses have placed the costs at trillions of dollars. Even if you accept the dire claims of man-made global warming, this bill would not have a measurable impact on the climate.”

Another strong carbon tax advocate is New York City Mayor Michael Bloomberg. At the 2007 Mayors Climate Protection Summit in Seattle [
See WIMS 11/06/07], and most recently at the February 11-12, United Nations General Assembly thematic debate on Climate Change at the UN Headquarters in NYC, Bloomberg has said, "Cap-and-trade is an easier political sell because the costs are hidden -- but they're still there. And the payoff is more uncertain. . . the price volatility for carbon credits can discourage investment since an investment that might make sense if carbon credits are trading at $50 a ton, may not make sense at $30 a ton. . . A cap-and-trade system will only work if all the credits are distributed from the start -- and all industries are covered. But this begs the question: If all industries are going to be affected, and the worst polluters are going to pay more, why not simplify matters for companies by charging a direct pollution fee? It's like making one right turn instead of three left turns. You end up going in the same direction, but without going around in a circle first."

Senator Inhofe excerpts several quotes from the CBO report on the subject of a carbon tax as follows:

A carbon tax "would provide firms with an incentive to undertake more emission reductions when the cost of doing so was relatively low and allow them to reduce emissions less when the cost of doing so was particularly high."

. . .“a tax would keep the costs of emission reductions in balance with the anticipated benefits, whereas a cap would not.”

“A tax on emissions would be the most efficient incentive-based option for reducing emissions and could be relatively easy to implement.”

“A cap that is too tight will disproportionately increase costs over benefits and a cap that is not tight enough will disproportionately lower costs relative to benefits. A tax, by contrast, will tend to hold the costs of emission reductions in line with the constant (although uncertain) expected benefits, encouraging greater emission reductions when costs are low and allowing more emissions when costs are high.”

“When analysts take into account the degree to which costs are likely to vary around a single best estimate, they conclude that a tax could offer much higher net benefits than a cap. One study suggests that the net benefits of a worldwide tax on CO2 emissions in 2010 would be more than eight times larger than those of an equivalent inflexible cap.”

“Viewed another way, any long term emission-reduction target could be met by a tax at a fraction of the cost of an inflexible cap-and-trade program.”

“A tax would provide a steady, predictable price from emissions. An inflexible cap, however, could result in volatile allowance prices, making a cap-and-trade program more disruptive to the economy than a tax would be.”

“Price volatility could be particularly problematic with CO2 allowances because fossil fuels play such an important role in the U.S. economy. They accounted for 85 percent of the energy consumed in the United States in 2006. CO2 allowance prices could affect energy prices, inflation rates, and the value of imports and exports. Volatile allowance prices could have disruptive effects on markets for energy and energy-intensive goods and services and make investment planning difficult. The smoother price path offered by a CO2 tax would better enable firms to plan for investments in capital equipment that would reduce CO2 emissions (for example, by increasing efficiency or using low-carbon fuels) and could provide a more certain price signal for firms considering investing in the development of new emission-reduction technologies.”

Access a release from FOE and link to California poll on carbon tax (
click here). Access Senator Inhofe's statement (click here)Access Mayor Bloomberg's speech at the UN thematic debate (click here). Access the complete 42-page CBO report (click here). Access the Carbon Tax Center analysis Tax vs. Cap-and-Trade (click here). Access various Internet postings regarding carbon tax v. cap-and-trade (click here). [*Climate]