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A REAL LIFE CARBON TAX.
I've argued before that you can compare a perfect-world carbon tax to a perfect-world cap and trade proposal, or a realistic carbon tax to a realistic cap and trade proposal, but you can't compare a perfect-world carbon tax to a realistic cap and trade proposal. Today, Kevin Drum draws that argument out at length:
Cap-and-trade is a real-world program for reducing pollutants. We used it successfully with sulfur emissions in the 90s. Europe is already doing it with carbon. The northeastern states are doing it with RGGI. The Waxman-Markey bill is a real piece of legislation that's hundreds of pages long and festooned with a hundred different compromises that will (we hope) allow it to survive the legislative sausage grinder.
And all of these variations of cap-and-trade are complicated. When you read about them, you're immediately bombarded with jargon: auctions vs. allocations; caps, floors, offsets, and banking; upstream vs. downstream; how the exchange should be set up; how often permits should be sold; etc. etc. Those are all real-life questions, and in any real-life plan they have to be addressed. And they're confusing. And yes, they all provide potential toeholds for special interests to game the system — something we should fight like banshees to keep to a minimum.
Tax advocates have no such worries. They propose that we simply tax various fuels based on their carbon content, and voila! We're done. Simple and easy.
Ironically, though, the only reason they can get away with this is because of the very fact that a tax is a political nonstarter, which means there are no real-world taxes on the table. But if there were, they'd have all the same questions as a cap-and-trade plan, plus a whole bunch of new ones. Should it be levied upstream or downstream? Can it be tax sheltered offshore? Are you allowed to apply a tax-loss carryforward to your carbon tax levy? How do you harmonize the tax with other countries? Can I get a tax credit for reducing carbon emissions? How are the revenues going to be distributed? Should midwestern states that rely more on coal-fired plants get treated differently than, say, California? What would it take to make a carbon tax on foreign oil compatible with WTO rules?
Rhetorically, tax advocates can pretend that none of these questions exist. They're able to contrast the genuine messiness of a real-world cap-and-trade plan with a Platonic, whiteboard version of a tax plan.
But that's not how it would work. If cap-and-trade goes down, we're not going to get a tax instead. And if we do eventually get a tax instead, it's not going to be a clean and simple tax. It's going to be a thousand-page monster with every paragraph the subject of a slugfest between a dozen different special interests lobbying half a dozen different congressional committees. That's reality.
It will look, in other words, very much like our actual tax code. Which is not to say that there's no argument for a carbon tax. But you can't simply argue that a theoretical carbon tax is more elegant than existing cap and trade legislation. The difference there is not between an apple and an orange. It's the difference between something you dreamed last night and something you might actually do today.
COMMENTS (19)
The Canadian province of British Columbia does have a carbon tax, and the party that introduced it is likely to win re-election today.
Posted by: tyronen | May 12, 2009 11:27 AM
I get it, so only ideas that are currently drafted as legislation are actually worthwhile. Thaks for the info.
As far as the viability of a carbon tax versus cap-and-trade, I fail to see why one is inherently more difficult than the other policy-wise. Both have to make decisions about who and what to tax at what point in the supply stream. Both have to deal with what to do with revenues. The fact that one has already been codified (but not yet passed!) while the other hasn't says nothing about which plan is inherently better.
That said, the whole cap vs. tax debate is a waste of time. Just do something. Most of us don't care about the means, just the end.
Posted by: anonymous | May 12, 2009 11:29 AM
Both plans make an unwarranted assumption, that making something more expensive will lead, per force, to the creation of a technological solution. The example of controlling sulfur emissions is cited as a example, but this is a bad analogy. In the first place the volume of pollutant to be removed was tiny compared with carbon. At most 2% of the flue gases, compared with, say 20%.
In the second place there was existing technology available, so economic incentives could be used to get it installed. There are no viable technologies available for carbon capture, regardless of what the "clean coal" lobby (and Obama) wish to believe.
We have been spending millions to find a cure for cancer each year, but haven't succeeded. Finance does not lead to innovation only encourages it. So changing tax policy is just a way for the economists and policy makers to push the real problem onto someone else.
The only real option at present is to cut consumption (this is not the same as improving efficiency). If we use less we produce less, but this is at odds with the fundamental theme that "growth" will solve all ills.
Posted by: robertdfeinman | May 12, 2009 12:44 PM
The important thing is to structure whatever you do so it appears to the average voter that only Exxon will actually pay for it.
Posted by: TL | May 12, 2009 2:30 PM
Still the carbon tax looks better in many way if you at theory verses theory or like reality verses like reality.
Cap and trade is designed to fool voters and is only better in as much it can fool the voters.
Posted by: Floccina | May 12, 2009 3:15 PM
The advantage of 'cap and trade' over a 'carbon tax' is marketing -- Washington-Wall Street can pass this legislation 'under the radar' like RGGI in the northeast ... or so they think.
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