federalcarbontax.org and climatehealth.org


“Carbon Trading and Offsets Counterproductive Compared to Politically Possible Carbon Tax”

by scientist/businessman Sylvester Johnson, Ph.D. Applied Physics


For an opportunity to take direct personal political action that does not require your money, see this link to the closely related Initiative for local governments’ resolutions in support of a federal carbon tax.

On this page:

Definitions, detailed background information, examples, and analysis

Emissions Trading Open To Abuse

Offsets Circumvent Emissions Reduction at the Source

Carbon Tax for Equitable Treatment and Predictability

Legislation

Abstract

Selected points in brief from the full length article below:

A new tax is politically impossible… until it’s politically possible. A carbon tax can become politically possible since both labor and business get harmed by cap-trade, beyond the added cost of energy.

Cap-trade in heat-trapping emissions makes energy costs even more volatile, making budget planning more problematic, while worsening the balance of trade due to buying possibly counterproductive offsets from abroad, sending jobs abroad for offsets that build in warming. European cap-trade has been called a failure, with little net reduction in heat-trapping emissions. Effective action requires reducing emissions at the source, not trading.

A carbon tax assigns definite costs to pollution, while revenues get used for dividends to the public and energy efficiency projects beneficial to the domestic economy.

Taxation upstream at fossil fuel sources minimizes bureaucracy with relatively little new hiring needed to supplement the taxation bureaucracy already in place, whereas cap-trade feeds intrusive, extensive, expensive bureaucracy to attempt to oversee the many negotiable features of cap-trade that would be influenced by intensive lobbying for unfair advantage, as well as bureaucracy to verify the difficult-to-monitor implementation of cap-trade. Smaller companies are less able to identify the cheaper offsets as well as larger, giving larger companies a competitive advantage. The business lobby should champion a straightforward carbon tax and scorn unwieldy and inefficient cap-trade.

Cap-trade is regressive, since costs spread across incomes with the effect of a flat tax. From the consumer's point of view, cap-trade looks like a tax, only more expensive than an actual tax. It slows the economy, depressing the labor market. Emissions trading benefits traders, while offsets provide windfall profits to brokers.

A carbon tax can be transformed from a flat tax hike. Progressive dividends of the majority of revenues can be made, while part of the revenue pumps the economy with labor-intensive projects. The labor lobby should endorse a carbon tax and disparage cap-trade.

Although a carbon tax, unlike cap-trade, does not in itself set a goal for emissions reduction, a carbon tax becomes a policy tool to arrive at a goal. It does so more effectively and at less cost than capricious cap-trade and evasive offsets.

With motivations for both labor and business to back a carbon tax over cap-trade, with enough communication of its merits a carbon tax could very soon become the political as well as environmental preference.

Fuller explanations of these points and further issues follow.

Introduction

The debate between a federal carbon tax and emissions trading may seem remote from daily life, but the outcome will affect citizens for decades. Objective appraisal of the unwieldy and inefficient character of volatile, expensive and intrusive cap-and-trade and the counterproductive potential of offsets forces the consideration of a federal carbon tax as the most effective path to emissions reduction as well as energy independence.

Emissions Trading Open To Abuse

In emissions trading (or emissions “cap-and-trade”), the government sets a limit or cap on the amount of pollutant that can be emitted. The overall total amount of caps gets reduced each year. Companies that pollute beyond their cap must buy permits from those who pollute less than their cap, or face penalties. This transfer is referred to as a trade. In effect, the buyer is being fined for polluting, while the seller is being rewarded for having reduced emissions.

Companies that can easily reduce emissions do so and those for which it is harder buy permits, which is a “market-based” approach that reduces greenhouse gasses at a reduced cost to society compared to governmental command and control dictating details of reductions in broad-brush regulations. However, a straightforward carbon tax also is a market-based approach that motivates everyone to reduce emissions by increasing efficiency or purchasing renewables, with companies that can easily reduce emissions doing so rapidly, lowering the cost to society of effective reduction. U.S. companies that cannot easily reduce emissions possibly could get assistance from tax-funded programs.

The potential transfer of wealth in cap-trade from polluters to non-polluters provide motivation for polluting firms to change. However, the motivation could be removed by politically motivated “grandfathering” exemptions that involve the government giving established polluters carbon permits, thereby undercutting the incentive to reduce. Lobbying for such exemptions could become intense. Rather than making transfer of wealth from polluters to non-polluters a likelihood as does cap-trade, a carbon tax instead simply persistently motivates investments in renewables.

The financial game of carbon trading may distract attention from the governmental action that needs to take place, such as improving public transportation. In addition, determining the caps on an industry by industry, and company by company basis requires an extension of federal bureaucracy, as well as further misdirecting business effort to management rather than substantive action and investment. The caps get allocated based on past usage. During the period required for political implementation of cap-trade, a perverse incentive is created to pollute more to increase the eventual base for allocations of caps. This consequence would increase emissions during implementation.

It’s often argued that a cap-and-trade market in sulfur dioxide permits has been functioning to reduce those emissions. However, the analogy of that market with cap-trade in greenhouse gasses breaks down due to the diversity of fossil fuels that would make carbon trading unwieldy. The many sources of fuels would require an unmanageably large scale of oversight for a market in permits for heat-trapping emissions, compared with the smaller number of transactions in sulfur dioxide permits. Setting caps among competitors lobbying for unfair marginal advantage would become a tangled political exercise on a grand scale. Monitoring compliance would be yet another. The potential for abuse and corruption would be correspondingly greater for cap-trade in greenhouse gasses than for the smaller scale of sulfur dioxide permits. A straightforward tax would be more practical for the task of increasing the cost of fossil fuels.

Design and implementation of cap-trade could become complicated, contentious, and quite prolonged, as political disputes get settled over: 1] Level of overall cap 2] Timing 3] Allowance allocations 4] Certification procedures 5] Offsets 6] Penalties 7] Permit banking from year to year 8] Inevitable requests for exemptions. The many negotiable features of cap-trade take longer to prepare than a straightforward carbon tax. Several of these components of cap-trade may need re-negotiation annually, making the administrative expense even less palatable.

Cap-and-trade may have an extreme effect on consumers' power bills. During a hot summer week, utilities need to burn more fuel, causing their emissions to rise. They have to buy more permits to pollute, and the increased demand causes permit prices to rise. The utilities usually pass those costs on to their customers, meaning that power bills increase sharply then plunge from one month to the next. That price volatility discourages innovation, because entrepreneurs and investors prefer stabler energy prices for projection of returns for installing renewable energy sources.

The costs would be higher under the disguised tax cap-and-trade than an actual carbon tax, due to income extracted by beneficiaries such as traders, brokers, attorneys, and an extensive new regulatory and oversight bureaucracy burdened with enforcement of compliance in this complex new commodities market, and due to overhead and infrastructure for all the above. Although a small fraction of the overall market activity, these extra costs of cap-trade could amount to many billions of dollars. If people struggling to pay energy bills were asked if they’d mind paying for overhead and the incomes of market participants, they’d possibly object to the extra energy cost, especially with their energy bills jumping around as utilities’ permits became more or less available due to small changes in economic conditions.

Goals for reductions in emission levels are likely to be too modest. Considering the disastrous consequences of failure, overshooting the goals, that is reducing more than the goals, would be advisable to reduce risk. Under emissions trading, any company that manages excess reductions will either sell them to another company, or bank them for future use. Thus the trading system would almost never end up with a net long-term overshoot, unlike taxation.

Truly effective action on climate change requires reducing emissions at the source, not trading, which doesn’t leverage any one polluter to reduce. In the cap-trade system, many companies have insufficient direct financial motivation to reduce carbon emissions to levels below the caps set for them. Carbon trading may not prove an optimal response to the need for emission reduction. Reductions in emissions must be motivated across the board without the loopholes and delaying strategies that characterize cap-trade.

With cap-trade’s "grandfathering", permits are given free to historic polluters. The more a company polluted in the past, the more permits it gets in the future - not just once, but year after year.  As the descending cap raises the price of fossil fuels, everyone pays more, and the companies that get free permits keep this extra money as windfall profits. Giving away permits to pollute means conceding defeat even before beginning the transition to renewables.

Partly to get rid of the grandfathering problem and partly because it's widely agreed that a tax probably would work more efficiently and effectively to motivate reduced emissions, in order to make cap-trade more like a tax, proposals have been made to auction off the permits to pollute, then trade them. But this so-called cap-auction would still bear the burdens of the faults with cap-trade that have been described here, would cost society substantially more than an actual tax, yet very probably not be as effective as an actual tax.

For example, a potentially useful and much-advertised feature of cap-trade would be that the overall total amount of caps would get reduced over time, hypothetically forcing reduced total emissions if the system were able to function without exemptions, abuse or corruption. However, that feature would get negated in the bill introduced by Senator Sanders that stipulates exceptions if the market price of allowances exceeds a set “stop price” “safety valve” (misnamed, because it’s really a problematic escape clause).

When the permit price exceeded that amount, the emissions cap would remain the same with the government selling extra permits to pollute beyond the planned amount. The extra permits would derail the scheduled reductions of heat-trapping emissions, resulting in a critical failure in reduction of emissions, thereby invalidating the rationale for the entire program. Because European ranges of variation in allowance price would not be tolerated here, a “stop price” is likely to be part of enacted legislation.

         With the “safety valve” or stop price of cap-trade, the total amount of permits of cap-auction is no longer determined by the regulatory goal; instead it's determined by the effectiveness of industrial lobbyists in securing as low a stop price as possible. This means that for all practical purposes reduction goals get negotiated to levels more comfortable for the fossil fuel industries, in contrast to the consistent motivation of a tax.

         Yet without this maximum permit “stop” price, the permit price would get forced even higher, worsening variation in energy costs. The worsened swings in energy costs would make it more difficult to gauge probable returns on investments in energy conservation and renewable energy, tending to hinder such vital investments. Therefore, whether with or without a “stop” price, emissions trading would very probably perform more poorly than a straightforward tax.

Advocates of cap-trade ague that the stop price could get increased or removed for greater emissions reduction certainty, but the stop price is already a band-aid on the system. The capability of removing the stop price is a band-aid on a band-aid. A brand-new system that has to get a band-aid on a band-aid designed onto it to function, is not likely to function effectively.


If offsets get built into the program, it’s even less likely emissions will get reduced regularly.

Offsets Circumvent Emissions Reduction at the Source

Carbon offsets mean paying someone else for reducing their heat-trapping gas emissions or increasing absorption, to compensate for one's own effect on emissions. A well-known example is to try to compensate for the greenhouse gas emissions from personal travel by funding the planting of trees, criticized below as an offset that builds in warming. Projects specifically intended to reduce levels of heat-trapping gasses may qualify as providers of offsets for sale to greenhouse gas emitters.

Offsets are an aspect of cap-trade that nearly everyone agrees creates disconcerting challenges for fair quantification of emissions absorbed or reduced and challenges for reliable verification of fulfillment of goals, inviting corruption, as well as creating unintended consequences.

The reason given for implementing an offset program in addition to cap-trade is that cap-trade may prove too burdensome to fossil fuel suppliers and energy intensive industries. However, increasing the costs of fossil fuels is a necessary burden to motivate reduction of the emissions. Therefore the very stated purpose of offsets is counterproductive. As will be shown below, even the functioning of many offsets is also counterproductive.

Under the Kyoto Protocol’s Clean Development Mechanism (CDM), every carbon credit generated by an offset project allows a country with emission reduction commitments to emit one ton CO2-equivalent more than their reduction target. Therefore, any offset project allowed into the CDM under false pretenses increases global emissions. Since false offsets would have the same effect under U.S. cap-trade, it's important to examine carefully the criteria for accepting or rejecting an offset provider.

The criteria for an offset may include the following: 1] What emissions would occur in the absence of a proposed project? -Setting an amount involves considerable guesswork and uncertainty.- 2] Would the project occur anyway without the investment raised by selling carbon offsets, such as hydropower projects that already have been planned? -The prospect of selling offsets based on the project may actually delay it indefinitely. - 3] Are the reductions already required by some other law or regulation? -The project may receive unwarranted additional income from obligations already in place.- 4] Are some benefits of the reductions reversible? -An offset could get reversed long after usage of the offset, if trees planted as offsets to avoid actual reductions of emissions got cut later for burning.- 5] Does implementing the project cause higher emissions outside of the project boundary as an unintended consequence? -It’s been proposed that seeding the ocean with iron would increase growth of phytoplankton that use carbon dioxide as part of their shells. The shells eventually get deposited on the ocean floor. However, seeding the ocean with iron depletes other nutrients as phytoplankton grow. The nutrient-depleted water circulates and mixes with remote waters, so that subsequent nutrient availability is reduced outside of the project boundary. This depletion reduces phytoplankton growth that could have occurred elsewhere as the previously available nutrients mixed in those remote waters possibly naturally higher in iron. Because of the reduced phytoplankton growth elsewhere in remote waters, the net overall reduction in carbon dioxide would be a fraction of the reduction that might be projected for the seeded area alone.-

Every criterion for becoming an offset provider listed above involves considerable subjective judgment that varies with the person evaluating the offset. Verification of these diverse criteria gets attempted by a governmental bureaucracy, although it’s challenging to find any offset that really meets all the criteria.

Beyond the additional governmental bureaucracy whose mission is to verify the offset project, offset programs create in the private sector the function of intermediaries called offset brokers. Brokers lobby intensively for their particular project to get accepted as an offset in a process that invites corruption and scandal. Brokers have a conflict of interest in meeting any requirements for reporting poor performance in reduction of heat-trapping gasses. Offsets purchased from brokers may plummet in value because they’re later found not to result in the emissions cuts promised, possibly disillusioning the public if a scandal of corruption erupts. 

Carbon offsets can create perverse incentives, motivating the establishment of sources of heat-trapping emissions in order to reap the reward of payments to reduce those emissions. Such abuses have already occurred in factories producing refrigerants that have over 10,000 times the Global Warming Potential of carbon dioxide. Potent waste gasses were being released during production of refrigerants. As an offset, companies from the European Union paid excessively large amounts for the installation of low cost incinerators to destroy the gasses before release, motivating the construction of further factories to produce refrigerants with the expectation of getting additional excessive windfall payments for destroying waste gasses (Nature). In general, some product refrigerants also eventually escape from leaking coolers after they’re eventually discarded. Since extra factories were built to produce refrigerants that may eventually escape, net warming may occur due to this supposed offset project.

In another example of an unwarranted windfall payment, a broker invited consumers to offset carbon emissions by investing in enhanced oil recovery, which pumps carbon dioxide into depleted oil wells to force the remaining oil upward. However, this process was profitable in itself, meaning operators were making extra revenues from selling redundant and unnecessary “carbon credits” for burying the carbon. The carbon sequestration would have occurred anyway, without extra payments that could have been invested in efficiencies to reduce consumers’ own fossil fuel usage. In addition oil fields are not reliable for long term sequestration, since poorly plugged wells may act as conduits for escaping gas.

The bureaucracy to investigate abuses and recommend remedies such as delisting the abusers would have to be enormous. Even so the investigations would likely be substantially less than 100% effective, so that new abuses would continue to proliferate. In addition, a shortage of verification may make it difficult for buyers to assess the true value of carbon offsets, and allow instances of people buying worthless offsets that do not yield any reductions in carbon emissions.

Carbon offsets can also create counterproductive subsidies. For example, dairy farms produce the greenhouse gas methane from both decomposition of manure and from digestion by cattle, with the substantial majority of methane produced by bacterial digestion of cellulose in the rumen-portion of the stomach and emitted in eructation or belching. Farms may capture the minority portion of methane produced on the farms, the methane from decomposition of manure processed in “digesters” and sell or burn it as fuel, so that the methane becomes a source of income, or reduction of fuel expense. In addition, such capture of methane may qualify for sale as an offset if the verifying bureaucracy does not take into account the likelihood that the methane-capture project would occur anyway without the investment raised by selling redundant carbon offsets. Purchasing such offsets, moreover, subsidizes the entire farm and the production of methane by digestion as well, a larger source of methane than decomposition of manure. This subsidy increases the average economic viability of dairy farms with the consequence that all other aspects being equal more farms will function and more methane get emitted overall by digestion than if the offset had not been sold. If the capture of the methane from decomposition of manure would have occurred anyway because of its profitability, this result of more methane emitted overall by digestion is counterproductive to the goal of reducing heat-trapping emissions.

Certainly investing in manure digesters needs to be done in any case to capture the methane. A carbon tax raises the price of fossil-fuel based energy, but not digester-based, motivating such investments in renewables, and without unwarranted windfall payments from selling offsets.

Many offsets build in warming: A fossil fuel consumer may seek an offset that involves planting trees to sequester carbon equal to the amount of the consumer’s emissions being offset, emissions from a car trip for example. One reason for the low price of the offset is that its cumulative effects over its entire lifetime are counted against the consumer’s emissions. Solar power gets employed in photosynthesis over the decades required for the tree to mature enough to store an amount of carbon equal to the carbon released during to the trip. However, warming occurs due to the trip emissions acting to trap heat during that growth period. By the time the tree is mature, warming will have occurred for decades, ultimately contributing to the melting of ice and consequent increased absorption of solar radiation. Although the intention is to reduce net warming to zero, instead the effect is to build in warming for decades. Therefore planting trees as an offset is counterproductive for reducing net warming. While donations to tree-planting need to get made anyway, offsets cannot substitute for critical reduction in emissions from fossil fuels as soon as possible to reduce their warming effect from that which would occur if usage of fossil fuels continued unabated.

Many offsets create similar counterproductive effects. Near-term reduction of emissions at the source is much more beneficial than offsets.

A well-managed woodlot has trees of all ages to maintain the health of the forest continuously when a mature tree gets felled. When that tree gets burned to heat a home, the canopies of the trees around it expand rapidly into the vacancy in the woodlot cover, rapidly sequestering a part of the carbon released in burning. Since many less mature trees around it grow more rapidly with larger canopies, the rest of the carbon released may get sequestered in say a matter of five or ten years, rather than the several decades it takes an individual tree or a newly planted forest to mature. However, the presence of trees of all ages growing up around it does not mean that zero warming occurs. The biomass still takes the five or ten years to get sequestered, during which the emissions from burning cause warming. Therefore culling trees from a woodlot for heating a home by wood burning does build in atmospheric warming, although far less than burning fossil fuels or planting new forests as offsets.

Unfortunately, when trees get planted on vacant land, eventually the dark leaves from the growing trees may absorb more heat annually than the plants that had been established previously. In the tropics, the growth rate is usually sufficient to absorb enough CO2 to reduce net warming. In the temperate zone, growth is slower, so that net warming by a woodlot may actually be greater than that of vacant land due to the dark leaves absorbing heat. However, in the larger context of species preservation and aesthetic appreciation, the variation provided by woodlots may well be preferable to vacant land.

Clearly application of any offset for annual emissions of heat-trapping gasses has to be made based on the offset’s annual effects on heat-trapping gasses, not the offset project’s cumulative effects over its entire extended lifetime. Otherwise the offset builds in warming.

Any offset that did apply the carbon dioxide absorbed or saved by the offset on an annual basis to compensate annual emissions would result in a present value of the proposed offset project only a fraction of the lifetime basis, and would result in a substantially higher cost to the purchaser of the offset to compensate annual emissions, reducing the marketability of the offset.

With an offset program, instead of competing on the basis of conventional products and services, businesses expend resources competing to get the cheapest offsets, a distraction from conventional productivity goals critical to fundamental value and competitiveness.

Carbon offsets make it more acceptable to continue burning fossil fuels, excusing continuation of usual practices with regards to emissions. Funds invested in possibly counterproductive offsetting projects may reduce the amounts available for investments in efficiency and installing renewable energy power stations. Offsets encourage short-term fixes at the expense of delaying fundamental, long-run solutions.

Selling offsets is an ineffectual strategy to reduce emissions. However, once the extensive and widely intrusive bureaucracy required for carbon trading and offsets is in place, with brokers, sellers and other nongovernmental stake-holders profiting, it will be very challenging to dismantle the running machine. Well-financed lobbyists are already making it difficult to derail the onset of cap-trade, making it even more difficult to discuss implementing a carbon tax instead.

Unfortunately, one reason the financial sport of offsets is more popular than a tax is precisely because offsets don't motivate reductions that require long-term investments substantially larger than the short-term cost of the offsets.

Some local governments in the U.S. may favor cap-trade in part due to expectations of selling offset projects. However, the value may get undercut by competition by inexpensive offsets from abroad, reducing the price of domestic offsets so much that some become unprofitable. Therefore those wishing to sell domestic offset projects may reconsider the merits of a carbon tax more objectively, considering that their project may not make a profit. Brokers of foreign offsets may find it even more difficult to consider the merits of a carbon tax objectively.

      Purchasing offsets from abroad is equivalent to paying disguised taxes to foreign countries. Instead, meritorious foreign projects could be funded by World Bank loans, a mechanism that’s already functioning.

Speculators on permit trading and offset markets may wish to consider that the risks of speculation are worsened by the fact that emissions allowances or permits are not accorded real property rights by law. The government can change the playing field at any time, invalidating emissions permits, making them worthless.

Offsets undermine the U.S. economy due to potentially high volume purchases of inexpensive offsets from abroad, worsening the balance of trade and sending jobs abroad. So how about skipping the whole complicated exercise and enacting a carbon tax instead?

What about highly meritorious projects to reduce emissions that deserve funding? Instead of deriving funds from the sale of offsets with all the inherent problems described here, part of the proceeds from either a carbon tax or auction of pollution permits can fund them, with a tax probably working more efficiently and effectively to motivate reduced emissions.

The distractions, corruption, and scandals arising from the gamesmanship involved in playing the financial sport of offset trading are not likely to result in the achievement of critical goals for reduction in emissions and warming. The European experiment with cap-trade has been a failure 1] in part due to the extreme variability in cost of permits and offsets, as well as 2] well-documented and publicized fraud, and 3] numerous mistakes under the Clean Development Mechanism of the Kyoto Protocol such as funding nearly-completed hydropower, with little net reduction in Europe of heat-trapping emissions since implementation of emissions trading, 4] in part due to export of responsibility to reduce emissions (http://www.aei.org/publications/pubID.26286/pub_detail.asp).

Offsets must not be a part of any cap-trade legislation, especially offsets from abroad. Yet an eventual worldwide protocol to reduce emissions would necessitate worldwide permit trading, another reason to implement a carbon tax instead.

Until recently, U.S. business and environmental groups have been favoring cap-trade over carbon tax. However, the erratic European experience with cap-trade had not come fully to light, providing historical evidence that cap-trade may work substantially less effectively than a federal carbon tax. Opinion may be shifting more toward a carbon tax.

Carbon Tax for Equitable Treatment and Predictability

The advantage of a carbon tax is that it applies a defined, straightforward surcharge to the carbon content of all fossil fuels, a cost that counters pollution. A straightforward carbon tax could produce results at least as effective as those of cap-trade with considerably less extensive bureaucracy. If the tax gets applied upstream to the source coal soon after mining, and to oil upon extraction or import, then fewer entities need to get taxed, with only a minimal bureaucracy required. (The cost of coal would go up the most.) Extensive experience exists in enforcing compliance for taxation via ready-made statutes, but not in enforcing caps. Therefore, unlike carbon cap-and-trade, little new bureaucratic machinery is needed to administer and levy a carbon tax.

Cap-trade imposes a heavy hand of invasive verification, regulation and oversight, whereas a carbon tax levied upstream requires almost no oversight downstream for the majority of energy consumers.

Taxing upstream makes it more demonstrable that equitable treatment is being afforded to everyone, so long as no outright exemptions from taxation get made. Exemptions are likely to undermine support for any program among those who do not benefit from the exemptions.

A new tax is said to be politically impossible… but that’s only until it’s politically possible. One reason that the income tax is a drag on the economy is that the income tax counteracts a "positive" for the economy, acting as friction on constructive, income-producing activities. A carbon tax gets applied to energy sources which emit into the atmosphere carbon dioxide, or more broadly, any long-lasting heat-trapping gasses. The tax creates an incentive for efficiency and investments in renewables that reduce the use of fossil fuels. Thus a carbon tax is an example of a corrective pollution-tax on "negative externalities" of activities rather than on a "positive" outcome of activities, such as income. Since heat-trapping gasses cause warming that’s beginning to damage society, for example by weather extremes and spreading insect-borne diseases, a carbon tax supports productivity and economic growth by reducing the emissions of such gasses.

To counteract the short-term drag on the economy, it can be stimulated by allocating a portion of tax proceeds to fund labor-intensive projects to reduce emissions such as improving efficiency. Cap-trade has the effect of a tax of increasing energy costs while doing nothing to reduce energy billing to consumers, but a tax could do so by funding efficiency programs.

A majority of the tax proceeds can get returned in equal dividends to every citizen, in general compensating for more of the energy expenses at lower incomes than higher. This progressive effect occurs even though lower income families spend a higher percentage of income on energy, since higher income families spend in general larger dollar amounts on energy and energy-intensive products, thus paying higher carbon taxes. An alternative to dividends is an an expansion of the Earned Income Tax Credit. Either method of returning the revenues would be progressive, with the result that people benefit more from working, while using fewer fossil fuels, a win-win for society. Many families who cannot afford an increase in energy costs may come out ahead due to this tax-shifting. If the substantial majority of revenues gets returned, the carbon tax is revenue-neutral tax-shifting rather than a tax hike.

Cap-trade results in increased variation in the market price of energy. Such energy cost volatility hampers companies’ strategic planning. A defined tax rate makes it more feasible than does cap-trade with its associated market variation for businesses to predict the future impact of climate policy on their bottom line, allowing businesses to fully focus instead on production, service and innovation. Reducing at least this regulatory aspect of energy cost volatility also lessens concern among shareholders about the uncertainty and risk that currently surround planning regarding climate change.

Reduced volatility makes it easier for investors to estimate the possible returns from investments in the energy sector. Therefore more money from the private sector could become available under a carbon tax than cap-trade for funding renewables and efficiencies.

People in favor of cap-trade have made the argument that the uncertainty introduced by climate change is the major factor influencing investments. That argument is misdirected since investments may get postponed due to risk assessment that was primarily negatively influenced by price volatility, which cap-trade increases, but a tax does not.

A carbon tax doesn’t favor or disfavor one part of the economy over another, or one competitor over another. It minimizes complexity and administrative costs. Businesses may consider straightforward predictability more desirable than the scramble for marginal advantage in emissions costs set in motion by cap-trade, a scramble that distracts management from making fundamental value-adding improvements in productivity critical to competitiveness.

Taxing fossil fuels to levels appropriate to their negative “externalities” motivates investments in renewable energy sources by making them more competitive.

Carbon taxes provide direct, transparent and understandable price signals. The benefit of a tax is that it provides continuous motivation to reduce the fraction of energy supplied by fossil fuels as energy demand increases, unlike trading. With a tax, increasing energy demand transforms into increasing demand for efficiency and renewables.

The many negotiable features of cap-trade take longer to implement than a straightforward carbon tax that can be implemented rapidly. Cap-trade is complex and subject to scandals that could undermine public support.

For an international accord, a carbon tax would be more appropriate because it's simpler to administer. Weak governments might not be able to provide effective oversight to prevent the many opportunities for corruption inherent in cap-trade. In addition a carbon tax could be accepted more widely for a worldwide protocol than emissions trading since each country’s revenue from a tax would remain in that country with minimal impact by foreign countries on national sovereignty. A key point is that a tax delivers revenue to the government rather than to private entities, thereby motivating the government to enforce compliance.

With cap-trade, the U.S. would pay developing countries many billions of dollars not to pollute as much, a step possibly not palatable to many Americans. With a carbon tax, every country would collect internal revenues and disburse most or all of them internally. Presumably World Bank loans could be made to developing countries for meritorious projects.

The international competitive playing field could be kept even by imposing a border tax adjustment on goods upon import from countries without a tax or cap. The adjustment could increase costs of products according to estimated energy input. Cap-trade would do the opposite, paying for offsets from abroad. For legal reasons, a tariff would be more feasible with a carbon tax than cap-trade under the World Trade Organization’s General Agreement on Tariffs and Trade. Quotas that would be consistent with cap-trade, because a cap is a quota, would not be allowed under WTO-GATT, whereas a border tax adjustment that would be consistent with a carbon tax would be allowed.

Any climate policy has to minimize coal-burning. Therefore that sector will be hard-hit. Part of the carbon tax revenues could be allocated to relief and job re-training for unemployed miners. Mainly increased natural gas burning may substitute for coal in the short run. In addition legislation could get enacted nationwide using the californian model enabling utilities to profit from helping customers increase energy efficiency. In regions highly dependent on coal, government loan guarantees could support construction of wind farms or hydropower.

It’s said that the disadvantage of a carbon tax is that it would not in itself set a goal for emissions reduction. However, an agency such as the EPA would use the carbon tax as a policy tool to arrive at a goal for reductions, based on price-demand modeling. In other words, increasing cost lowers demand (as price increases, demand decreases). If it got determined that emissions were not being reduced enough to meet the policy goal, then the tax could be increased to motivate more rapid transition to renewables and increased efficiency. After the first 2 or 3 years of observations of responses to initial rates of taxation, economists’ models could be adjusted to make more accurate predictions of the rate of taxation required to meet a goal for reduction, and to account for energy demand possibly increasing faster than predicted. In this way a tax would achieve goals for reduction of emissions by applying price-demand modeling as a public policy tool.

Using this well-developed modeling, the fixed tax rate for each year would get determined by the goal for reduction in usage of fossil fuels, without the continual price volatility of permit trading. Year-by-year reductions would vary above and below goals, but over periods of several years the results could be used to readjust the price-demand modeling to get a better fit to experience and more accurate prescription for future tax rates needed to achieve regulatory goals.

First, the tax would get implemented in a much shorter time than cap-trade. Next, the idea is that over a decades-long period the cumulative reduction would amount to a close approximation of the goal, although each year’s reduction may vary around the downward trend line. In the first decade relatively inexpensive efficiency measures should make it quite feasible to make substantial reductions in emissions. Hitting the barn door target shouldn’t be a problem. Mustering the political will to make the barn door target ever smaller is the political problem. The major policy question is what the levels of annual goals for reduction of emissions will be, 2%, 5%, or 10%, not whether a tax will motivate reductions accurately enough as a policy tool used to achieve the policy goal.

According to several studies (carbontax.org/issues/energy-demand-how-sensitive-to-price), demand for fuel is quite responsive to the price of fuels, and varies with the type of fuel. For example, gasoline demand has an approximate "price-elasticity" of 0.40, and electricity about 0.70-0.75. (Price-elasticity is the % change in quantity demanded divided by the % change in price. If the price of gasoline increased by 30%, the demand would decrease by 12% over a several year period.) All other fuel price-elasticity falls between those for gasoline and electricity.

As uncomfortable as it is to enact a new tax, the potential climate change and societal damages resulting from an ineffectual cap-trade program could be substantially more problematic. Cap-trade also increases costs to the consumer like a more expensive tax, but with more bureaucracy and less effect on emissions, especially with offsets.

Trading in offsets for promised emissions reduction in developing countries tends to be a cheaper way of meeting reduction targets on paper. However, it doesn’t guarantee lower actual emissions because of the difficulties involved in oversight of compliance and in fraud prevention. These trade agreements are equivalent to the misallocation of billions of dollars to foreign aid rather than allocating that money to making actual domestic reductions in heat-trapping gases emitted from sources in the USA. Rather than linking emissions reductions indirectly to foreign aid, which is a separate issue, the goal of cutting these gases needs to be addressed as the paramount issue.

It’s said that a carbon tax would make U.S. businesses less competitive and “send jobs abroad”. However, cap-trade also imposes a cost on the hitherto free service of the atmosphere in accepting carbon emissions. By delaying the development of a robust manufacturing base for renewable energy devices, letting other countries gain the expertise instead, we’ve been “sending jobs abroad”.

Furthermore, the proceeds of a carbon tax can get invested in the USA rather than abroad as with imported offsets in trading. Investments in improved efficiency and transitioning exercise a beneficial employment multiplier on the economy, expanding the pie. Such investments are also more effective in reducing emissions from the high level found in industrialized nations rather than from the already low levels in developing countries. Diligent oversight in this country is less likely to be plagued by corruption. Therefore a carbon tax reduces greenhouse emissions and warming more than trading with developing countries, in addition to keeping investments in the USA.

An effective tax is affordable. The Intergovernmental Panel on Climate Change (IPCC) estimates that an added cost sufficient to stabilize carbon dioxide at a “safe” level by 2050 would reduce average annual economic growth by about a tenth of a percent. Judicious usage of revenues to pump the economy with income tax breaks and labor-intensive projects could even result in extra growth instead of a reduction. However, if temperatures increase more rapidly than foreseen, greater effort to reduce emissions will be required than the IPCC estimate entails.

The Economic Policy Institute (EPI) has run a sophisticated computer model of the changes in the economy with the implementation of a carbon tax with most proceeds returned (www.epi.org/content.cfm/studies_cleanenergyandjobs). Contrary to the IPCC estimate, the EPI results indicate that sectors such as coal mining will suffer but the overall gross domestic product may increase. Transitioning may actually prove a small net gain for the economy.

Considering the unwieldy malfunction exhibited by cap-trade in Europe and the counterproductive potential of offsets, a carbon tax is the most effective path to energy independence and to reduce the threat of climate change to everyone, especially to the children.

Advocates of a carbon tax get told to stay quiet, that cap-trade will be better than nothing, that the best (carbon tax) should not be the enemy of the good (cap-trade). But what if cap-trade turns out to be poor, counterproductive or only works for example less than a tenth as effectively as might a carbon tax, as indicated by the European failure of cap-trade? In that case, the rush to enact cap-trade would look reckless and ill-considered. While it could perhaps get enacted more readily politically than a tax, the implementation of cap-trade would take longer due to the many and diverse ways to burn fossil fuels, ways that span multiple sectors of the economy, not just coal-burning for example.

Lobbying for unfair advantage could delay implementation of cap-trade. A tax levied upstream could be implemented much sooner.

Silence on this issue allows special interests to dominate the debate. It’s time to broadcast the merits of a tax.

Legislation

At least three bills have been introduced that mandate a minimum 80% reduction from the emissions of 1990 by 2050, reducing by a small fraction per year. From the foregoing analysis, the bill advocating carbon taxes [Stark Save Our Climate Act (H.R. 2069) in the House] is preferable to those promoting cap-trade [Waxman Safe Climate Act (H.R. 1590) in the House and the Sanders-Boxer Global Warming Pollution Reduction Act (S. 309) in the Senate]. A political compromise for a lesser reduction than 80% may be seen as a political success, but could be a climatological failure, delaying the necessary levels of cutbacks for an unknown number of years as impacts accelerate, creating a need for an even more severe goal for 2050 than 80%. Meanwhile, the country would likely be awash in expenses arising from impacts, enervating the ability to invest in efficiency and renewable energy sources. The optimal strategy to mitigate climate change is entailed in carbon taxes motivating at least the 80% goal.

(A brief excerpt from an early version of this article was published as a Guest Column in the Ithaca Journal on July 14th 2007.)

A comprehensive resource on tax versus trade: www.carbontaxcenter.org 

Article from the conservative American Enterprise Institute favoring a tax: http://www.aei.org/publications/filter.all,pubID.26286/pub_detail.asp

For an opportunity to take direct personal political action that does not require your money, see this link to a closely related article: Initiative for local governments’ resolutions in support of a federal carbon tax.

Outreach

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       Further Information

       For a listing of the contents of this website: Site Map, for further articles, for slides taken from Sylvester’s donated presentations, and for his resumé.

More information on how to reduce emissions can be found on this website at Article, Climate Change, The New Urgency of Emission Reduction, and How to Reduce Emissions of Heat-Trapping Gasses.

For references on climate change and how to reduce emissions on the page References