"Our greatest responsibility is to be good ancestors."

-Jonas Salk

Thursday, May 7, 2009

Cap & Trade vs Emissions Tax

A nice effort to untangle the cap and trade vs carbon tax mess at Yale Environment360, interviewing eight experts.
There was disagreement on many points, but on one issue most concurred. As Jeffrey D. Sachs, director of the Earth Institute at Columbia University, said, imposing some sort of price on fossil fuels “is a big improvement over the do-nothing status quo.”
If this is the best they can do, I find the cap-and-trade arguments very unconvincing both in themselves and by comparison with those advanced by carbon tax proponents.

This (from Fred Krupp of the EDF) seems to be the crux of their argument:
From an environmental point of view, the advantage of an emissions cap over a carbon tax is clear: A cap puts a legal limit on pollution. A tax does not. Guessing what level of tax might drive the pollution cuts we need to avert runaway climate change is a risk we simply can’t afford to take. Only a cap with strong emissions reduction targets — and clear rules for meeting them — can guarantee that we achieve the environmental goal.
That is the sort of argument you get from people who are not telling you their real motivations. The time constant of the problem is thirty years; the time constant of a tax rate is what? The Fed adjusts the prime several times a year. It's an argument without foundation in reality, and yet all the proponents quoted here are flogging it very hard. As usual when people advance ideas that seem obviously wrong to me, I wonder how they are motivated to convince themselves of this.

Compare to, say, Jeffrey Sachs's argument:
Cap-and-trade emissions trading seems to politicians to be the ideal solution. It is “market-based,” does not require the T-word (taxes), and can be worked out with special-interest groups in back-room negotiations. For the rest of us, however, cap-and-trade seems a funny way to do business.

A straightforward carbon tax has vast advantages. It can be levied upstream at a few dozen places — at the wellhead, the mine face, and the liquid natural gas depot — rather than at thousands or tens of thousands of businesses. A carbon tax covers the entire economy, including automobiles, household use, and other units impossible to reach in cap-and-trade. A carbon tax puts a clear price on carbon emissions for many years ahead, while a cap-and-trade system gives a highly fluctuating spot price. A carbon tax raises a clear amount of revenue, which can be used for targeted purposes (R&D for sustainable energy) or rebated to the public in one way or another, while the revenues from a cap-and-trade system are likely to be bargained away well before the first trade ever takes place.
As usual, Sachs makes sense to me. You?

Update: Joe Romm, to me unsurprisingly, falls into line, but very much to his credit allows and attracts extensive discussion in the comments to his posting. I found some of the comments very interesting indeed. There is, in particular, some very pointed criticism of the Waxman bill itself from Laurie Williams, with a link to a detailed analysis, and this very cogent comment from Dan Galpern:
Serious shortcomings in the Waxman-Markey (W-M) measure, some of which you have illuminated, coupled with the nature of the climate crisis, which you have done so much to publicize, easily could lead persons to support an alternative. While your ear may be finely tuned to Washington-insider realpolitik, it is not true that every proposal not already supported by this administration is off the table. Indeed, the W-M draft retains gaping holes with respect to auctioning, use of revenues, and so on. A full-throated debate about this legislation remains necessary and relevant.

Also, this comment on an article on DailyKos:
First, I agree that we've simply ignored this for far too long. However, I'm also concerned that the recent doom-mongering is yet another iteration of the Shock Doctrine - an attempt by the Wall Street set to push through policies which have not been very successful in curbing carbon emissions, but merely create yet another phony market for speculators to siphon off the labor of the productive. Without a doubt, a carbon tax will be more successful in achieving these goals with a lower economic cost, yet we're told: "Don't worry about that! Don't think! We have to pass cap-and-trade immediately, or we're all doomed!"

Have we really not yet learned to disregard media-driven hysteria and think rationally?

I don't think that's what motivates David Roberts or Joe Romm, but it's worth a ponder whether it's what's pushing the congress away from a simple tax/dividend scheme.

Meta: This little throw-away item has legs. Energy Collective picked it up, and David replied to it (among others, but I think I may have been the prverbial straw and David the respective camel) not only on Grist but also on Huffington.

Since this is all over the place, I need to follow up. Here is what I wrote on Grist. Huffington invariably loses my comments so I'll post it here instead.

Since we've been so far from any legislative action until now, I hadn't thought much about the exact form that action would take. So I'm a novice to this part of the debate, looking for cogent arguments. I am not yet trying to stake out a position; I am just reporting my initial reactions to the positions presented in the Yale article.

All I have heard from cappers so far, other than the argument that cap and trade creates a cap better than a tax does, is counterarguments to the arguments for the tax, and arguments from expediency ("the document already exists") indifference ("it should be quite possible to reach pretty much the same result from either direction") and failure of leadership ("the general population will not tolerate a tax but may be fooled briefly by a policy that is not called a tax, which raises energy prices and creates federal revenue").

So I have four problems:

1) Frankly, it is dishonest to create a Rube Goldberg contraption that is effectively a tax, call it somehting else, and deny that any taxation is involved. It continues the behaviors that make people distrust politics and politicians and the process that keeps the population confused about cause and effect.

2) It starts from complexity, leaving it impossible to advocate for simplicity and transparency.

3) It is presented as a fait accompli, but I have no idea where it came from. Where was the public consultation? Where was the effort to bring the public on board?

4) It smacks very much of business-as-usual, lobbyists, earmarks, etc. Businesses with Washington insider status get huge giveaways. Startups whose skills are actually in energy technology are placed at a distinct disadvantage.

In short, all the advantages you propose seem tactical rather than substantive. Even presuming those tactical advantages are true, the origins of the tactical advantage are deeply obscure from where I am sitting. It just feels like something elaborate and unclear is being sprung on me, and that most of the people supporting it are more interested in politics than in science.

Kevin Drum's rebuttal to Sachs is typical. It states pretty much that if you put the right ingredients into cap-and-trade it can act a lot like a tax. Your caliing Sachs "head-slappingly false" really doesn't seem to follow from that. If you put the right ingredients into a soup it can taste a whole lot like a chocolate cake, but that is still not what I want you to put my birthday candles in.

So again: it's easy to understand what a simple carbon tax would look like and how it could be tuned to achieve desired objectives. A compelling argument would address the follwoing:

1) What is cap and trade? Is it better in principle than a tax, and if so, why?

2) What exactly is the 700 page bill you are putting up as an alternative? (preferably with a link to the text and another link to a plain-english pointwise summary)

3) Where did it come from? Who drafted it? When? What interests are accounted for?

4) How are new ideas balanced against established interests? Specifically, given that existing interests are given permits, doesn't it systematically promote large institutional and corporate interests while suppressing startups and innovation? This is a clear weakness: what compensates for it?

Again, I am just starting to think about this. Honestly, I am nowhere near committed. Although the "head-slappingly" thing seems contrived to wedge me away, I am not entirely decided yet. Maybe all these questions are answered. All I say is that based on the Yale piece, I am becoming nervous that the answers are not going to be very compelling.


Arthur said...

Hi Michael - I for one don't care one way or the other; taxes can be very complex too when politicians get into them, and if one is more likely to be implemented than the other, well, why not go with that?

Also, Joe Romm has claimed taxes would have to be extraordinarily high ($1000/ton) to have much of an impact. I'm not sure how accurate that is, but it could be limiting in the effectiveness of the tax approach, while with a cap you supposedly know exactly how much will be emitted, and it forces people to emit less whether or not they're willing to pay $1000/ton.

However, I'm not sure I understand your question about "The time constant of the problem is thirty years; the time constant of a tax rate is what? "

Is your point that one can regularly adjust a tax rate (like the Fed adjusts interest rates) in order to make it high enough to limit emissions to whatever level is needed?

In order to make such regular changes it would need to be administered by an independent body with clear criteria on limiting emissions, not directly by any elected officials. Otherwise there will be intense pressure not to increase rates when needed - just look at the federal gas tax, still stuck at 18 cents after decades!

Michael Tobis said...

Yes, exactly. There do need to be independent criteria, but since what you are counting is quite simple, it's quite doable. It's essentially a cap with no trade.

Yes, either can be done well or badly, and yes, either can be targeted toward a cap, or fixed revenue, or whatever.

It just seems very odd. David Roberts for instance is practically apoplectic about people getting off the ranch about this.

I can't make any sense of it: to me given a choice between an elegant solution and an inelegant one there needs to be a strong argument why the elegant one doesn't work.

I see no sign of that here.

As for the $1000/ton, who knows, but if that's what the needed explicit tax is, that is what the implicit cap and trade tax will end up as, I figure.

Of course I'm a bear of little brain, so maybe someone smarter than me can explain it to me in terms I can understand. So far, the explanations I have seen are even dumber than I am. My BS meter was already wiggling but given this article it is definitely above zero now.

crf said...

In some sectors, a cap and trade system, to trade within and between sectors, may work. Doing this economy wide seems
difficult to me. For example, caps and tradable emissions on cement industry, power industries, and pulp and paper industries (and so on) could be implemented, monitored, and the market regulated. But what about small sources of carbon emissions, from small and medium businesses, or consumers, that still significantly add up? Here, it would be easiest to just tax their carbon fuel inputs, without monitoring and regulating them, because it would be difficult and relatively more expensive than for larger emitters. Maybe have tax credits if they can show they've not emitted all the carbon that was initially taxed when they purchased their fuel.

So I think you should do both.

One thing that bothers me is the idea that a cap would provide certainty of emissions. What if that assumption is wrong? It's more likely to be right if the system is well designed: but designing a system with just large emitters involved would be easier to design than a comprehensive system over all sources of emissions.

So I would say that we should try hard to design a cap system that covers not all emissions economy-wide, but only all emissions within certain sectors where a trade and monitoring would work well.

Marion Delgado said...

I agree with Sachs this time but in general it's only randomly that that occurs.