Time to Radically Rethink Carbon Pricing?

According to the conventional wisdom, the only way to discourage emission of carbon dioxide is to establish a carbon trading system, despite the cumbersome administrative infrastructure such a system requires and the controversial decisions that have to be made about permits and penalties. Why not a much simpler uniform carbon tax? If you don''t mind my echoing James Carville, BECAUSE IT''S A TAX, STUPID! But hey, it''s an all new ballgame, so perhaps it''s time to consider how such a tax could fit into the comprehensive tax reforms President-Elect Obama has outlined.

Mainstream economists have always preferred a carbon tax to a trading system because a tax would establish a completely level playing field, with organizations and individuals penalized in exact proportion to the carbon they emit; everybody would be free to adjust to the new situation as best they could, without the government having to constantly jigger the system to influence who''s coming out ahead and who''s falling behind. A carbon tax appeals to climate scientists too, for essentially the same reason. If you''re a coal-fired electricity generator, you''ll pay about twice as much tax as an oil-fired generator and three times as much as a gas-fired generator because per unit electricity you produce, coal is about twice as carbon-intensive as oil and three times as intensive as natural gas.

Politicians hate carbon taxation for the obvious reason. Once I asked a top environmentalist who had played a big role in designing California''s ambitious carbon reduction program why they had opted for carbon trading rather than taxation. ''If you can ever find me two state assembly members who like the idea of a carbon tax,'' he said, ''maybe I''ll get interested.''

Could a carbon tax look different to politicians in the context of the tax reform program Candidate Obama proposed? If the very rich are to be taxed more and the working and middle classes less, so that the Reagan and Bush tax reforms are essentially reversed, why not include a carbon tax, with proceeds earmarked for green tech R&D, relief for low-income people most sharply affected by higher electricity bills, and jobs creation in the coal-dependent states most adversely affected by higher electricity prices''precisely the mid-western battleground states, by the way, that won Obama the election.

If, say, a carbon tax were tuned to hike the cost of coal-generated electricity by 50 percent, as I have proposed in a book, the predictable effects would be roughly as follows: average electricity prices would rise 25 percent (since coal accounts for half of our power generated), prompting consumers to use energy more parsimoniously and rely on more efficient devices; wind energy would be highly competitive with coal, and nuclear energy would be quite competitive enough, so that it would require no further subsidies or guarantees; the various approaches to carbon capture and storage would have a fighting change of asserting themselves in the market over the next 15-25 years. And by 2015 or so, the United States would be in step with international efforts to curb carbon emissions.

President Obama might ask himself this: Does he want to propose yet another cap-and-trade carbon trading system that will run to hundreds of pages and be a sitting-duck target for opponents eager to portray it a tangle of red tape? Such a system will be a target too for critics pointing out, perfectly accurately, that a trading system is just a disguised, roundabout way of putting a price on''that is to say, taxing''carbon.

Perhaps President Obama would rather say that the honest thing to do is just enact a carbon tax, in a system that can easily be described in three pages, and which will be an integral part of a complete progressive tax system, in the tradition of the Roosevelts and Wilson.


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