Is Cap and Trade the Only Path to Carbon Reduction?

Ask an economist for the best way to reduce carbon emissions, and the answer almost always is a carbon tax: drive up the cost of emitting CO2, and then let free markets find the technologies to avoid or reduce emissions. Ask a politician, and the answer is almost always cap-and-trade: set annual ceilings for carbon emissions, sell or issue emissions allowances to the major emitters, and let them trade the allowances so that those best able to cut emissions do so first. Every half-wit knows that either scheme will drive up energy and electricity prices. But economists prefer the tax because it's technology-neutral and virtually self-administering, while politicians dislike the tax because it's a tax and prefer to make it look as if in their system the emitters are bearing almost all compliance costs.

The Lieberman-Warner cap and trade bill that was introduced in the Senate a couple of weeks ago, only to be withdrawn moments later because its backers lacked the clout to bring it to a vote, reflected the politicians' point of view. Because the tax route is so unpopular in the corridors of power, and because both McCain and Obama have endorsed cap and trade, it's been considered almost a foregone conclusion that sooner or later the United States will have a carbon trading system. But the alacrity with which the Lieberman-Warner forces folded has prompted some speculation that other approaches to carbon reduction may turn out to be attractive after all. Sure, the bill's backers figured that next year, with a strongly Democratic Congress and a president sympathetic to cap and trade, it will be much easier to get a bill through. But if they really had the courage of their convictions, shouldn't they have hung on a little longer--at least long enough to get it across to the public that this is an important item on the political agenda? A lot of editorialists and commentators certainly thought so.

One thing that alarmed the bill's backers was the insistence by its opponents, mostly Republican, on having the whole bill, which runs to hundreds of pages, read out loud in session. That's a tactic that could end up backfiring. If carbon trading will create an administrative nightmare, then the answer may be--not to do nothing about climate change--but to enact a carbon tax. Days after the bill's 2008 demise, the New York Times climate reporter Andrew Revkin drew attention in his blog to a proposal from the climatologist James E. Hansen for what Hansen calls a "carbon tax with 100 percent dividend."

Taking his inspiration from freelance economist Peter Barnes, who has proposed creation of a "sky trust" consisting of the proceeds from sales of emissions allowances, Hansen suggests an escalating carbon tax, with 100 percent of the proceeds fed directly back to the public, with each taxpayer getting the same monthly share. Hansen's formulation is geared to satisfy both economists, who don't want politicians to treat a carbon tax as just an easy source of revenue, and political progressives, who want taxes to be progressive. Since richer people tend to use more energy and emit more carbon, a carbon tax will tend to take a bigger bite than they get back, when proceeds are rebated equally.

Carbon trading has come under considerable criticism not only on the political right but the political left as well, often for overlapping and complementary reasons. The Hansen-Barnes approach could be appealing at both ends of the political spectrum, to the extent concern about possibly catastrophic climate change is real.

To the extent carbon trading loses its aura of political inevitably, the door opens for other possibilities as well. Joseph Romm, a former Energy Department official and author of a devastating critique of the "hydrogen economy" vision, has a commentary in today's Nature Reports Climate Change (June 20), in which he condemns cap and trade as too slow and indirect. Romm wants to ban construction of coal fired plants, unless they make full provision for carbon capture and storage, and at the same time provide generous tax credits and incentives for energy efficiency and low-carbon generation and fuels.

"These are all features of the climate plan of the Democratic presidential nominee, Barack Obama," says Romm, showing his hand. But note: Obama is not the only candidate proposing a direct attack on climate and energy problems. McCain said this week that he wants to add 45 nuclear reactors to the nation's fleet of atomic power plants.

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