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Are Carbon Taxes Really Simpler?

It's hard to find anyone who really adores the idea of using a cap-and-trade system to curb our carbon-dioxide emissions. I mean, just look at all it entails: First, the government has to set an economy-wide limit for emissions. Then it has to distribute permits—either by auctioning them off to the highest bidder or doling them out according to some complex formula ripe for exploitation by lobbyists. Then the permits get traded on a secondary market. Volatile prices, derivatives, permit banking... the whole thing gets sloppy in short order.

And that, in short, is why so many academic economists like to stump for a carbon tax. How simple, they marvel. Just stick a price on carbon and the markets will squirm and writhe away from using fossil fuels. No pollution-permit exchanges. No shady companies gaming the system or lobbying for extra permits or safety valves. No dubious offsets. Just pure Pigovian nirvana! It sounds enticing, right? Except, as David Hawkins, the climate director of NRDC, explains in this excellent post over at Grist, that's not how a carbon tax would necessarily be designed in the real world. Corporate interests would still work ferociously to carve out tax loopholes and exemptions for themselves—and the end result might not be much simpler than a cap-and-trade regime. Let's roll tape on what fate befell the BTU tax the Clinton administration tried to impose in 1993, courtesy The Washington Post:

Some opponents of the energy tax have already been accommodated with exemptions proposed by the administration itself or the House Ways and Means Committee.

For example, Clinton proposed exempting grain alcohol used as fuel, a concession to grain growers, and the House tax-writing committee proposed exempting much of the electricity consumed in the production of aluminum. But such concessions seem to have fueled the demand for even more changes in the tax.

Both Boren and Breaux come from states with considerable oil and natural gas production. For Breaux, however, the greater concern may be Louisiana's energy-intense industrial base, including chemical, glass and plastics makers that export products.

Feeding frenzy! In fact, a carbon-tax bill might even be more susceptible to the congressional monkey wrench than a cap-and-trade bill. After all, with cap and trade, you start with a scientifically based emissions target, and it's relatively easy to keep track of how every loophole and carve-out in the bill will undermine the larger goal of averting severe climate change. With a carbon tax, however, you start with a price tag, while the actual effect on emissions is uncertain, and since the emissions target is uncertain, it's much harder for scientists and environmentalists to start howling about loopholes and exemptions, since the main question—how much is this bill reducing greenhouse gases?—was hazy from the get-go.

The other particularly gruesome aspect of cap and trade are carbon offsets. Many cap-and-trade proposals would allow polluters to get "credit" by, say, planting some trees or bankrolling methane capture at a landfill. In many cases, these projects would've happened anyway, which means they don't really offset the extra pollution emitted by the company getting the credit. (Plus, in the case of planting forests, there's no guarantee the trees will even survive for as long as the "offset" carbon pollution stays in the air.) So offsets are dubious. Agreed. But the thing is, most carbon-tax proposals also include rebates for companies that fund offset projects. So this is a problem in either approach. It all depends on the design.

Bottom line: One can argue about which would work better, a carbon tax or cap-and-trade regime (though, politically, cap and trade is far and away the most likely route at this point, not least because many states have already adopted it—the case for a carbon tax would have to be outlandishly good to derail this momentum, and proponents have yet to show why it's politically feasible). Still, it's no fair comparing an idealized carbon tax dreamed up by some tenured professor to a messy cap-and-trade bill that's been pinched and poked by a gantlet of lobbyists and congressmen. No one ever looks fresh and shiny after going through that.

--Bradford Plumer