President Obama has driven a stake in the heart of his carbon
cap-and-trade program. By transforming it from a relatively
cost-effective environmental program into a cash cow to finance
his ambitious health and social welfare agenda, he has encumbered
it with very expensive baggage. Blue Dog Democrats and
conservation-minded Republicans will gag on its cost to an
economy now racked by recession.
In broadening the goal of cap-and-trade legislation from the
paramount goal of reducing Greenhouse Gases (GHGs), primarily
carbon, and mitigating climate change, to that of raising,
conservatively, well over $600 billion in revenue for his social
programs, the President has raised the ante on this ambitious
proposal. He has guaranteed a contentious fight in Congress,
strong Democratic majorities notwithstanding.
A clear sign of what is to come was a February 3rd statement by
Senator Bob Corker (R-TN): "I believe there is a growing
bipartisan agreement that all of the revenues generated from a
cap-and-trade tax should be returned to the American people."
Evidently, the National Association of Manufacturers (NAM) and
the U.S. Chamber of Commerce, both of which supported the
President's stimulus package, are drawing a line in the sand over
the proposed cap-and-trade program.
Most economists who have studied the matter of mitigating climate
change and the daunting challenge of reducing GHG emissions have
focused on two major policy options: carbon taxes and
cap-and-trade programs. The former is more transparent than the
latter and, therefore, less popular with politicians.
There are two variants of the carbon tax option. There is one
that is designed to generate revenues and another that is
"revenue-neutral." The latter one is the preferred option from
the perspective of economic efficiency and is defensible on
supply-side and security grounds, independent of climate
concerns, since it contemplates off-setting tax cuts in either
marginal income and corporate tax rates or Social Security taxes.
In other words, the government does not gain any significant
additional revenue. Any income generated from the carbon tax is
returned to taxpayers and plowed back into the economy.
A revenue-neutral carbon tax shifts taxation away from income and
productivity ("distortionary taxes") in favor of taxing
emissions, pollution and waste. It encourages energy efficiency,
a cost saver, while reducing the nation's reliance on
international energy markets controlled by less than friendly
petroleum states. It is an example of a "No Regrets" response to
scientific uncertainty and a changing climate without putting the
entire economy at risk. It provides time for the economy to grow,
science to mature and new technologies to emerge.
"No Regrets" approaches recognize that there is certainly climate
variability out there without resolving ultimate issues as to
causality (human or natural) or duration (permanent or cyclical).
For instance, a water utility manager in the western United
States has to adapt to drought, increased forest fires, and less
mountain snowpack, which impacts the quality and quantity of
water supplies in reservoirs no matter the ultimate cause.
Jack Kemp once said, "If you tax something, you get less of it.
If you subsidize something, you get more of it." A
revenue-neutral carbon tax would give us less pollution, reduced
energy intensity and more growth and efficiency while preserving
political transparency.
Carbon cap-and-trade is the other market-based instrument offered
by economists and policy specialists. The concept is simple in
theory, less so in practice. A cap or reduction target is set for
carbon or GHG emissions that can be achieved in a flexible,
least-cost manner by regulated industries. Newer or more
efficient operations can over-control and sell credits, say, to
older, less efficient plants that may not find it economically
feasible to control their emissions. It avoids one-size-fits-all
regulation or overkill in favor of a flexible system that takes
advantage of control-cost differentials between different sources
of emissions.
The poster child for cap-and-trade programs is the one set up to
control acid rain and sulfur dioxide emissions in the 1990
amendments to the Clean Air Act supported by the first Bush
administration. This program yielded tremendous results at a
fraction of anticipated costs.
Whether or not the government should give away or sell carbon
allowances or credits in the start-up of a cap-and-trade program
is the tricky part. If the idea is to put a price on carbon and
create incentives for reducing carbon emissions, selling or
auctioning the allowances makes sense. However, this drives up
the costs for taxpayers and energy utility ratepayers with
deleterious consequences for the economy. In functional terms, it
has the same effect on the productive sector as any other tax.
What's the solution? Basically, the most economically efficient
response is similar to the revenue-neutral carbon tax: return as
much money as possible to taxpayers or ratepayers to offset the
elevated energy costs. This could be done through tax cuts,
rebates or other kinds of payments.
The Obama administration has decided not to pursue this
more cost-effective response to carbon reduction. It intends to
sell carbon allowances and pocket the proceeds to carry out its
ambitious social agenda. It views the proposed carbon
cap-and-trade program as a means to generate more federal tax
revenues rather than simply an environmental program to be
implemented in the most cost-effective manner possible.
This is a strategic error in the best of times, which these are
not. It will yield a great deal of controversy and political
acrimony at the expense of both the economy and the environment.
topics:
Taxes, Environment, Environmentalism
