Mayor Michael Bloomberg of New York called for a national
carbon tax back in November, 2007. Where are our Oregon advocates for a carbon
tax, or, what I would prefer to start, a more focused gas tax? Yes, I think what’s
at issue is not about knowing what to do, we do know, but finding the political
will and creating the public understanding needed. Speaking at a two-day
climate protection summit in Seattle organized by the United States Conference
of Mayors, Bloomberg said (here):
…. We have to stop ignoring the laws of economics. As long as greenhouse gas
pollution is free, it will be abundant. If we want to reduce it, there has to
be a cost for producing it. The voluntary targets suggested by President Bush
would be like voluntary speed limits — doomed to fail. If we’re serious about
putting the brakes on global warming, the question is not whether we should put
a value on greenhouse gas pollution, but how we should do it. This is where the
debate is moving, and I’d like to briefly touch on the pros and cons of the two
approaches that are most often discussed: creating a cap-and-trade system, and
a putting a price on carbon.
Both of these ideas share the same goal: raising the cost of producing
greenhouse gas pollution. If you want less of something, every economist will
tell you to do the same thing: make it more expensive. Of course, none of us
wants to pay more for electricity or gas or anything else. Rising energy costs,
rising health costs, rising college tuition — the middle class is getting
squeezed left and right. But raising the cost of pollution can actually save
taxpayers money in the long run — and I’ll explain how in a minute. But first,
you might be thinking: “Wait a second. Five years ago, oil was selling at $30 a
gallon. Now it’s selling at more than $90, and we’re not buying any less of it.
So why would raising the cost of carbon make any difference?” The answer is: It
would and it wouldn’t. People are going to keep buying gas whether it costs $1
a gallon or $2.75 a gallon — or even more — because the demand for gas is
inelastic. But the demand for coal is far more elastic than oil, and so if its
price goes up, many power plants would likely switch to natural gas, which is
much cleaner, and the 100 coal plants that are now on the drawing boards would
likely convert to natural gas as well. Raising the cost of carbon would also
make alternative energy sources more cost-competitive, which would lead more
consumers and property owners to make the switch.
To raise the cost of carbon, we can take either an indirect approach —
creating a cap-and-trade system of pollution credits — or a direct approach:
charging a fee for greenhouse gas pollutants. The question is: Which approach
would be more effective? I’ve talked to a number of economists on this issue,
people like Gilbert Metcalf at the National Bureau of Economic Research, and
every one of them says the same thing: A direct fee is the better approach —
but for the politics. There’s that phrase again: “But for the politics!”
Cap-and-trade is an easier political sell because the costs are hidden — but
they’re still there. And the payoff is more uncertain. Because even though
cap-and-trade is intended to incentivize investments that reduce pollution, the
price volatility for carbon credits can discourage investment, since an
investment that might make sense if carbon credits are trading at $50 a ton may
not make sense at $30 a ton. This price volatility can also lead to real
economic pain. For instance, if 100 companies release higher emissions than
they had planned for, they all have to buy more credits, which can create a
very expensive bidding war. That’s exactly what’s happening in parts of Europe
right now, and it’s going to cost companies there billions of dollars.
There are also logistical issues with cap-and-trade. The market for trading
carbon credits will be much more complex and difficult to police than the
market for the sulfur dioxide credits that eliminated acid rain. And there are
political issues — because the system is subject to manipulation by elected
officials who want to hand out exemptions to special interests. A cap-and-trade
system will only work if all the credits are distributed from the start — and
all industries are covered. But this begs the question: If all industries are
going to be affected, and the worst polluters are going to pay more, why not
simplify matters for companies by charging a direct pollution fee? It’s like
making one right turn instead of three left turns. You end up going in the same
direction, but without going around in a circle first.
A direct charge would eliminate the uncertainty that companies would face in
a cap-and-trade system. It would be easier to implement and enforce, it would
prevent special interests from opening up loopholes and it would create an
opportunity to cut taxes.
I was in England a month ago talking to the Conservative Party, which has
proposed a series of revenue-neutral “green taxes” that would be offset by
reductions in other taxes. I believe that approach merits consideration — and
the most promising idea I’ve heard is to use the revenue from pollution pricing
to cut the payroll tax. After all: Employment is good, pollution is bad. Why
shouldn’t we lower the cost of the good and raise the cost of the bad? Studies
show that a pollution fee of $15 for every ton of greenhouse gas would allow us
to return about $500 a year to the average taxpayer. And a charge on pollution
would be less regressive than the payroll tax, because the more energy you
consume, the more you would pay. That would give us all of us an incentive to
reduce our energy use — whether that’s buying a more fuel efficient appliance,
or making the switch to compact fluorescent light bulbs, as we’ve done in New
York’s City Hall – and as I’ve done in my own home. Under this approach, even
though energy costs would rise, the savings from tax cuts and energy
efficiencies could, over the long run, leave consumers with more money in their
pockets.
Creating a direct charge for greenhouse gas pollution would also incentivize
the kinds of innovation that a cap-and-trade system is designed to encourage —
without creating market uncertainty. To do this, a portion of the revenue from
the pollution charge would be used to create an innovation fund, which would
finance tax credits for companies that reduce their greenhouse gas pollution.
As a result, companies would have two big incentives to reduce their pollution:
minimizing the charges they would have to pay and maximizing their tax savings.
And unlike a cap-and-trade system, the certainty of tax credits would be more
likely to lead companies to make the long-term investments in clean technology
that will allow us to substantially reduce greenhouse gas pollution.
Both cap-and-trade and pollution pricing present their own challenges — but
there is an important difference between the two. The primary flaw of
cap-and-trade is economic — price uncertainty. While the primary flaw of a
pollution fee is political, the difficulty of getting it through Congress. But
I’ve never been one to let short-term politics get in the way of long-term
success. The job of an elected official is to lead – not to stick a finger in
the wind. It’s to stand up and say what we believe — no matter what the polls
say is popular or what the pundits say is political suicide.
From where I sit, having spent 15 years on Wall Street and 20 years running my
own company, the certainty of a pollution fee — coupled with a tax cut for all
Americans — is a much better deal. It would be better for the economy, better
for taxpayers and — given the experiences so far in Europe — it would be better
for the environment. I think it’s time we stopped listening to the skeptics who
say, “But for the politics” and start being honest about costs and benefits.
Politicians tend to prefer cap-and-trade because it obscures the costs. Some
even pretend that it will lower costs in the short run. That’s nonsense. The
costs will be the same under either plan — and if anything, they will be higher
under cap-and-trade, because middlemen will be making money off the trades.
Yes!
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