Bloomberg Called for Carbon Tax

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!