....Cap and trade is the right debate to be having because it focuses the discussion on how to change the fundamental economics of fossil-based energy. But ultimately cap and trade is the wrong solution; superior means exist to achieve the results we need not only for the environment but also for national security and our economy. A better solution is a strategically targeted "ceiling" tax on carbon combined with a tax dividend.
Cap and trade sounds good on the surface. Seemingly it would allow the market the freedom to choose among implementing technologies that reduce greenhouse gas emissions, paying to use existing technologies that emit greenhouse gases, or paying for offsets from another entity. But cap and trade is inherently flawed in its complexity and the slow rate at which it can propel change.
The potential for loopholes and corruption, both through the specifics of how the law is implemented and the trading markets that will be created, are enormous. If you have read my blog previously, you may be surprised to hear me come out against a seemingly market-based solution like cap and trade. Many assume that because cap and trade worked for acid rain, it will work for greenhouse gases. But for markets to work well there needs to be transparency around both price and what actually is being purchased. As the graphics shown help illustrate, the complexity of greenhouse gases are enormous compared to the simplicity of sulfur emissions from coal plants. The challenges around accurate and transparent accounting of how much carbon is emitted or "re-sequestered" through an offset is fairly daunting.
There have already been significant challenges around carbon offsets with the European cap and trade efforts. So far in Europe, the impact on greenhouse gas emissions has been much less than desired (for additional reading see the
upcoming book by Roger Pielke). Because of these factors, not only does cap and trade create risk of corruption because of the challenges around defining exactly what has been emitted or how much an offset has recaptured, but its ability to actually achieve the desired reduction in greenhouse gases also falls into question.
Efforts to implement a cap and trade system that would be truly comprehensive would treat all long-lived greenhouse gases as equal. To make any meaningful difference, the price of carbon must be set high enough to move the meter significantly on the cost of fossil fuels . Many experts estimate that price to be as much as ten times the current price in Europe. As a result, if a cap and trade system is actually going to result in a meaningful reduction in greenhouse gas it will have an enormous impact on the economy given the scope of activities that generate greenhouse gases. In addition, the sheer process of requiring businesses to account for their emissions would lead to significant wasteful administrative costs beyond the cost of the carbon emissions themselves. Such a requirement would, however, create a great jobs program for accountants, attorneys and even investment bankers who would get paid to navigate the complicated mess that would result. This reality is why many cap and trade proposals end up being limited to areas of highly concentrated emissions that are easy to track. This effectively means focusing on power plants, which represent about 39% of the impact-weighted greenhouse gas emissions (of which 85% is from coal-fired plants). And most proposals generally leave transportation -- which produces about 33% of the impact-weighted U.S. greenhouse gases – largely unaffected.
"So what?" you say. Let's focus on reducing the 39% that is largely from coal-fired plants, right? From an environmental perspective it does not matter where we reduce emissions – just that they are reduced. But from an economic and national security standpoint it matters significantly. The U.S. is home to roughly 25% of the world's coal and supplies virtually all the coal Americans consume. Meanwhile, the U.S. imports the majority of petroleum that we consume. Reducing consumption of coal will not strengthen our national security, and the most immediate effect on our economy will be negative. Even if one doesn't believe those are important factors (hard for me to fathom but I know some feel that way), I suspect that everyone would agree that the political ability to implement something that moves the meter is critical. A policy that appeals to the left and right of the political spectrum holds the best promise.Tax and dividend, whereby a tax is placed on carbon and some, if not all, of the proceeds are distributed back to those who paid the tax, is a concept that has begun to receive discussion as a potential alternate solution. Such a system taxes based on consumption but the dividends are paid out without respect to specific consumption. So, the motivation to move to alternative fuels or implement energy efficiency remains because the dividend will still be received even if tax payment is reduced. Yet, the sting of the tax is reduced by receipt of the dividend. Tax and dividend eliminates many of the problems associated with the complexity and lack of transparency with cap and trade and it largely leverages systems already in place to tax things like gasoline, coal, etc. However, it still is flawed in that it treats all carbon as being equal. Again, while all emitted CO2 is equal from an environmental standpoint, it is not from an economic or national security standpoint. In addition, the greater the scope of the tax, the more interest groups it will upset and the less likely it is that it can ever pass Congress to become law.
The better solution, both from an efficacy and political standpoint, than cap and trade or tax and divided is a strategically placed "ceiling" tax on carbon combined with a tax dividend. Our greatest opportunity lies at the nexus where greenhouse gases are reduced, national security is strengthened and our economy is at least not harmed.
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