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 Economics vs. global warming: Carbon tax vs. cap-and-trade!
POSTED 4 DECEMBER 2008

In this corner, the carbon tax!

Taxes are used for medical research and state programs
Graphic: LAO
Tobacco-Related Taxes These taxes raised an estimated $1.3 billion in total state revenues in 1999-00, with the proceeds used for both General Fund and special fund-related purposes. The state's cigarette tax is currently $ 0.87 per pack (20 cigarettes) and is levied on cigarette distributors. As shown, the total tax is comprised of both General Fund and special funds components.

If you don't like something (alcohol and cigarettes come to mind), you tax it. Civilians call them "sin taxes," but economists dub them "Pigovian taxes," in honor of British economist Arthur Piguo, who said, early in the 20th century, that taxes could shape behavior in desirable ways.

Although the public is a bit tax-shy, economists see taxes as a smart way to reduce carbon emissions. N. Gregory Mankiw, a professor of economics at Harvard University and former chair of President George W. Bush's Council of Economic Advisors, says surveys show that most American economists favor higher energy taxes (see #3 in the bibliography).

Ideally, the tax would be paid near the point of production: At the coal mine, or oil or gas well. From that point, businesses that buy the energy pass the price on to consumers, who find high-carbon energy more expensive, giving them an incentive to save energy or find a greener, cheaper source.

Cumulative CO2 emissions, comparing different periods
As a percent of world total emissions from 1990-2000
Although the United States and Europe have dominated the release of carbon dioxide, their share is declining. India and particularly China are gaining prominence in these numbers.

Plusses

plus signSimplicity: The carbon tax can be levied at the source: Each company that extracts coal, oil or gas pays the tax on the carbon it its production, then folds the tax into its prices. "Under the carbon tax, there is only transaction per ton emitted, that's where you pay the tax," says Barrett of Redefining Progress. "It's one transaction that the government has to be concerned about, rather than trying to track all these [cap-and-trade transactions], which involves a whole new apparatus."

plus signEconomic logic. For reasons we Why-Filers can't begin to understand, economic models prefer a tax to a permit system for controlling greenhouse gases. "From an economic standpoint, a carbon tax is more efficient," says Morris of MIT. "Especially under uncertainty, when we do not know the cost of abating emissions, you are better off using a price instrument rather than a quantity instrument."

plus signLong-term planning. "If you are a business looking to make investment decisions for 50 to 75 years, your planning will be whole lot easier if you know the price of carbon emissions," says Metcalf of Tufts. "You can back out the price from a permit [cap-and-trade] proposal, but because of volatility, you can't plan as well." Price fluctuations -- AKA the market -- are essential to the functioning of cap-and-trade.

plus signA national decision. A global carbon tax would be much easier to negotiate than a global cap-and-trade, avers Mankiw of Harvard. "All governments require revenue for public purposes. The world's nations could agree to use a carbon tax as one instrument to raise some of that revenue. No money need change hands across national borders. Each government could keep the revenue from its tax and use it to finance spending or whatever form of tax relief it considered best."

plus signMoney to spend: The revenue from carbon taxes could be devoted to funding energy research, energy conservation, national health care or anything else the government chose.

Projected greenhouse gases emissions,
by major emitting countries
China's projected increase by 2025, 118%; US 39%; EU 19%
Greenhouse gases will be growing around the world, but developing countries will see the greatest growth.

Minuses

plus sign The name: Americans are allergic to taxes, which may be (aside from "s-x") the most potent three-letter word in the language.

plus signMomentum: With California and the European Union already aboard the cap-and-trade bandwagon, and Obama stepping up, cap-and-trade has already left the starting gate.

plus signEffectiveness: An effective carbon tax might have to be a high tax. In the United States, gasoline consumption did not really start to drop until the price reached about $4 a gallon. The carbon limits in a cap-and-trade system may be more effective in controlling total pollution.

plus signRegressivity: A carbon tax would fall most heavily on the poor and lower classes, according to economists. Metcalf, however, suggests using tax revenues to offset Social Security taxes, which are the most regressive income tax, or creating an "environmental earned income tax credit" for low-income people who pay an outsize share of carbon taxes.

plus signSucking wind from the economy. Raising taxes in the middle of the recession is a recipe for disaster, but the tax could be rebated in any number of ways to make it "revenue neutral."

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Terry Devitt, editor; Nathan Hebert, project assistant; S.V. Medaris, designer/illustrator; David Tenenbaum, feature writer; Amy Toburen, content development executive

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