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

The winner is!

Before we assess the struggle between carbon tax and cap-and-trade, let's consider "the known unknowns" that any effective greenhouse-gas regulation system must confront:

Which greenhouse gases are covered? The focus has been on carbon dioxide, the biggie, yet methane is many times more effective at re-radiating heat to Earth, and bringing methane under control could improve the cost-benefit equation.

Which economic sectors are covered? Although greenhouse gases come from multiple sources, some systems, like the European Trading Scheme, have concentrated on electricity.

Who goes first -- the developed economies, which have spewed greenhouse gases for centuries without control? Or should developing countries like China, which is edging past the United States in total carbon emissions, be regulated from the get-go?

Who is the enforcer? National bodies? An international body?

One last question may be the key: How well will it work? We were discouraged by an email from Jon Hovi, of the department of political science at the University of Oslo, Norway (see #4 in the bibliography), who told us, "Both systems will be difficult to enforce. Moreover, not only is it difficult to design an enforcement system that effectively deters participating countries from being non-compliant; it is also unlikely that effective enforcement would be politically feasible in an agreement that includes all major countries. Hence, we might have to choose between an agreement with broad participation but without effective enforcement and an agreement with effective enforcement but with limited participation. If so, the former option might well be preferable."

Energy production has most CO2; Agriculture, most Methane
Electricity, agriculture, industry, transportation are among the largest sources of greenhouse gases.
5 tall silver cylindrical turbines rise from cement base.
A combined-cycle gas turbine power plant cuts greenhouse gases by capturing waste heat, and because the methane in natural gas contains less carbon per unit of energy than coal or oil. However, gas turbines cost more to build in India than in developed countries, according to a 2006 report.

Winner by a judge's decision...

Today, with both California and the European Union signed on, the skids are greased for cap-and-trade. But the situation can change, Metcalf says. "I don't want to be naïve; cap-and-trade is the preferred route today, but now we are talking about auctioning permits, which we were not before. And we are talking about mechanisms that will make cap-and-trade function like carbon tax."

But is the current downturn a sensible time to start taxing or limiting fossil fuels? Although green energy is less profitable with oil so cheap, the argument can be stood on its head. "That's precisely why we need a carbon pricing policy," says Metcalf. "When oil was $140 a barrel, wind projects for electricity could stand on their own feet. Now with the price collapse, there is all the more reason to have a carbon pricing policy," which would make environmentally destructive fuels like oil and particularly coal more expensive and make wind and other non-carbon sources more competitive.

Methane in the World's Atmosphere
Stratospheric methane image colored in vs surface methane.
The distribution of methane, a powerful greenhouse gas, at the surface and in the stratosphere, as calculated by a NASA computer model. Methane is created near the surface, and carried into the stratosphere by rising air in the tropics. A 2005 study found that methane may be causing twice as much warming as previous estimates. (ppmv = parts per million by volume).
Images: (top) GMAO Chemical Forecasts and GEOS-CHEM NRT Simulations for ICARTT; (bottom) NASA GSFC Atmospheric Chemistry and Dynamics Branch. NASA

The energy system is a multi-trillion dollar investment, and major facilities are expected to operate for many decades, Metcalf notes. "Because of the size, and the time frame involved, stability and predictability are enormously important when you look at this kind of investment." Right now, the politics favor cap-and-trade, based on the fact that it's not called a tax, but if cap-and-trade continues to gain the law upper hand, the prg should be as smart and fair as possible.

But that's another article.

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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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