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Cap & Trade vs. Tax


By Eileen Claussen and Judith Greenwald
Miami Herald
July 12, 2007


The climate change debate has shifted. No longer is the argument about whether
or not the world is warming, and whether or not this is a problem. It clearly
is. Now, the debate is about how to address it.

As Congress moves closer to enacting a ''cap-and-trade'' program aimed at
limiting U.S. greenhouse gas emissions, a number of commentators are touting a
carbon tax as a preferable policy. Their key arguments in support of such a tax:
1) it would be simpler; and 2) the European Union has tried the cap-and-trade
approach, and it has failed.

Both arguments are wrong.

Under a cap-and-trade program, the government sets an overall emissions cap and
issues tradable allowances that grant businesses the right to emit a set amount.
Those who can reduce their emissions more cheaply are able to sell extra
allowances to others who would otherwise have to pay more to comply. Because of
this market-based approach, a cap-and-trade system helps assure that you can
achieve your overall cap at the lowest possible cost. Cap-and-trade is the basis
of the U.S. effort to control acid rain pollution, which has achieved greater
reductions at lower costs than anyone anticipated.

Under a carbon tax, emitters are required to pay a tax for every ton of
pollution they emit. Neither system is inherently more complex than the other.
Both require monitoring and enforcement -- to determine taxable emissions and to
guarantee payment in the case of a tax, or to ensure that allowances match
overall emissions in the case of cap-and-trade. Both approaches also must
address the question of how to distribute costs and benefits. For cap-and-trade,
that means figuring out how to distribute and/or auction emission allowances;
under a tax, it means figuring out who pays and what to do with the revenue.
Yes, under a cap-and-trade program, exemptions and special treatment are
possible, and even likely. But the same goes for a tax. Only someone who has
never filled out a tax form or helped write a tax bill could expect a tax to be
simpler than cap-and-trade.

As for the cap-and-trade system in Europe, it is actually a major success. The
system covers more than 10,000 sources and has spawned a robust emissions
trading market with millions of transactions per month.

So why the bum rap for cap-and-trade in Europe? It is a classic case of no good
deed going unpunished. Cap-and-trade is the EU's primary means of complying with
the Kyoto Protocol, which requires emissions reductions between 2008 and 2012.
Looking ahead to the five-year ''compliance period,'' the EU wisely launched a
''learning phase'' for its emissions trading system. And, it has learned a lot.

For example, the European Union learned that its emissions data were flawed and
that companies could reap windfall profits by reducing emissions much more
cheaply than had been expected. The EU thus is rapidly improving its emission
data, and in 2008 it will allocate a smaller percentage of emission allowances.

To commentators appalled that the EU's system thus far hasn't achieved
significant emissions reductions or caused industry much pain, the response is
clear: they weren't trying to reduce emissions yet. They were just getting their
system up and running.

Both a carbon tax and a cap-and trade system would use economic incentives to
drive emission reductions. Cap-and-trade, however, has some important
advantages. It's more flexible for one, allowing you to link your system to
other cap-and-trade systems around the world. In today's global economy, where
companies operate in multiple countries at once, this kind of system has obvious
advantages. Cap-and-trade also allows the ''banking'' of emission allowances -
reducing emissions early and using the saved emission allowances for later.

But the key difference between a carbon tax and the cap-and-trade approach comes
down to the issue of certainty. A tax provides for cost certainty; the cost is
fixed because of the tax. Cap and trade, on the other hand, provides for
environmental certainty. What's fixed is the cap itself -- and it is based on an
assessment of the level of emissions you need to get to in order to protect the climate.

In response to a carbon tax, many emitters will reduce their emissions rather
than pay the tax, but that result is not guaranteed. With Alaska and Greenland
melting, and with droughts and other weather extremes on the rise, environmental
certainty would seem to be the more compelling imperative.

Combine that with the fact that taxes are awfully hard to get through Congress,
and the case for cap-and-trade is even stronger. Which just goes to show: We
shouldn't let carbon-tax enthusiasts use false arguments to trash a politically
feasible approach in favor of one with a snowball's chance in a warming world.
Eileen Claussen is president of the Pew Center on Global Climate Change. Judith
Greenwald is director of innovative solutions at the Pew Center.

 

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