Cap and Trade Rules
Carbon Taxes vs. Cap-and-Trade

Think Tank
January 9, 2009

Rex W. Tillerson, the chairman and chief executive of ExxonMobil Corp.,
delivered a speech in Washington yesterday endorsing a carbon tax of about
twenty dollars per ton as a better way to address global warming than the
principal alternative-policy idea, known as a cap-and-trade system, which has
already been adopted in Europe. Many large corporations, accepting the political
and policy environment signaled by the 2008 election results, are transiting
from fundamental opposition to climate-change remediation policy toward a
political-engineering phase in which the corporations will seek to influence
policy details and mechanisms. For its part, ExxonMobil has come some distance
from its earlier period of funding climate-change skeptics; its new proposal is
credible, and puts a notable foot down on one side of a carbon-policy debate
that has yet to reach resolution, and which is likely to become fluid later this
year. Tillerson said that he had been “chewing” on this dichotomous policy
question for three years, searching and failing to find a third alternative, and
that he decided Exxon had to weigh in now to avoid risking irrelevancy when the
Obama Administration and Congress begin negotiating later.

Last year, the Senate considered but defeated a cap-and-trade bill called
Lieberman-Warner. The basic idea of a cap-and-trade system is to control carbon
emissions by creating a regulated marketplace in which polluters can buy and
sell emissions while adhering to aggregate caps. The case for this approach is
that it offers an enforceable total-emissions target, achieved through a market
mechanism whose flexibility might ease necessary changes in the industrial
economy. The case against it is that it threatens to be complex to administer
and is subject to abuses; there are also differing views about whether Europe’s
experiment with cap-and-trade has worked well enough to warrant emulation. That
Lieberman-Warner made the Senate floor and came within shouting distance of
passing has encouraged some environmental groups to stay on this policy path.
All along, however, some economists who are concerned about global warming have
advocated a broad carbon tax as an alternative to cap-and-trade. The case for a
tax is that it may be a simpler and more durable policy, allowing big businesses
and alternative-energy garage-innovators alike to adjust to a global-warming
policy in a steady-state environment, motivated by price incentives, rather than
regulatory incentives. A carbon tax has appeal for the same reason that a gas
tax has appeal—if done properly, it would set a policy and price regime that
would change behavior but not require a master’s degree to understand.
Tillerson, for example, said Exxon prefers a carbon tax because its capital
expenditures are made over decades, and he feared the cap-and-trade bureaucracy
might become “a new Wall Street of energy” and whose year-to-year workings and
evolution would be difficult to predict.

I have no well-developed view about this debate, and I certainly don’t know
enough about what’s happened in Europe to offer an empirical analysis about its
example. However, long before Exxon weighed in, I was inclined to think that a
carbon tax would be preferable to the invention of a new government-regulated
marketplace—replete with executive orders, commissioners, auditors, etc.—if a
tax could achieve the same goals. This is a minority view among climate-change
types, I understand, but it is not regarded as full-blown heresy.

The majority view, as I understand it, holds that a carbon tax would also be
complex to administer—that it would also be subject to abuses—and that, anyway,
the cap-and-trade experiment is under way in Europe and should not be abandoned.
In any event, my impression has been that a carbon tax was regarded as
politically unachievable in the Senate, in comparison to cap-and-trade. That was
usually where the discussion stopped. It may be that Exxon et al, adjusting to
the political contours of 2009, will start the discussion up again; policies
they favor are almost by definition plausible politically. Obviously, Congress
is not likely to raise taxes of any kind, or impose the costs of cap-and-trade,
while the current economic crisis is in full bloom. But that is not really the
question this spring—any politically plausible new carbon tax or regulatory
regime would likely be set up to phase in only as the economy recovers. The
issue, in the meantime, is what the shape of that regime should be.


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