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The People vs. Cap‐and‐Tax

By James Hansen

Jan 13, 2010

Fee‐and‐dividend, in contrast, is a non‐tax. The fee collected at the first sale of oil, gas and coal in the country does increase the price of fossil fuel energy. But 100 percent of the fee is distributed monthly to the public as electronic deposits to the bank account or debit card of all legal residents, with half shares for children, up to two children per family.

The dividend keeps families whole while providing an economic stimulus to boot. By the time the fee reaches $115 per ton of carbon dioxide (equivalent to $1 per gallon of gasoline) the dividend will be $2,000‐$3,000 per legal resident per year — $6,000‐$9,000 for a family with two or more children.

People who keep their carbon footprint smaller than average will make money. The fee will rise gradually so people have a chance to choose more efficient vehicles, insulate their homes, and so on. The dividend will help people afford these investments. Jobs will be created as society retools the economy from high‐carbon to low.

Perhaps coincidentally, the Times published alongside my op‐ed an by their columnist Paul Krugman extolling the merits of cap‐and‐trade. Krugman asserted that cap‐and‐trade provided the basis for a successful international agreement at Copenhagen on climate.

This one‐two punch, evisceration of my article via a nonsensical title and an opposing piece by Nobel Prize winner Krugman, was not enough. By the time readers were ready for their second cup of coffee, at 10:45 a.m., an titled “Unhelpful Hansen” appeared on Krugman’s heavily trafficked blog.

Krugman is one of my favorite columnists. I am amazed at his productivity, and I agree with most of his opinions. I am not suggesting that he was given prior knowledge of my piece by Times editors — I assume that he just works fast. My hope is that he is open to persuasion. Our aims are similar, and this matter is so important that it deserves careful reanalysis.

I also think the public can distinguish the forest from the trees. This topic is not rocket science. It is mostly a matter of common sense. And, contrary to Krugman’s insinuation, most economists are in closer agreement with my perspective than with his.

First we must recognize one basic fact. Then I will describe the three main issues on which Krugman and I disagree. Then you can make up your own mind.

Basic fact: As long as fossil fuels are the cheapest form of energy their use will continue and even increase.

Consider the Kyoto Protocol, which was negotiated at a prior UN climate meeting in 1997. National emissions of signatory countries were capped at some agreed levels. Nations evaded these limits by purchasing “offsets” — putative but often illusory reduction in greenhouse gas emissions from developing countries. Offsets destroy the effectiveness of the agreement, because the scientific requirement for stabilizing climate is that the fossil fuel emissions are phased down rapidly. And some nations just ignored the limits, because there was no realistic way to enforce them. However, the fundamental problem was that “Kyoto” did not increase the price of fossil fuels relative to non‐carbon energies.

The handful of nations that claimed to have reduced their carbon emissions were joshing their citizens and everybody else. They were just pretending to be “green”. Manufacture of products based heavily on fossil fuels simply moved to developing countries, which had no cap. Then the products were flown to the developed countries, while burning aircraft fuel that is untaxed because of a 1940s agreement to support the fledgling airline industry.

Prior to “Kyoto,” global fossil fuel emissions were increasing 1.5 percent per year. Afterwards, they increased 3 percent per year. Kyoto may not have caused the increase (although shifting production to developing countries, often by coal‐fired inefficient industries, with shipping to developed countries, did not help), but it certainly did not stop it.

Now let’s address the three main arguments of Krugman, common arguments wielded by proponents of cap‐and‐trade.

Krugman Argument #1: Cap‐and‐trade is the only way to get an effective agreement rapidly.

That is a myth. In fact, every cap‐and‐trade regime has taken many years to hammer out. Kyoto negotiations dragged on a decade and were not completed. Individual countries had to be bribed to participate, yet some still would not. And the result was not successful, as we have seen.

Proposed cap‐and‐trade within the United States would be even more complex than “Kyoto.” The Waxman‐Markey and Boxer‐Kerry cap‐and‐trade bills in Congress are larded with 2,000 pages of give‐aways to special interests, soaking the public who must pay higher energy prices.

Fee‐and‐dividend, in contrast, is defined by a single number: the fee (tax) rate that the fossil fuel companies must hand over at the first sale of oil, gas or coal. All the government must do is divide this collected revenue by the number of legal residents and punch a button monthly to deliver the dividend to the public.

What is the chance that a United States cap‐and‐trade law could be a precursor for a global agreement? Zero. There is no chance that China will accept a cap. Nor should they. They are still in the early phase of their economic development.

The People vs. Cap and Tax

Amy's comment about "Murder Credits" certainly rings true. For one of the most shocking examples of the harm Cap and Trade is doing, watch the Canadian documentary, "The Refugees of the Blue Planet." You'll see hundreds of square miles of Brazilian eucalyptus plantations, showing monoculture at its worst. Native forests are being clear-cut and replanted with these trees, creating green deserts. Here's a quote from a review of this film:

"In Brazil, the large corporations have forced local people out of their homes so that the companies can harvest eucalyptus plantations to make toilet paper for the developed world. One interviewee in the documentary described multinational corporations buying land and affecting the sustainable futures of its residents as “a crime against humanity”. The eucalyptus plantations foment termite infestations which eat away at farm crops, and contribute to drought conditions, as each tree requires thousands of litres of water a month, taken from local sources. DDT, which is known to be is also sprayed on the farms to prevent termites, causes health issues for the surrounding displaced citizens."

Why eucalyptus? Maybe because it's a real money-maker. These trees grow six feet a year, so just think of the carbon credits. The corporations even provide jobs for the local farmers whose land has been "purchased." They and their children can now find work making charcoal from waste eucalyptus wood. The film shows footage of adults and children with blackened faces stoking open charcoal ovens.

The eucalyptus plantation owners must look up at the leaves of their trees rustling in the breeze, and see dollar bills.

The Equivalence of Cap and Trade and a Carbon Tax or Fee

I have considerable respect for James Hansen and his work, but I believe he overplays the difference between cap and trade and a carbon fee or tax. Let me explain.

Under cap and trade, a cap on emissions is set and marketable emissions allowances are created by the government equal in number to the tons of carbon emission equivalents allowed within the cap. These allowances are then either auctioned off or given away. An emitter of greenhouse gases would be required by law to purchase or otherwise obtain allowances for each ton of carbon equivalents released into the atmosphere. The interplay of demand and supply for such allowances would establish their actual price.

Under a carbon tax, the government directly sets the price for carbon and the volume of carbon emissions emerges as the result of market forces. A higher tax encourages greater reductions in emissions by stimulating a more substantial shift to clean energy and more energy conservation. Gasoline at 4 dollars a gallon because of a higher carbon tax will lead to more fuel efficient hybrid cars on the road than, say, 3 dollar gas. If the tax equals the carbon allowance price that would occur under cap and trade, then the two approaches to limiting emissions would be equivalent. Each would yield the same prices for gasoline and other fuels. If the government knew ahead of time the exact response of all carbon emitters, then the tax could be selected to limit emissions to a specified amount (or cap). In its most recent report, the Intergovernmental Panel on Climate Change suggests that a carbon tax (or price) of roughly $100 per metric ton by 2030 will put us on a path to limiting global temperature changes to about a 2 degree Celsius average. Either a $100 tax or a cap yielding a $100 carbon price will lead to the same result. Under either regime, the incentives to get unhooked from carbon emitting fuels will be the same. Cap and trade and carbon tax would be economically equivalent.

The problem is, no one can know ahead of time exactly what the tax should be to obtain a certain limit on emissions. If the tax turns out to be set at too low a level, emissions will be excessive. Of course the tax could be raised, but this might turn out to be politically challenging. A tax increase would incur the wrath of the fossil fuel lobby and would be tough to pull off. If the tax is initially too high, environmentalists will be happy, but industry would be livid and lobby intensively to push it down, opening up the potential for a downward tax adjustment getting out of hand. Altering a tax once it is set would be politically messy.

Cap and trade has its own unfortunate political realities (as Hansen recognizes). If the U.S. Clean Energy Act now before the Senate passes and becomes law with cap and trade in place, many carbon allowances will be given away. Environmentalists hate the idea of coal-fired utilities getting free allowances. I suspect that if Congress were currently negotiating a carbon tax instead of a cap, huge giveaways of tax revenues to utilities and others would occur just as it has for carbon allowances. It’s ugly, but to get unhooked from fossil fuels and to move to a clean energy path under a democracy will require buying the political support of entrenched interests. This is the truth of interest group politics in a democracy. In essence, the fossil fuel industry will have to be bribed to go away no matter whether we adopt a carbon tax or cap and trade (Hansen doesn't seem to get this).

The biggest political advantage of cap and trade is that it is not a tax. Taxes in this country are politically a tough sell. Cap and trade indeed results in a price being placed on carbon much in the same way a tax would—the right wing critics of cap and trade are right about this—but it is a price, not a tax. The real economic virtue of cap and trade is that we know we are getting a specific cap on emissions. We don’t know exactly what we would get from a tax. Once the cap is in place, the political struggle will be over once and for all. Establishing an adjustable tax could be just the beginning of a never-ending battle over its magnitude.

Perhaps our attitude toward taxes will change in the future. We could fund our government and reduce government deficits by taxing bad things, such as carbon emissions, instead of good things, such as earning income from work. The French government recently signed a carbon tax into law, but ran afoul of constitutional problems over exemptions of polluting industries. French President Sarkozy believes that his government will ultimately approve a revised carbon tax law that will pass constitutional muster. Unlike the U.S., the French get most of their electricity from carbon-free nuclear plants, eliminating a significant source of political opposition to a carbon tax.

For more details on all this, check out .

the people v cap-and-tax

Thoughtful argument, I was thinking along much the same lines except that the dividend paid to each individual would be tied to their carbon usage noted on their power bills. Each time they used less energy (ie reduced their carbon emissions) they got a higher dividend & vice versa. A lot more bureaucratic, granted, but could "push" the issue quicker.

The only argument for cap-and-trade that I like is the fact that already efficient energy producers in developed countries can trade their emissions with less-efficient industries in developing countries, this provides more 'bang for the buck' so to speak. It would take less money to make a major change in emissions in those countries than it would in countries already producing quite efficiently.

Just a thought

cap and trade for other undesireable activities?

What this article is missing is a concise way to show that Capt and Trade is a very bad idea. It is just another way to shovel tax money to undeserving corporations.

I didn't write this, the url is at the bottom.

Murder Credits

For instance, Wall Street could also trade the credits of various illegal activities such as murder or grand larceny. Say for instance that you wanted to murder someone, but feared going to jail? Well, you could buy murder credits, that is purchase the credits from other people who don’t plan on murdering anyone, and then when you have enough go an commit your murder. Seems pretty efficient, because the person you bought the credits from was not going to use them, and secondly, you have saved the government the time and effort from having to prosecuting you. Finally, and most importantly, Wall Street made their cut from the transaction. Seems like a great deal for everyone….except of course the person who got murdered….and their family. This essentially would be a scam to maximize revenues to the state and Wall Street, while increasing the murder rate. And this is what will happen with cap and trade for pollution credits. Those that buy and sell credits will maximize their pollution. However, we don’t want pollution maximized as a society. Now Wall Street will that that this is not true, that the credits can be managed in a win-win situation that will be better for everyone. Sure it will. However, when was the last time that Wall Street was right? About anything? Do we really want the greediest and sleaziest people on the planet setting or manipulating our pollution standards? So the people that brought us the mortgage backed security meltdown are here to improve the environment now? If you believe that, I have part of a bridge in Brooklyn to sell you.

"By the time the fee reaches $115 per ton ..."

The kind of tax (or "fee") advocated by Hansen is similar to the pending federal cap-and-trade legislation, in that both start out with a modest carbon price (e.g. of order $10/ton), and over time increase the price to a level (e.g. $100/ton) sufficient to make carbon-intense energy uneconomical. However, price incentives for decarbonization of order $100/ton could be created immediately, and at very little cost to industry or consumers, by initially focusing regulatory instruments on making renewable energy very inexpensive rather than trying to make fossil fuels very expensive. Carbon fees on fossil fuels would gradually rise, as advocated by Hansen, but fee-subsidized renewable energy would accrue an immediate and sustained high price incentive that would be the primary driver of decarbonization. This kind of regulatory approach is outlined in the following paper (which has been peer-reviewed and will shortly be published in ):

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