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The People vs. Cap‐and‐Tax

By James Hansen

Jan 13, 2010

But would China be willing to place a carbon fee on their fossil fuels? Yes, for many reasons. First, China wants to avoid, or at least minimize, the problems of fossil fuel addiction that plague the United States, such as the need for military protection of global supply lines. Second, China would be hit hardest by climate change, with several hundred million people living close to sea level and a still‐enormous agrarian population. Third, air and water pollution from fossil fuels are a huge problem in China.

China is taking the right steps. They are investing heavily in energy efficiency, renewable energy, and nuclear power, threatening to take over technical and economic leadership as the United States continues to dawdle. The Chinese government knows that replacement of fossil fuels with energy efficiency, renewable energies, and non‐carbon energies requires a price signal (in addition to other more‐targeted policies and investments).

Compare the difficulty of negotiating national carbon fee (tax) rates with the difficulty of convincing China that they should have Waxman‐Markey‐like cap‐and‐trade. Because of our historical energy profligacy, versus China’s energy penury, a U.S. cap — even expressed as a percentage reduction — has no moral standing in China. On the other hand, the Chinese leadership appears to be smart enough to realize that a rising carbon price is just what their country needs as the underpinning to policies aimed at a clean energy future.

International agreement requires principally that the United States and China agree to apply such internal fees across the board on fossil fuels at the mine or port of entry. Agreement on such action is in the best interests of both nations, making it far easier to reach than agreements on caps.

With the United States and China acting in concert on a carbon fee, Europe, Japan and other nations would surely follow. Import duties based on standard amounts of fossil fuels used in production could be applied to products from countries that did not have a carbon fee, removing any competitive disadvantage from the fee and providing strong incentive for participation in the carbon fee.

Krugman Argument #2: Cap‐and‐trade and fee‐and‐dividend are really equivalent.

Krugman says that the fee‐and‐dividend I propose is “essentially equivalent” to cap‐and‐trade. Here I may not have been clear. I do not dispute the economic theory that a cap and a fee are, in principle, equivalent. But cap‐and‐trade’s complexity allows special interests to take over, killing its effectiveness.

The devil is in the implementations, as I discuss in my book “Storms of My Grandchildren”. I believe lay people can appreciate the differences. Cap‐and‐trade’s complexity provides a breeding ground for special interests. A fee at the mine, wellhead or port of entry, with distribution of proceeds to the public, has a great advantage in simplicity. Let me note here its superiority in transparency and fairness.

One can appreciate the difference in transparency by comparing the 2,000‐page Waxman‐Markey cap‐and‐trade bill with the simplicity of a single fee (tax) rate on fossil fuels. With fee‐and‐dividend we know who gets the money – equal amounts to all legal residents. But try reading the Waxman‐Markey 2,000‐page bill to figure out who would get the money! Why do those special interests deserve it anyhow?

Regarding fairness, I should note that there is a variant of fee‐and‐dividend preferred by Al Gore. He would use the money collected by the fee to reduce payroll taxes, rather than give U.S. residents a dividend. It seems to me that a payroll tax deduction fails the fairness test, because half of adults are not on payrolls, being either retired or out of work involuntarily.

However, some economists also prefer a payroll tax deduction. Their argument is that reducing taxes on employment creates jobs and stimulates the economy. It seems to me that dividends do the same, but I suppose that using half of the collected fee to reduce payroll taxes would be an acceptable compromise. However, it would be important to be certain that the payroll tax deduction is real and matches the fee collection. With a dividend it is easier to be sure that the government is coughing up the full amount.

Krugman Argument #3: Wall Street will not be involved in carbon trading.

Krugman says that my suggestion that carbon trading will be an open invitation to Wall Street to again pillage the financial system “is bizarre.” What is bizarre, in my opinion, is his implicit presumption that government regulators can outwit Wall Street executives.

Congress can write a cap‐and‐trade bill that tries to exclude Wall Street. But to think that Wall Street will not get involved in carbon profits, directly or indirectly, is naïve. This is a free country. Wall Street banks can buy the companies most affected by carbon price.

Notice what happened after we bailed out the big banks? They decided the chump‐change in loans to home‐owners wasn’t worth their trouble. Instead they went to trading — in the stock market — making billions. Their secretive trading units are good, very good; there is a reason that they get big bonuses.

Wall Street and the big banks took us to the cleaners once — shame on them. If we allow Congress to pass cap‐and‐trade, letting the banks do it to us again — shame on us.

Trading schemes make sense only when they provide added value. Carbon trading provides mostly added cost. What we need is a transparent, honest approach that benefits the public.

The Fundamental Requirement

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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