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