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The People vs. Cap‐and‐Tax

By James Hansen

Jan 13, 2010

We can cure our fossil fuel addiction and in the process reduce emissions that cause climate change. It requires that we take actions for the public interest, not for special interests.

What we need is an approach that addresses the fundamental fact that keeps us addicted to fossil fuels: they are the cheapest form of energy, provided their prices do not have to include the damage they do to human health, the environment, and the future of our children.

For the sake of the people, especially young people, there should be a rising price on carbon emissions. The price should rise at a known economically sensible rate, so that businesses have time to plan their investments accordingly. The money collected should be put in the hands of the public, so they are able to make the purchases necessary to reduce their carbon footprint.

The money collected should not be used by Congress to invest in energy R&D. It has been shown time and again that Congress does not invest efficiently, and certainly not compared to the private sector. Private sector investments will be made if a rising price of carbon emissions is legislated through a carbon fee that makes the rising price explicit. The government already has resources to support research — it should not steal fee‐and‐dividend money from the public.

Contrary to claims of mainstream environmental groups and others politically invested in cap‐and‐trade, the legislative train has not left the station. There is time to negotiate and pass a simple transparent bill that is in the interest of the public. It should be a bi‐partisan bill that can be supported by conservatives.

Congress is accustomed to working with special interests. There is a revolving door between Congress and lobbyists. Ex‐members know the Washington ropes. The lobbyists wrote most of the pages in the 2,000‐page bills in Congress.

We, the public, cannot allow politics‐as‐usual to steamroll this topic. It is too important for the health of our economy, our children, and the other life on the planet. Fortunately, there are members of Congress who are beginning to understand the problem and move in the direction to address it.

Rep. John Larson’s with a rising carbon fee, addresses half of the task. The rate at which the fee rises in this bill is perhaps too slow, but the important point is to provide the business community and the public some certainty that carbon prices will rise so they can make decisions and investments accordingly.

Sen. Maria Cantwell’s also addresses half of the solution — distributing 100 percent of the proceeds to the public as a dividend. However, it is just as important to dispense with the “cap” approach, still present in the Cantwell bill, as it is with the “trade” aspect.

A cap is more complex than a fee (dollars per ton of CO2, applied uniformly at the source), so a cap is more subject to jerry‐rigging by special interests. But the fundamental reasons to remain dead‐set against the cap approach are these:

(1) Caps inherently cause prices to fluctuate wildly. Even if legislators attempt to outsmart the market by building in limits on the fluctuations, there is still uncertainty in the impact on energy prices. Business people need to have confidence about how prices will change in the future. Ditto, the public. If they expect prices to be fluctuating they are not as likely to make the lifestyle decisions that are needed to move us toward the cleaner future beyond fossil fuels.

(2) A cap‐and‐dividend approach is not a route to a global agreement. There is no way that developing countries such as China can accept a cap, given their state of development. The United States should be a global leader. The way to do that is to demonstrate an understanding of the global problem and provide a leadership example in solving it.


See also:

Cap-and-Trade, California Style: Who Gets the Money?

Low Carbon Prices: Just a Phase or an Indictment of Cap and Trade?

Study: Carbon Cap Has Little Impact on Small Businesses

Lawyers Advising Clients to Prepare for Economy-Wide GHG Regulation

Cap and Trade in Perspective: Stopping Acid Rain

Cap and Trade in Perspective: Carbon Trading in the Northeast

Cap and Trade in Perspective: The European Version

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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