Carbon Taxes or Cap and Trade for Overnight Success?

A debate is raging over whether the next president of United States (we’ve given up on this president taking action) should propose carbon taxes or cap and trade. We need progress now. I will support whatever produces concrete reductions in CO2 emissions immediately and over the long term, meeting the necessary schedule. But carbon taxes are what will actually do the trick.

As far as I can tell, Cap and Trade doesn’t touch the 33% of emissions that come from the transportation sector because CaT is targeted at big industry and utilities. These big players will be forced to buy, trade, and sell for the right to emit. I don’t see how that touches you and me driving our cars (20% of America’s CO2 emissions).

A recent report by Robert Stavins of the Brookings Institute argues that Cap and Trade is less susceptible to political shenanigans and more likely to produce real outcomes. But that certainly hasn’t been the European experience. A New York Times article tells the story of an incinerator in China, financed by Europeans buying carbon credits. The Europeans paid a 100-fold markup on the cost of the reductions achieved by improving the Chinese plant, with plenty of middle men getting rich with little environmental advantage.

Carbon Taxes, on the other hand, will impact every person and sector of the economy. We will all be aware on a daily basis of the cost of our choices (drive or transit? lettuce from Chile or the one from the local farm? Insulate or turn down the thermostat?) and be able to make trade-offs based on our own priorities.

People respond quickly and immediately to price signals as I have learned from Zipcar (where people reduce the vehicle miles they travel by as much as 45% because they decide that it simply isn’t worth $8-$10/hour to go buy some ice cream or return the video). London and Stockholm’s congestion pricing schemes illustrate this reality more overtly. When they turned on congestion pricing, congestion dropped by 20-25% overnight -- literally, not metaphorically. And when Stockholm turned theirs off after the seven-month trial, it increased by 25% immediately, overnight in fact. And this is what we need, overnight success.

Stavins argues that CaT can deliver results, while carbon taxes might not. It'll take years for the investments in cleaner technologies and infrastructure to actually reduce emissions. We don't have time for these investments to be conceived, approved, drafted, built, run over schedule, etc. While we want these improvements in the long run, we need results today.

I recommend that we set the tax rate at whatever is the right price to deliver the desired reductions. We set the US CO2 emissions goal for each year and make a plan for the next decade. Then we set the price of the carbon tax. We review emissions quarterly. On schedule? We clearly have set the price right. Too much carbon still being produced? Raise the tax. Ahead of plan? Reduce the tax. We are already using a system similar to this today: the Federal Reserve changes interest rates periodically to meet money supply goals.

What about poor people and what about middle class people? Won’t this new tax be unsupportable? No. The increases in carbon taxes can be written off against income taxes. Carbon taxes can be tax neutral with respect to your annual tax outlay. But we will be focusing everyone’s behavior on the desired outcome: reduced CO2 emissions.

Given the timeframe we have in which to get worldwide CO2 emissions on a downward path (3 years?), we need to do something that works immediately. We no longer have time to for incentive plans or opt-in plans – that was Kyoto. We no longer have time to get the fine print just right or fret about the gray areas. We need to implement the tax now, monitor closely, and adjust as needed.