I spent more three hours this morning at a debate
hosted by the New York City Bar Association which was narrowly focused on a
single issue: whether the US government should implement a carbon tax or whether
it should go with a cap-and-trade system. I went into the debate on the side
of the cap-and-traders, but alive to the fact that a lot of very
smart people have put their weight behind a carbon tax. So I was willing
to change my mind if I heard some good arguments in favor of the tax. I didn’t.
That said, however, the two debaters on the side of the carbon tax, Dan Rosenblum
and Jim Barrett, were very impressive and made some great points. Barrett, in
particular, seemed to be very plugged in to political considerations, and was
compelling on the question of the impact of climate change, and climate change
legislation, on America’s poorest. Environmental groups, he pointed out, tend
to lead with pictures of windmills and polar bears, not the 700 diesel trucks
per hour which drive directly in front of an elementary school in Trenton, New
Jersey. It’s in places like that – and of course New Orleans – that
the ill effects of our carbon-spewing lifestyle are most keenly felt, and they’re
felt disproportionately by poor, black Americans. Yet it’s also the case that
poor black Americans have significantly larger carbon footprints than their
poor white counterparts, which means that unless legislation is designed very
carefully indeed, they will also bear the regressive brunt of any carbon tax
or cap-and-trade system.
And there’s no doubt that either system, if it is to work in its avowed aim
of reducing carbon emissions, will raise prices for consumers. Cap-and-trade
might not have the word "tax" in its name, but it has the same effect.
In fact, as Billy Pizer noted in the debate, one of the huge advantages that
a cap-and-trade system has over a carbon tax is that, tweaked enough, you could
use a cap-and-trade system to exactly replicate a carbon tax. (Auction
everything, put in a safety valve, measure as far upstream as you like, etc.)
In other words, anything you can achieve with a carbon tax you can achieve with
a cap-and-trade system – but the opposite is most emphatically not
Specifically, both sides agreed that given the way that the US government is
constructed, one can’t expect much in the way of innovative ongoing legislation
on this front. One a system is set up, that system is going to remain for decades.
A carbon tax might be raised or lowered, but it will remain a carbon tax. A
cap-and-trade system, by contrast, would be much more flexible. At the outset,
it might behave quite similarly to a carbon tax, targeting carbon prices rather
than emissions reductions. But if you used a cap-and-trade system to do that,
it would me much, much easier to move over time to a system which targeted emission
reductions rather than carbon prices.
This was one of Jon Anda’s main points. Any successful policy, he said, has
to at least keep open the possibility that we will choose in future
to restrict global warming to 2 degrees celsius more than pre-industrial levels.
It’s entirely possible that scientists investigating feedback loops will discover
that any warming above that level would be catastrophic. We don’t know. But
only a cap-and-trade system would create a mechanism which would make that possibility
achievable. "I don’t want to tell my grandchildren that we tried taxing
CO2 and it didn’t do much good, and sorry," he said.
Anda even came prepared with a (not very catchy) slogan: a successful policy,
he said, "has to be a dynamic hedge of fat-tail CO2 risk". If it turns
out that our carbon emissions are rising too far, too fast – or not falling
fast enough – then the system has to be able to dymaically adjust to that,
and that’s something a carbon tax finds pretty much impossible to do.
What’s more, most of the most exciting carbon-reduction technologies only become
economically efficient when carbon-emission prices get very high indeed: around
$75 per ton or so. Now Anda isn’t advocating a cap-and-trade system where prices
start off that high. But the genius of any cap-and-trade system is that even
if prices aren’t there today, there’s a non-zero chance that they will be there
in the future. So it can make economic sense to invest in those technologies,
after discounting for the likelihood that they will be profitable in the future.
If a carbon tax, by contrast, is never slated to reach $75 per ton, then no
research on those technologies will ever get market funding.
The best argument for a carbon tax, by contrast, was that it is less legislative
work: it could be built in to a big 2009 tax bill. But given the number of cap-and-trade
proposals already in front of Congress, and the fact that there seems to be
very little real Congressional support for a carbon tax, that argument is pretty
weak. It might also be easier to slap import tariffs on high-carbon-footprint
goods from the likes of China if the US was operating a carbon tax system rather
than a cap-and-trade system. But that’s a question of the way that WTO regulations
are worded, and I’m pretty sure that no one thinks the wording of WTO regulations
should drive a question as important as this one.
Ultimately, the most compelling argument is the flexibility/optionality argument.
Think of a cap-and-trade system, Pizer says, as a big machine with a whole bunch
of dials. "You can dial certainty on the cap versus certainty on the cost,
and you can dial free allocations versus auctioned allocations," he says.
By fiddling with the controls, you can basically get anything you want –
which is a crucial feature given that we really don’t know exactly what problems
the cap-and-trade system is going to be asked to solve in the future. If Congress
is worried about the price uncertainty inherent in a cap-and-trade system, they
should be much more worried about the cost-of-environmental-damage uncertainty
inherent in global warming mechanisms – something which demands flexibility
in terms of our response.
It’s also worth noting that Pizer’s dials can be adjusted to match other cap-and-trade
systems globally, creating a worldwide liquid and fungible market in carbon
In the wake of my
visit to Carnegie Hall last night, I’m reminded of the case of Zankel Hall,
its new underground venue with flexible seating. Rather than simply construct
an old-fashioned shoebox, the architects of Zankel Hall ensured that all manner
of different performance and seating configurations would be possible. Now in
practice the hall opened with the old-fashioned shoebox configuration, and has
stubbornly stayed that way ever since, despite many performers and performances
which might have been better served with different seating arrangements. (I
suspect the reason for this has something to do with the stagehands’ union;
I’m not sure, though.) But this doesn’t mean that building a flexible hall was
a bad idea. The hall might not get changed at the moment, but it’s likely to
achieve its potential in the future. And that possibility alone justifies the
architects’ decision to build in that flexibility.
Similarly, if you want to impose a carbon tax, do it using a cap-and-trade
mechanism, and then turn the dials as much as you need to in order to replicate
the tax. In a couple of decades’ time, you’ll be thankful.