Put a Price On Carbon

CHARLOTTESVILLE All of us who recognize that man-made emissions are creating the climate crisis also realize that the surest way to reduce and, ultimately, eliminate the problem is to put a price on fossil carbon itself. For the past eight years the only solution deemed politically viable was a cap-and-trade system because Americans aren't thought to be mature enough to use the term "taxes" in debates about public policy. Well, much has changed since Nov. 3, 2008.

What hasn't changed is the need for speed. We are already above what many now consider the safe level of atmospheric CO2

-- 350 PPM.

If speed matters then we should realize that cap-and-trade is a formula for delay. For starters, there is no consensus on how CO 2 allocations (the key to capping carbon emissions) will be distributed: free to big polluters, auctioned freely, or some sort of hybrid system? What doesn't even exist today is a working U.S. market for these carbon allocations -- and who thinks that, from the ashes of the financial markets, a new dependable system will soon arise? The much smaller carbon trading system recently inaugurated in New England has taken years to work out. The one in the EU also took years to work out and a recent GAO report says that it has failed: CO2 emissions are worse now than they were in 1990.

ANY FORM OF carbon pricing will provide incentives to develop alternative energy, even prices set on carbon by a cap-and-trade system. The real incentive, however, for such Innovation-creating investment is the long-term assurance of a stable premium on fossil fuels. Look at the dampening effect on fuel-saving investments the current swing in gasoline prices is having. Supporters of cap-and-trade point to the successful effort to reduce SO2 and NOx through such a mechanism. Yet price volatility -- on average 17 percent a month -- was a hallmark of that very limited system. Prices swings in the European Union's system are equally volatile.

Cap-and trade suffers from many other defects as well, but since speed in responding is the goal, our leaders should be urging a national, if not global, direct tax on carbon. Administered far upstream, at the refinery, mine head, natural gas processor, or port of entry, the tax is transparent, can be collected with no additional bureaucracy, and can be implemented in six months.

Economists who have studied this subject believe that, since virtually all the products that will be covered by a carbon tax are already being taxed in one way or another, a national tax could easily cover 90 percent of the sources of carbon emissions. Just last week, Rex Tillerson, the CEO of Exxon, called for carbon taxes as a "more direct, more transparent, and more effective approach" than cap-and trade.

A BIG PROBLEM with cap-and-trade is that no one wants to discuss openly what happens to the revenues derived from that system: Do they reward existing polluters, do they become another government (albeit greatly diminished because of middle-man profits) revenue stream, or is there some other way that these funds will be used?

Carbon taxes can be structured to be revenue neutral if that is what the politics demand, but whatever happens to the revenue stream will be a decision by our elected leaders and not by shadowy, unregulated financial markets.

Thomas Friedman, in Hot, Flat and Crowded, when comparing cap-and-trade to carbon taxes, opts for the latter, saying: "We have to go from 'this is the best we can do' to 'this is how we are going to do it best.'"

That is the formula for creating jobs, reducing carbon emissions, and restoring America's leadership role as we seek to save our planet in peril.

Al Weed is the chairman of Public Policy Virginia, a Charlottesville-based think tank working on climate change issues. Contact him at (434) 970-2232 or aweed@ppvir.org.