Tuesday, April 03, 2007

'Tis Better To Trade Than Tax

After Al Gore's Congressional testimony the other day (I'm going to pretend like it was just the other day; it takes me that long to get around to blogging these days), it looks like the two leading proposals being considered in Washington for doing something about greenhouse gas emissions are either to impose a carbon tax or to create a cap-and-trade emissions exchange. Here's why I think a carbon tax is likely to derail and lose its original purpose, while cap-and-trade could actually help the environment a lot:

No doubt taxing greenhouse gas emissions would spur us all to decrease the amount of those gases we produce. But, the tax would also become a source of revenue. Especially if the carbon tax were to replace existing income taxes, as Gore proposes. Before long, ongoing government programs would come to depend on that income.

Just like any other situation where two forces oppose each other, an equilibrium would be reached: at first the carbon tax would result in some reduction in emissions, but politicians would have a strong motivation to make sure we don't cut emissions too much. If a carbon tax is enstated, don't be surprised if you flip on the TV one day and see Senators arguing that we'll have to live with global warming because cutting greenhouse gas emissions will cause cutbacks in vital social services. The original purpose of the tax, the environment, would be clouded with other concerns.

Don't think the politics can get that twisted around? Rob Reiner, on the board of First Five, a health and education program for children, funded by a cigarette tax backed by Reiner, threatened to sue the California Hospital Association because it planned to put a proposition on the ballot to increase the cigarette tax. His concern: if California's cigarette sales were hurt, First Five would lose revenue:

Michael R. Blood, Associated Press: "Director Rob Reiner threatens hospitals on ballot issue"

(By the way, I wouldn't characterize Reiner as a hypocrite for taking this position. As far as I know, he's always been about helping children, never about getting smokers to quit.)

So, what about cap-and-trade? On Science Friday the other day, Bill Chameides, chief scientist for a group called Environmental Defense did a great job of explaining the benefits:

http://www.sciencefriday.com/pages/2007/Mar/hour1_032307.html

One of the nice qualities of cap-and-trade that Chameides doesn't go into is that creating a market for greenhouse gas offsets would boost the monetary value of environmental assets. For example, an acre of preserved rainforest.

Cap-and-trade isn't a no-brainer, though. It worked well in reducing acid rain in North America, but the greenhouse gas trading in Europe set up under Kyoto hasn't met targets because the cap part of the cap-and-trade was set too high. And setting the cap too low could harm the economy: as in higher prices and unemployment.

Even if cap-and-trade succeeds, I doubt it will be a magic bullet. We're going to see some climate change. The best news I've been seeing on climate hasn't been coming from the world of politics, but from an environmental technology bulletin I've started to follow:

MIT Technology Review

There are lots of ideas out, but it's going to take some time for the great ideas to develop.