Energy: Strategies, Policy & Best Practices for the Northwest

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Carbon Tax vs. Cap and Trade
The best way to start addressing climate change is to yank subsidies from fossil fuels and put a price on carbon dioxide emissions from them. Of the two methods widely discussed for pricing carbon — cap and trade, and a carbon tax, which is better?

The January-February 2008 issue of Technology Review has a Q&A with Tufts University economist Gilbert Metcalf about how best to price carbon emissions.

Metcalf argues in favor of a carbon tax over a cap-and-trade system. He admits that a direct carbon tax would not be very effective at reducing transportation emissions. The cheapest place to get initial emission reductions will be from the electric utility sector and from industry, Metcalf says.

Metcalf may be right about a tax, but his argument is weak on many points. The basis of his case is that a tax is simpler to administer than a cap-and-trade system. When energy imports come into the picture, it gets more complicated.

He also argues that a tax is better for utilities because “they need to know what price they are going to face to make [new] plants competitive.” But the cost of a percentage tax is no more predictable than the price of coal, natural gas, or uranium.

Finally, he says that a cap-and-trade system creates unfamiliar, complicated financial instruments. “I think some of the bloom is off the rose in creating these kinds of instruments,” he says, referring to the recent financial and mortgage crisis. “It could make the tax that much more politically attractive.”

Tradable carbon allowances can’t any get less politically attractive than a new tax. Dr. Metcalf should instead examine ways to repeal tax subsidies that have been granted in perpetuity to fossil fuel industries.