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Economist Cal Kent evaluates proposals to reduce greenhouse gas emissions.
Even though the current administration has signed on to using cap and trade (CAT) as its primary approach to curbing CO2 pollution, a major debate rages among those who favor reducing greenhouse gas (GHG) emissions. That debate centers on the relative merits of using CAT or imposing carbon taxes (CT) as an alternative. Both approaches have support from economists and environmentalists.
Under CAT, government establishes a cap on the amount of CO2 and other GHG emissions that will be allowed. Tradable credits are issued to firms for amounts not to exceed the cap. Those credits can cover the amount of pollution produced by the firm or, if the firm finds it less costly to reduce emissions, to be traded to other firms. The firm also could “bank” or hold its permits until needed later or if the price increases.
Carbon taxes provide direct payments to the government based on the carbon content of the fuel being used. If a firm finds it less costly to reduce its use of the fuel or to switch to a less carbon-intensive fuel, it can reduce its tax liability.
Proponents of carbon taxes list several advantages. Because the tax is fixed and known in advance, it can be more easily budgeted by users of carbon-producing fuels, whereas emission credit prices are volatile and are traded in the same manner as other commodities on an open market.
Carbon taxes are much simpler to administer. The tax is placed on the fuel where and when it is extracted or imported. Emissions trading is more complicated, making it harder to police. Cap and trade involves higher costs from fees to brokers and exchanges. Technical issues involving offsets, monitoring and enforcement have to be solved with cap and trade, making it a more expensive alternative.
Carbon taxes provide a source of revenue to reduce the social costs of lowering emissions. Because the tax would be collected at the time the fuel was extracted or imported, the revenue could be used to promote research and development of new technologies, or it could be used to offset the increased price of energy to end users, such as low-income households or energy-intensive industries. The same effect could be achieved with cap and trade if the permits were auctioned rather than given to current emitters. The money received from the auction could be used for the same causes as carbon taxes. But the proposed legislation provides for the initial round of emission credits to be free.
Taxes are viewed as being a more comprehensive way of cutting CO2 pollution. The successful cap-and-trade programs in Europe are applied only to major industries for administrative ease. Smaller producers and transportation are excluded despite a combined contribution of around 30 percent of all CO2 emitted. The use of fossil fuels in transportation also can be covered under a tax, but is difficult to be covered under emission trading because of dispersed usage.
In reply, other environmentalists and economists prefer cap and trade because it assures that the amount of emissions desired to be reduced is actually achieved. Permit prices will fluctuate until the cap is realized. Taxes may be set too low, and the target is missed or too high forcing higher energy costs than what is necessary.
To ensure proper reduction, taxes would have to be adjusted frequently, and that would be difficult, particularly if increases were required. Emission trading also would apply to all greenhouse gases and not just to CO2, making it a more comprehensive approach.
But whichever alternative is selected, the result would be higher energy prices for consumers and a depressed economy for West Virginia.
Story By Calvin Kent
Calvin A. Kent, Ph.D., is vice president for business and economic research at Marshall University in Huntington
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on Nov 2nd, 2009
@ 5:33 am:
Both taxes and emission trading are wrong:
1. Taxes wrongly tend to assume that fossil fuels are a problem:
They are not – their emissions might be.
Since emissions can be dealt with by carbon capture and storage (even developed for cars, at Georgia Tech)
- then a neutral solution is simply to allow whatever fuel people want to use, within defined emission limits, limits that can be defined by emission tax (cars) or emission limit regulation (power stations).
Emission trading ( cap and trade)
There are many reasons why cap and trade are wrong,
whether or not you believe that emissions should be lowered
Emission Trading (Cap and Trade)
Basic Idea — Offsets — Tree Planting — Manufacture Shift — Fair Trade — Surreal Market — Allowances: Auctions + Hand-Outs — Allowance Trading — Companies: Business Stability + Cost — In Conclusion
As it happens,
if there is to be an emission policy,
Electricity and Transport sectors alone (80% of emissions) are sufficient to meet emission reduction targets,
with measures advantageous in themselves (including energy renewability, and that emissions contain much else, whatever about CO2),
long term funded for reduced consumer price impact,
without efficiency regulation, industrial carbon taxes or cap and trade schemes
.
BA
on Nov 2nd, 2009
@ 6:23 am:
It’s not just West Virginia that will pay. Every state will be impacted by this legislation that will raise energy prices and cut jobs. Write your Congressmen and voice opposition to cap and trade at .