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Carbon Tax isn't Best Solution for Global Warming

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New York Times columnist Thomas Friedman's recent article "Show Us the Ball" claims that a carbontax would not only be simpler and more transparent, but have fewer special provisions, accommodations, or loopholes than a cap and trade system.? The flaw in Mr. Friedman's logic, however, is comparing a "real-world" cap and trade design like the draft legislation released by Representatives Waxman and Markey with an idealized carbon tax design. Although the legislative process for adopting a carbon tax would involve the same pressures for special accommodation as a cap and trade bill, if emissions reductions are the end game in passing climate legislation, cap and trade has advantages on several fronts:

1) Cap and Trade Policy Guarantees Emission Reduction

If the goal, shared by President Obama and others, is to reduce the amount of greenhouse gases in the atmosphere by 80% or more, a cap and trade program that gradually reduces the amount of CO2 permits available to emitters over a 40 year horizon is far more effective at achieving this goal than a tax. A carbon tax can only attempt to change consumer behavior and is therefore one or more steps removed from actually achieving the desired emission reductions within an acceptable time frame. In other words, a cap directly regulates the quantity of dangerous pollution, whereas the abatement results of a tax are less certain.

2) Cap and Trade Creates Better Economic Certainty for Investment

In order to make the investments in clean energy necessary to achieve our goals, investors need a clear price signal. Cap and trade provides a 40 year framework of economic certainty that will allow investors to base their investments on what industry thinks the price of carbon is today and will be far into the future. A carbon tax would only offer what government thinks a carbon tax rate needs to be on annual basis in order to attempt to achieve the desired emissions reductions. Furthermore, under a cap and invest strategy, incentives can be put in place to accelerate these investments, creating jobs through a combination of supply push and demand pull, thereby helping the economy recover faster than it would under a tax.

3) Cap and Trade's Program Costs are Countercyclical

The price of carbon under cap and trade legislation will fall as the CO2 output from the economy slows and rise as the CO2 output increases. In other words, carbon prices are countercyclical and wouldn't provide an undue burden on the economy during periods of economic stress. This is in direct contrast to Mr. Friedman's idealized carbon tax policy that would continue to ratchet up the costs of carbon emissions over time regardless of the direction the economy takes. This makes cap and trade more effective and more responsive than a carbon tax, which needs to take into account how much progress the carbon tax has made historically before it can decide whether or not to provide economic relief during an economic slowdown.? ?

4) Cap and Trade Policy is Less subject to Political Intervention  

While the regulation of a cap and trade market for CO2 will likely be reviewed every five years, the program itself will be designed to operate for nearly four decades and will not be subject to the same intense political pressure that a carbon tax would experience. Since it is politically advantageous to under-estimate the amount of tax needed to affect behavioral changes, it is likely that a carbon tax program would be persistently behind on its reduction targets and constantly confronted with demands to? reform or abandon the program. Moreover, during periods of nascent economy growth, politicians will constantly struggle to determine the amount of increase in carbon taxes needed to avoid derailing the recovery.

5) Cap and Trade Better Supports and Advances Goals of Complementary Standards

A cap and invest program is more effective at encouraging public support for complementary policies to increase efficiency and reduce global warming pollution. For example, all energy consumers have a stake in encouraging strong standards for appliances, minimum efficiency codes for buildings, and fuel economy standards for vehicles under a cap and invest program since all of these would help to reduce the long-term market price of carbon allowances.

Carbon is a Cost - Oil Addiction is a Tax

In addition, Mr. Friedman argues that putting a price on carbon is a tax when it is actually going to be just another cost of doing business following the EPA's endangerment finding on carbon dioxide emissions. While cost still sounds like a tax, costs that motivate improved energy productivity don't carry the same negative baggage as taxes do. One tax that stands out as being extremely unhelpful to doing business in America is the tax we pay every day to keep the country addicted to oil and fossil fuels. According to the Department of Energy statistics, this "oil addiction tax" is forecast to cost us $420bln a year in higher energy costs with-in the next five years. This tax works out to $3,500 per family per year in reduced economic competitiveness, and is far more costly to our long term growth than putting a cost on carbon emissions.

In sum, while Thomas Friedman clearly understands the urgency of reducing our greenhouse gases emissions, his willingness to back a carbon tax based on its simplicity drops the ball in the climate debate. Although a carbon tax sounds like the more straightforward solution, if the goal is to achieve guaranteed emission reductions, well written cap and trade legislation will provide more economic and environmental certainty than a tax. Further, as Larry Summers recently stated, cap and trade can "spur a whole range of green investments in the present, when our economy can benefit from all the investment it can get". Investments that Mr. Friedman agrees will create jobs, accelerate the pace of the recovery, and secure our long term energy independence.

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