Cap and Trade
A cap and trade system intends to over time lower the emissions of the offending substance, in this case greenhouse gases. A number of permits are issued and that number is reduced over time to meet a national emissions reduction target. These permits allow a certain amount of pollution and can be traded on the free market. In most systems, any group can buy these permits, including those who don't pollute, increasing the price of the permits by reducing the supply, or permits can be
donated to non-profits as tax deductions to reduce emissions faster. This system takes advantage of the fact that some groups are better at reducing emissions than others, benefitting both emitters by allowing the efficient one to bring in additional income by selling its permits and the less efficient one by reducing the cost of meeting a standard while still reaching the ultimate reductions goal. In economics terms, a Lagrange optimization framework can be used to determine the required emissions reductions by each entity
based on its Marginal Abatement Cost. The advantage of a cap and trade system is that, while costs are not necessarily predictable or stable, which is a downside to business, it predicts the emissions level that will be achieved, which is what scientists are worried about. Many scientists claim that there is a threshold at which we must maintain emissions regardless of cost because the
cost of not complying will be huge. There is some agreement that emissions must be reduced to 80% below 1990 levels by 2050, which could be
guaranteed by this system. To reach this goal, in the near-term, permits are expected to be
$10-15 per metric ton of carbon dioxide. One advantage of a cap and trade system that businesses would be encouraged by is that it leaves innovation up to the private sector,
letting the free market find the most efficient and cost effective ways of meeting a regulatory goal. One of the most important parts of a cap and trade system is that of measuring, reporting, verification, and enforcement. Not only must all emissions be accounted for, but they must be accounted for equally, especially for exchange between different trading systems, to make sure that carbon has the same value across all systems. This is difficult because of the wide variety of sources of greenhouse gases, not all of which lend themselves to simply placing a meter in a smokestack. There will also need to be enforcement that is strong enough to
avoid cheating in the system. A variation on a cap and trade system, which has taken some criticism, is a baseline and credit system, in which polluters that are not affected by the cap can reduce emissions below a baseline can produce a credit that can be sold to those under the cap. The disadvantage of this is that it is
producing credits that are not allotted for in the permitting process. There are some who are for this as a way of producing additional income sources for those who can reduce emissions, often through carbon sequestration in biomass.
Carbon Tax
A carbon tax, similar to the gasoline tax and tobacco taxes in the US, is meant to raise the cost of producing greenhouse gases and provide a competitive advantage to alternative processes that are less carbon-intensive. Similar to a cap and trade system, the revenues would be used to help lower the impacts the tax has on low and middle-income households and help to
fund low-carbon industries and research. The hope is that a carbon tax reaches all areas of the economy, encouraging more environmentally friendly behavior through monetary incentives. One major advantage of this over a cap and trade system is that a carbon tax sets a definite price on carbon, leading to a known return on investment in energy efficient products and behaviors. It is much more predictable and
may encourage longer-term investments. If a utility company knows how much money it will cost to produce energy from coal versus wind over the next 20 years, they
may be hesitant to build new coal-fired plants. There are a number of options with regards to where to implement the tax. Some argue that it should be at the top of the supply chain, from coal mines and oil wellheads to coal shippers and oil refiners, with the idea that costs would be passed down. Others argue that the tax should affect distributors, the oil companies and utilities. Others still argue that taxes should charge consumers directly through electric bills and gasoline. It tends to be easier and less economically disruptive to tax the consumer, but it also allows for the most leakage, where emissions can occur without being taxed, and some argue it has the least impact by having a large number of small economic effects. Most carbon taxes implemented thus far have been
targeted at the consumer, with fewer at the middle level and none at the top. Carbon taxes have had a mixed history of success in Northern Europe, where they have been in place since the 1990s. Of the four countries to have implemented a carbon tax in Northern Europe, only Denmark has had a per capita reduction in emissions. One of the difficulties in implementing a carbon tax, is implementing it in a way that changes behavior instead of making the government money while permitting the same behavior to continue. The government
must provide easy substitutes for carbon-intensive fuel by providing at least some of the money raised by a carbon tax back to industry to promote clean-energy alternatives, according to the Danish model. A carbon tax has advantages over a cap and trade system because it would potentially be easier to implement and monitor, with less of a chance for cheating and evasion if implemented at the proper level. One economist has put the benefit-to-cost ratio of a tax-based system at times that of a cap and trade system. There is also the concern among environmentalists that rather than auctioning permits in a cap and trade system, they will ration out carbon allowances based on historical emissions, rewarding those that produce the most emissions today. A tax is also seen as the most fair, with the fewest opportunities to exclude certain companies or industries. Additionally, the Europeans and a number of states in the US have either implemented or plan to implement a cap and trade system that would be able to trade with a US system, creating an international marketplace, whereas the
chances of an international tax policy are next to none. The simplicity of carbon taxes allows them to be implemented much sooner than cap and trade systems and are also more transparent, which is either a benefit or not, depending on the public's perception on the need to act. Another argument in favor of a tax is that we don't know where emissions need to be in the near term and that the environmental cost of a certain level of emissions over a short time is unknown, so that a tax should be used and raised until emissions hit a long-term target. Varying emissions yearly doesn't affect climate nearly as much as varying carbon prices yearly would affect economies, the importance is on movement towards long-term goals, according to some. Some argue that we must aim to reduce carbon emissions as much as possible, and then some, and that a cap and trade system, while mandating a certain amount of reduction, also limits reductions to that level economically. Plus, most cap and trade systems currently being discussed only include 40% of our emissions, those from electricity generation, and include a safety valve, which allows for more emissions (see below). More emissions can be allowed if special interest groups lobby for waivers or extra permits, which is what happened in Europe, where the first attempt at a cap and trade system resulted in
more permits than there were emissions to begin with. There have been a number of carbon tax rates proposed by leading researchers. In general, they all start off with a modest rate that increases over time. There are a number of different proposed uses for the money raised by this tax, more of which is discussed below. The general categories, however, are offsets for the poor, research and development/credits for clean technologies, a dividend to American people, or an offset of the payroll tax, which would help make the tax more progressive by reducing taxes on the first certain amount of money earned by a person. Below is a
table reviewing four different tax strategies. They were put forth by Nordhaus
Get more info on this guy , Gilbert Metcalf of Tufts University, Robert Shapiro, co-chair of the US Climate Task Force, and the Carbon Tax Center. More detail of each plan can be found at http://www.carbontax.org/ (190)
| Source | Initial tax, $/ton CO2 | Annual Tax Increment | Tax Rate in 10 years | Tax Rate in 20 years | Revenue Treatment |
| Nordhaus | $7.40 | 2-3% | $9-11 | $11-13 | Offsets for the poor, Low-carbon energy R&D |
| Metcalf | $16.60 | 0 | $16.60 | $16.60 | Payroll tax shift |
| Shapiro | $15 | $2 | $35 | $55 | Payroll tax shift |
| Carbon Tax Center | $10 | $10 | $100 | $100-200 | Payroll tax shift/Dividend |
To give you an idea of what this translates to, a tax of $100 per ton of CO2 would translate to a tax of $0.978 per gallon of gasoline, $1.119 per gallon of diesel fuel, and $1.055 per gallon of jet fuel. This would also mean an increase in the cost of natural gas by $6.03 per thousand cubic feet, $140-$284 per ton of coal, depending on the type ($140 for lignite, $186 for subbituminous, $247 for bituminous, and $284 for anthracite), which translates to about $10 per million BTUs, regardless of type of coal. Consider making a chart and find current prices for each
Safety Valve
While not really a third option, per se, it is more of a combination of the previous two options that is much more likely to exist than a pure cap and trade system. This is more or less a cap and trade system, but has a cost point built in at which permits can be bought directly from the government as opposed to on the free market. This places a ceiling on the cost of permits, which is something that is applauded by the business world. If done properly, a cap and trade system with a safety valve can be manipulated by setting this trigger place and the number of permits available in a way that gives the government maximum flexibility with regards to the program. It can be seen as a best of both worlds, but could also become a worst of both worlds, where if the trigger price was set too low, you would essentially end up with the industries all paying the government a fixed small amount to pollute, as opposed to encouraging reductions in pollution. This system would allow the system to fail by either of the means the cap and trade or tax could fail, namely too many permits, or too low a cost of carbon.
Revenues
There has been a lot of talk about what to do with the profits from a cap and trade or carbon tax system, with the Congressional Budget Office estimating that an economy-wide cap and trade program could make
$50-300 billion per year. The first thing is to ensure that this money is actually made; some cap and trade proponents have argued for giving away the permits as opposed to auctioning them off. There are four main places that this money could go, first is back to the industry, paying for R&D, credits for green technologies, green-color job training, etc, the second option is to the public to offset the higher energy costs that any system would create, the third is into developing countries, to help them adapt to global warming and address energy-poverty issues, and the fourth option is that the money makes it to another area of the government budget and is spent on paying down debt or to fund other programs. This fourth option obviously wants to be avoided, and realistically, the third option is not likely to be a huge part of any plan, as we will look out for out own economy before others. So the debate is the extent to which money will be reinvested in industry or given back to the people, the difference between
\"cap and invest\" and \"cap and dividend\", as the Natural Resources Defense Council (NRDC) has recently put it (or \"tax and invest\", \"tax and dividend\"). The NRDC wants to start with a cap and invest and move towards a cap and dividend, however, it is more likely that there will need to be a combination of both. Industry is likely going to be able to lobby for some of the profits, but there will also need to be money returned to lower income Americans to help offset rising energy costs a tax or cap and trade system will intentionally bring. Without rebates for the poor, any tax on carbon is a regressive tax, like the sales tax, as opposed to a progressive tax like the income tax. There is also likely to be backlash to any plan that tries to pick which technologies to fund, as the government has not been particularly successful at
choosing which technologies will succeed in the past.