Three Answers from Charles Komanoff on Carbon Taxes

I'd like to thank Charles Komanoff of the Carbon Tax Center for graciously and intelligently responding to my three questions for him from last week. He makes some good and strong points, I think. And so I hand my blog over to Charles:

FS: Please explain how a carbon tax would be simple, transparent, or equitable, compared to a cap-and-trade system.

CTC: Simple: The carbon tax would be one number — so many dollars per ton of carbon (though increasing over time) — levied at the most-upstream point where the fuel is extracted or imported. Since fuels’ heat and carbon content are already contractually recorded, no additional measuring would be required. Yes, provisions would be made for possible carbon sequestration, border tariffs and the like, but overall, a carbon tax stands in contrast to cap-and-trade as a Mozart sonata to a Wagnerian opera. We challenge cap-and-traders to come up with a 25-words-or-less description that a majority of Americans can understand.
Transparent: The carbon tax level would be chosen by Congress and written in the tax code. No mystery. Cap-and-trade will require a big book of rules, not to mention an army of auditors, to cover such fortune-making (and breaking) matters as: Which emissions get grandfathered? Can allowances be banked for future use? Can they be traded internationally?
Equitable: Across the demographic spectrum, spending on energy declines as household incomes fall, but the percent of income spent on energy rises. Either method for putting a price on carbon will be regressive unless tax-shifting or rebating is built in. The likelihood that revenues will be used to ameliorate regressive impacts is far greater with a tax, since the magnitudes will be known in advance and the process will be more public.

FS: What’s wrong with having cap-and-trade “dollars flow to market participants”? And surely the market knows better than the government how best to spend money to reduce emissions — wasn't that proved by the market in sulfur trading?

CTC: We agree that an economy-wide carbon price, whether delivered via a tax or cap-and-trade, will be far more efficient at reducing emissions than the usual jumble of government entitlements. Our characterization should have referred to market insiders, not participants. The bevy of consultants, financiers, traders and lawyers fillings those $2,500-a-day seminars on carbon trading expect to be well-compensated, and not just while the market rules are being formulated but on an ongoing basis. Cap-and-trade requires lubrication with generous trading fees, which will siphon off much of the carbon revenues and intensify the potential for an anti-carbon-pricing backlash. Analogizing to the successful sulfur-trading market is dubious, as the necessary carbon market will be up to 100 times larger and entail price pain to consumers. Without compensatory tax-shifts and/or rebates, we can kiss the whole enterprise — carbon-pricing and climate stability — goodbye.

FS: You say that a carbon tax would provide certainty about energy prices. Energy prices aren’t certain now, with no tax; why should they be certain when there is a tax? And why would energy prices be more volatile under a cap-and-trade system? I understand that the market in emissions rights might be volatile, but once an emitter has bought a certain number of rights, his prices are just as certain as if he was paying a tax, no?

CTC: Yes, once an emitter has bought carbon allowances his price is locked in, but so what? Ahead of that purchase, the price he pays will be extremely variable due to fluctuations in demand resulting from the economy and the weather. Far more importantly for Earth’s climate (and for climate-dependent humans and other beings), a graduated carbon tax will lend increased predictability to the future price path of fuels and energy, thus making it possible — finally! — for millions of carbon-critical decisions (my home purchase, your car purchase, his factory location, her airframe design) to be both economically rational and climate-protecting. As Heisenberg might have appreciated, carbon-pricing lets either the future carbon level or the future carbon price, but not both, to be fixed in advance. Contrary to Environmental Defense and other cap-and-trade adherents, it’s the latter that matters more. A recent L.A. Times editorial said it all: “Entrepreneurs and venture capitalists prefer stable prices so they can calculate whether they can make enough money by building a solar-powered mousetrap to make up for the cost of producing it.”