Politically Possible Tax for Reduction of Fossil Fuel Usage in the U.S. and Worldwide

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By Sylvester Johnson, Ph.D., federalcarbontax.org, Brooktondale NY

Global CO2 emissions.

Global CO2 emissions.

Abstract

This article first outlines the key advantages of the straightforward carbon tax over “cap-and-trade” and “cap-and-auction.” Next it describes how to get the tax enacted.

Comparison of Carbon Tax with Emissions Trading

The discussion about climate change now centers on federal legislation to reduce fossil fuel emissions. The major options for widespread reductions are a carbon tax and “cap-and-trade” of emissions.

In cap-and-trade, the government sets a limit on the amount of emissions. Over time the government hypothetically reduces that limit. The purchases made by polluters in an emissions market that deals with permits to pollute are referred to as trades. In essence, the buyers are fined for polluting.

With the carbon tax, the government levies a pollution fee on the first sale of a fossil fuel after extraction or import. This “upstream” taxation applies to relatively few providers of fossil fuels, simplifying the administration. The added cost flows down to retail consumers, motivating reduction in usage.

In brief, the carbon tax is more effective than cap-and-trade because the simpler tax is easier to enforce and can be raised periodically to motivate further reductions in fossil fuel usage. In other words, if usage is not decreasing fast enough to meet goals for reductions, the Environmental Protection Agency raises the tax. To increase political acceptance of the new tax, the proceeds would fund an associated dividend that returns the tax revenues to the American people. As the tax increases over the years to meet emissions reduction goals, the dividend increases.

To build a broad base of support for continued increases, the dividends are distributed in equal amounts to all Americans, especially benefiting lower income groups who in general use less fuel. Consumers who reduce their carbon tax expense through energy conservation and through buying energy from renewable sources realize more of a benefit. This financial benefit provides strong and effective motivation to reduce fossil fuel usage.

The tax increases the value of projects to install renewable energy sources by increasing the cost of fossil fuels. The tax also makes renewables easier to invest in because returns on the investments can be estimated more accurately than under cap-and-trade with its speculative emissions trading increasing the variability of energy cost.

Smokestack.

Smokestack.

Cap-and-trade would be less effective because polluters trade away the responsibility to reduce emissions at the source. The probability of abuse of the wide-ranging, complex emissions trading system implies that the goals for emissions reduction would not be met, after accounting for fraudulent permits and inaccurately measured emissions.

If cap-and-trade under-performed it would be difficult to abandon the system because of entrenched beneficiaries such as traders, brokers, financiers, attorneys, and an extensive and expensive new regulatory bureaucracy. The income derived by those beneficiaries of cap-and-trade would add substantially to the costs of energy and of government.

Many capped businesses would devote significant effort to trying to utilize the system to continue business as usual instead of reducing emissions. Rather than wasting that effort on the distraction of cap-and-trade, the carbon tax would motivate businesses to focus on actually reducing usage of fossil fuels.

Offsets Evade Reduction at the Source of Emissions

Offsets are sold into the emissions market associated with cap-and-trade. They pose persistent problems of quantification and verification of CO2 absorbed. Beyond fundamental problems with sincere attempts to quantify offsets, often the value is substantially overstated by fraudulent application of the offset‰Ûªs cumulative effects over its entire extended lifetime against present-day emissions.

A well-known but flawed offset tries to compensate for the heat-trapping emissions from personal travel by funding the planting of trees. Certainly it‰Ûªs desirable to donate money for tree planting. However when planting is used as an offset, counterproductive effects occur. The extra blankets from the present-day emissions supposedly compensated by the offset remain over the Earth. Those extra blankets cause warming during the growth of the trees for decades. Therefore the usage of planting as an offset ironically builds in warming during those decades.

This example is a special case of the Carbon Cycle argument against offsets. In the Cycle, emissions from decomposing organic matter get absorbed during photosynthesis and by other means. Burning fossil fuels adds human-induced carbon to the natural Cycle. No known financially feasible offset removes carbon from the Cycle.

For people planning to sell offsets, the value would probably be undercut by competition from inexpensive offsets from abroad. Such offsets would worsen the balance of trade.

Offsets do not correct emissions at the source. Polluters purchase the offsets to continue business as usual. Meritorious projects must be funded by other means than offsets.

Los Angeles smog.

Los Angeles smog.

Escape Clauses Riddle Cap-and-Trade

In one version of legislation for cap-and-trade, a maximum permit “stop” price would be set by a government agency. If the permit price exceeded that amount, the emissions cap would remain the same, with the government selling extra permits beyond the planned amount. The extra permits would derail the scheduled reductions, resulting in a failure in reduction of emissions, thereby invalidating the rationale for the entire program.

Yet without this maximum permit “stop” price, also ironically called a “safety valve”, the permit price would be forced even higher, worsening variation in energy costs with the emissions market’s roller coaster ride. For example, permit prices under the EPA cap-and-trade program for sulfur emissions have jumped as much as 50% in a month.

The worsened swings in energy costs would make it more difficult to gauge probable returns on investments in renewables, tending to hinder such vital investments. That hindrance would be a counterproductive effect of cap-and-trade because it is supposed to motivate such investments.

In addition, if the increased variation in energy costs under cap-and-trade disrupted the broader economy, pressure would mount to extend the amount of borrowing of permits from future years. Increased borrowing would lessen the demand for permits and the high swing of the permit price. However borrowing permits from future years would delay reductions, defeating the purpose of cap-and-trade.

Therefore, whether with or without a “stop” price, cap-and-trade would probably perform poorly. Climate change has no escape clause.

Climate-Critical International Issues

Considering the problems with corruption plaguing many governments, cap-and-trade seems problematic with its many difficult-to-verify transactions. The transparent nature of the carbon tax makes it more readily applicable.

A carbon tax delivers revenue to a nation’s government rather than to private entities, motivating the government to enforce compliance. Each government maintains national sovereignty, arriving at its own balance between returning the tax revenues to citizens and investing in energy efficiency and renewables.

The tax would be more competent especially in the case of China, because strict caps would not be feasible there. China has decentralized, so that provincial governments make their own decisions about energy generation. Those governments see continued economic growth as essential to their survival because hundreds of millions of subsistence farmers expect to rise out of poverty. If the central Chinese government attempted to enforce meaningful caps on provincial governments, they probably would reject them firmly.

Wind turbine. US Geological Survey photo.

Wind turbine. US Geological Survey photo.

However, with a U.S. carbon tax a border tax adjustment could be made to equalize tax expense between taxing and non-taxing countries. The adjustment could influence provincial governments in China to support a Chinese carbon tax because of the effect of the U.S. adjustment on their competitiveness and growth. Moreover, the central government of China probably would succeed in imposing a national carbon tax, because it would not set up a fierce internal battle with and among the provincial governments as might setting caps region-by-region. After all, corporation taxes have long been collected nationwide in China, and the personal income tax has recently been initiated.

Concern has been expressed about damaging America’s international competitiveness if strong federal legislation got enacted. The utility of a border tax adjustment could allay that concern, easing passage in the U.S. of the legislation for a carbon tax.

Under cap-and-trade an adjustment would not be effective. In international terms a cap is a quota that restrains trade, so that the argument could be made that the adjustment would be equivalent to imposing quotas. The World Trade Organization‰Ûªs General Agreement on Tariffs and Trade does not allow quotas, setting the stage for cap-and-trade’s adjustment to be contested in a dispute lasting for years. If ultimately the adjustment were defeated as seems likely, the world would still be without a protocol for reducing emissions of fossil fuels.

Therefore cap-and-trade would not be useful for effecting the necessary long-term reductions worldwide. In contrast, the simpler carbon tax could be implemented worldwide in a relatively short time.

Problems Apply to Cap-and-Auction

The problems with cap-and-trade described above also apply to the version that would auction 100% of permits rather than giving them to polluters. Trading away responsibility to reduce still would take place in the emissions market. Likewise with cap-and-auction a part of consumers‰Ûª energy expense would be funneled into traders‰Ûª retirement accounts via the trading fees, ultimately tens of billions of dollars each year.

Political Compromises Jeopardize Reductions

Some environmental groups support emissions trading with the rationalization that legislation with “t-a-x” in it would not be enacted. However, both cap-and-trade and carbon taxes will be attacked as being taxes.

Revenue-neutral carbon taxes are more defensible than the covert tax of cap-and-trade because carbon taxes could be neutral to the economy when the revenues are returned to taxpayers. Even if cap-and-trade provided for returning auction revenues as dividends, it would burden the economy substantially due to permit variability, as calculated by the Congressional Budget Office.

Tundra. US Fish and Wildlife photo

Tundra. US Fish and Wildlife photo

Reductions need to be motivated as soon as possible. The carbon tax would be levied upstream upon the first sale after extraction or import, utilizing agencies already in place to raise the cost of fossil fuels. The tax could be implemented shortly after passage because it would require little new bureaucracy. In contrast, it would take several years to set up the bureaucracy that cap-and-trade would require to monitor the emissions responsibly to reduce abuse by polluters and to regulate the manipulations in the new and vast commodities market in emissions.

A fire of feedback cycles threatens to overheat the Earth. For that fire to sputter and go out, we have to stop fanning it.

The carbon tax makes motivating reductions simpler, with greater reliability. Supporters of the tax are listed here. Fuller treatment of these issues is given in the Carbon Tax Center and in federalcarbontax.org on the debate page.

Action Steps to Achieve a Carbon Tax

The first step for concerned readers to take is to sign the petition at pricecarbon.org. Beyond promoting the carbon tax-and-dividend in Washington, readers have the opportunity to promote it nationwide among the leaders of the grassroots, especially local elected officials.

This action is the mission of federalcarbontax.org, which makes available as a public service a sample resolution in support of the federal tax for city, town, or county governments to consider. No monetary donation is solicited. An action plan for working with local officials details how any citizen, elected or not, can help get the resolution introduced. A sample letter to an official is available.

Once the resolution is passed by the local government, it sends copies of the resolution to officials representing the government at the national level, signaling that a federal carbon tax could become politically possible. The resolution requires no further commitment on the part of the local government.

Officials inform their constituents of the advantages of the tax when they explain their votes. Local media coverage of the passage amplifies the message.

The time from contacting an official to passage can be as little as three months. Within a year, dozens of resolutions could be passed nationwide, informing the people and letting Washington know that common sense can prevail.

Following this feasible method, as more local governments pass such resolutions the increasing magnitude of the news could inspire the introduction of more resolutions, bringing greater nationwide attention to the advantages of the tax-and-dividend, and building momentum for a mandate.

Some officials may object that local governance needs to emphasize local issues. However, in a democracy we the people also need to pay some attention to broader issues that impact citizens at both the local and the national levels.

At Stake: Earth as Nurturing Mother

Let’s not put the Earth-critical process of reducing emissions into the hands of traders and financiers who are pitching deals. Let’s get this epochal, overarching environmental policy decision right, enacting the more effective, economical, equitable and timely carbon tax, not built-broken cap-and-auction, a boondoggle with many linkages for failure.