Changing Climate: Carbon Tax Gaining Momentum over Cap-and-Trade?

After my talk, everyone broke up into brainstorming teams to review the report’s findings and provide thoughts/insights/ideas. I sat down with one of the groups and listened in. Of the nine other people at the table, not a single one supported the implementation of a carbon cap-and-trade regime.

Hold on. How could this be? I’m at a conference dedicated to clean-energy innovation, attended by many environmentalists, technologists and business entrepreneurs, in one of our nation’s greenest cities — and no one in my group was voicing support for carbon cap-and-trade. As someone who favors a carbon tax approach over cap-and-trade, my interest was piqued. So I went around the table and asked everyone to explain why they didn’t favor cap-and-trade.

The number one response: Cap-and-trade could too easily be manipulated or gamed. In an age of global financial turmoil, much of it brought on by dubious financial creations such as credit default swaps and subprime mortgage derivatives, these folks didn’t trust the market makers (or regulators) to properly manage the process. They weren’t buying the argument that financial trading markets are always elegant and efficient. Instead, they see cap-and-trade as being rife with potential mismanagement and corruption. Equally important, they didn’t believe that a cap-and-trade system could be transparent or open enough to guarantee critical safeguards and to provide a fair and accurate pricing mechanism.

And herein lies the big “hairy” problem for proponents of cap-and-trade. If people can’t easily understand or trust something, they aren’t likely to buy into it. That’s been one of my chief complaints against carbon cap-and-trade.  It’s simply too complicated for most people, even many experts, to understand.

That’s why I prefer a carbon tax — it’s transparent and simple.  And I’m hardly alone. Democrat Al Gore, who put climate change on the social and political map with his book and movie “An Inconvenient Truth,” was an early proponent for a carbon tax. “Democrat turned Republican turned independent” New York Mayor Michael Bloomberg has called for a tax instead of cap-and-trade. Others on both sides of the political spectrum and in between who have voiced support for a carbon tax include New York Times columnist Thomas Friedman; South Carolina Republican Congressman Bob Inglis; NASA Goddard Institute for Space Studies director James Hansen; Exxon Mobil CEO Rex Tillerson; and economist  Jeffrey Sachs.

I have good friends who are ardent supporters of cap-and-trade — and they probably won’t like this column. But here’s the rub — in private many of them will admit that in an ideal world a carbon tax would be an easier, efficient and more streamlined mechanism. They just don’t believe it’s politically viable, whereas they think cap and trade is. So they support cap and trade not because it’s better but because they view it as possible.

I was speaking recently with Gregg Small, executive director of non-profit Climate Solutions (our partner in the Carbon Free Prosperity report). He stressed something to me in our conversation that I found very interesting. “Even though we prefer cap and trade, the issue that we’re talking about most is the need for an enforceable cap on emissions. We’re open to many different mechanisms for making the cap work as long as it is fair, well-designed, and achieves the desired emission reductions.”

He’s absolutely right on that point. Setting caps is a great way to guarantee that governments and industries meet critical greenhouse gas reduction goals. Part of the issue of the carbon tax vs. cap-and-trade debate is that it obscures a critical point. You can have a tax and a cap — they’re not mutually exclusive. Connecticut Rep. John B. Larson, chair of the House Democratic Caucus, has introduced a bill that could provide both. The bill, as currently written, would require an annual carbon reduction target (based on meeting an 80 percent reduction from 2005 carbon emission levels by 2050) and a price on carbon to help achieve the reduction targets. The bill proposes starting with a price on carbon of $15/ton, and increases annually at varying rates, depending on if emission reduction targets are met or not.

At the end of the day, I think we need three things in any effective carbon policy: 1) A stable and increasing price on carbon that will account for fossil fuel-based externalities in a transparent and simple way; 2) a cap on emissions that meets critical reduction targets;  and 3) a distribution of the tax revenues that reduces other taxes (keeping the plan near revenue-neutral) and distributes a small portion of the revenues (I’d recommend around $15 billion a year for a decade) to clean-tech development and deployment. By making sure a portion of these dollars is spent on technology build out, we can help keep America at the forefront of the emerging global clean-tech economy.

As more and more people speak out in favor of a carbon tax, and momentum builds, I think that a carbon tax could be just as much a political reality as cap-and-trade.  The Obama team is clearly serious about advancing clean energy, low-carbon transportation, conservation/efficiency, green buildings, and the smart grid. But as we move forward — I hope the Administration, House, and Senate take another look at the policy toolkit — and don’t dismiss or abandon the concept of a carbon tax. A price on carbon is the signal that will ultimately guarantee a true shift in our economy away from polluting and extractive industries to low carbon, renewable ones. Let’s be sure to design a carbon pricing system that’s fair; that will result in real and measurable greenhouse gas emission reductions; that can be explained readily and easily; and that is transparent to all stakeholders. The way to do that, I believe, is a carbon tax with a set emissions cap.

Ron Pernick is cofounder and managing director of Clean Edge, Inc.; coauthor of The Clean Tech Revolution; and sustainability fellow at Portland State University's School of Business.