Cap-and-Trade vs. Carbon Tax
I went to an interesting confabulation yesterday up at the Earth Institute. Jeffrey Sachs, director of the Earth Institute, and Yvo de Boer, Executive Secretary of the UNFCC, kicked around the relative merits of the financial architecture of the Kyoto Protocol. In a nutshell, Sachs thought the way we’ve been doing business in terms of creating a carbon market based on the regulatory regime of the Kyoto Protocol is insufficient to meet the Herculean task of confronting global warming. He said that a carbon tax would be much more effective. Mr. de Boer maintained that building out the regulatory scheme in an agreement that will, hopefully, be finalized in Copenhagen next year, will enable further gains than those we’ve already realized from the Kyoto financial mechanisms. The discussion got worldwide press. See this, for instance, from Reuters. (I’ve highlighted some aspects of this debate before, here for one example.)
One of the points that de Boer made regarding the usefulness of the cap-and-trade system is that it generates interest. It certainly has caught the interest of the financial industry. A market-based approach was also endorsed in Bali, de Boer reminded the audience. He also made it clear that the market mechanisms are not the only ones. He did see a role for taxes, subsidies etc. For a distillation of the UNFCCC’s views on this, see Carbon market, international offset mechanisms critical in meeting climate change challenge from their latest newsletter.
Sachs articulated a number of faults with the present system. The existence of two types of participants in the Kyoto Protocol – those subject to regulation and those developing countries who are not – is a big flaw. In a word, the US won’t sign the Copenhagen agreement if China and India, not to mention South Africa and Brazil, among others, aren’t required to make firm GHG-reduction commitments. The 1997 Byrd-Hagel resolution in the US Senate is all the proof anyone needs of that. Another problem is the amount of money available from an international regime. It won’t be enough, Sachs said. He also cited the incredible complexity of the regulatory scheme in this. It would be much simpler to tax the “upstream” sources of the GHGs: the coal mines and pits or the oil and gas wells.
One of the more salient points made was by one of the commentators, Columbia engineering professor Klaus Lackner, albeit unintentionally. He is deeply invested in developing CCS technology. He said that we can choose between CCS and phasing out fossil fuels. Unfortunately, neither Lackner, nor any of the principals in yesterday’s discussion, nor most other policy makers for that matter, consider the latter a real option. Witness for instance the emphasis on CCS in Dingell and Boucher’s discussion draft (see the last post below). From my vantage point, we are wasting precious time and money on CCS and, for that matter, nuclear power. (See my close encounter with a major proponent of nukes from the last time I attended an Earth Institute event.) We have the resources to more than meet the transition to a zero-carbon society and we ought to get on with it.
Another thread from yesterday was that taxes are politically unpalatable. Sachs said Americans are “neurotic” about taxes. I would say that’s a kind way of putting it. Another commentator, Henry Derwent, head of the International Emissions Trading Association (IETA), recounted how he’d been briefing a top British official recently and ticked off a number of the very positive aspects of a carbon tax but that the worthy high panjandrum said he’d never be reelected if he supported such a thing. (Actually, there has been a fair degree of good discussion in the UK on this. See “Oh, to be in England …”)
What I don’t think does get mentioned in these sorts of high-level policy discussions – on most subjects, in my experience – is the pervasive influence of special interests. In short, King Coal, the oil and gas majors, and most utilities don’t want a carbon tax. The cap-and-trade approach gives them not only time and space, but the opportunity to get free allowances, and an ample ability to make money on selling allowances. The financial industry has many reasons as well to support the market-based approach. A carbon tax would bring us much faster and surer to a zero-carbon world than these folks might find to their advantage.
Finally, while I’m up on my horse, I have to say that although Sachs and the others talked about the primary importance of carbon financing and technology policy, little was said about lifestyle changes. The IPCC chairman, Rajendra Pachauri, has begged us to eat less meat. We can make enormous progress with an ever-greater awareness of energy conservation and mass transit, recycling and teleconferencing. We can look at low-tech alternatives in housing and energy. And we can do away with bottled water, as I recommend the Earth Institute and Columbia University do for their events.
By the way, you can see the webcast of this event here. Check out the many extraordinary programs of the Earth Institute and, if you’re around New York City, get on their events list. And for more on the Carbon Tax, go to the Carbon Tax Center. They’ve got an impressive line-up of economists endorsing their program.
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Speaking of events, you might find this program on “Securing Asia’s Energy Future” next week at the Asia Society in NYC of some interest.