Taxing Carbon - Part 5

| Mon May 11, 2009 7:51 PM EDT

I promise this is the last post in this series.  (For a while, anyway.)

But there's one general point about the debate between carbon taxes and cap-and-trade that I want to make directly.  Namely this: it's an unfair fight.

Here's the thing.  Cap-and-trade is a real-world program for reducing pollutants.  We used it successfully with sulfur emissions in the 90s.  Europe is already doing it with carbon.  The northeastern states are doing it with RGGI.  The Waxman-Markey bill is a real piece of legislation that's hundreds of pages long and festooned with a hundred different compromises that will (we hope) allow it to survive the legislative sausage grinder.

And all of these variations of cap-and-trade are complicated.  When you read about them, you're immediately bombarded with jargon: auctions vs. allocations; caps, floors, offsets, and banking; upstream vs. downstream; how the exchange should be set up; how often permits should be sold; etc. etc.  Those are all real-life questions, and in any real-life plan they have to be addressed.  And they're confusing.  And yes, they all provide potential toeholds for special interests to game the system — something we should fight like banshees to keep to a minimum.

Tax advocates have no such worries.  They propose that we simply tax various fuels based on their carbon content, and voila!  We're done.  Simple and easy.

Ironically, though, the only reason they can get away with this is because of the very fact that a tax is a political nonstarter, which means there are no real-world taxes on the table.  But if there were, they'd have all the same questions as a cap-and-trade plan, plus a whole bunch of new ones.  Should it be levied upstream or downstream?  Can it be tax sheltered offshore?  Are you allowed to apply a tax-loss carryforward to your carbon tax levy?  How do you harmonize the tax with other countries?  Can I get a tax credit for reducing carbon emissions?  How are the revenues going to be distributed?  Should midwestern states that rely more on coal-fired plants get treated differently than, say, California?  What would it take to make a carbon tax on foreign oil compatible with WTO rules?

Rhetorically, tax advocates can pretend that none of these questions exist.  They're able to contrast the genuine messiness of a real-world cap-and-trade plan with a Platonic, whiteboard version of a tax plan.

But that's not how it would work.  If cap-and-trade goes down, we're not going to get a tax instead.  And if we do eventually get a tax instead, it's not going to be a clean and simple tax.  It's going to be a thousand-page monster with every paragraph the subject of a slugfest between a dozen different special interests lobbying half a dozen different congressional committees.  That's reality.

If you're going to compare cap-and-trade to a tax, honest advocates need to compare apples to apples.  We need to hear what a real-life carbon tax bill would be like.  And we should have a few dozen tax experts in the room to laugh at us while all this is going on.  The fact is, cap-and-trade isn't as complicated as it seems, and a tax isn't as simple as it seems.  In the end, though, despite the admitted complexities of cap-and-trade, at least it wouldn't be embedded within an existing 100,000-page corporate tax code.  A tax would be.  I'd keep that firmly in mind whenever you hear about how simple and clean a carbon tax would be.

POSTSCRIPT: Rasmussen reported today that only 24% of voters have any idea what "cap-and-trade" even means.  That doesn't surprise me.  When I set out to write my cap-and-trade piece for the magazine a few months ago, I originally planned to write about the debate between cap-and-trade and carbon taxes.  Very quickly, though, I realized that even among plugged-in people, very few of them really knew what cap-and-trade was or how it worked.  So I switched gears and decided to write a straight ahead cap-and-trade primer instead.  If you're part of the still-confused 76%, my piece is here.

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