Monday, March 16, 2009

Carbon Tax YES! - Cap&Trade NO!

According to an AP story today:

"Eight Senate Democrats are opposing speedy action on President Barack Obama's bill to combat global warming, complicating prospects for the legislation and creating problems for their party's leaders.

"The eight Democrats disapprove of using the annual budget debate to pass Obama's 'cap and trade' bill to fight greenhouse gas emissions, a measure that divides lawmakers, environmentalists and businesses. ..."

"'Enactment of a cap-and-trade regime is likely to influence nearly every feature of the U.S. economy,' wrote the Democratic senators, mostly moderates. They were joined by 25 Republicans. 'Legislation so far-reaching should be fully vetted and given appropriate time for debate.' ...

"The Democrats who signed the letter, addressed to the chairman and top Republican on the Senate Budget Committee, were: Robert Byrd, W.Va.; Blanche Lincoln, Ark.; Mary Landrieu, La.; Carl Levin, Mich.; Evan Bayh, Ind.; Ben Nelson, Neb.; Bob Casey Jr., Pa.; and Mark Pryor, Ark."

This Blog avoids partisan politics but this issue cuts across party lines and is somewhat "philosophical".

Although I am not a Global Warming "alarmist" and I do not believe human burning of previously-sequestered carbon (coal, oil, natural gas) is responsible for most Global Warming or most of the rise in atmospheric CO2, I am concerned about rapidly rising CO2 levels. I do believe we (humanity) should take action to reduce carbon footprints. I do not believe that action should be precipitous or extreme, but I do believe action is necessary. The sooner the better!


There are two general approaches:

1) Cap & Trade Carbon Permits and

2) Revenue-Neutral Carbon Tax.

Both approaches will have the effect of raising the price of energy derived from sequestered carbon as a way to reduce demand and encourage more use of alternative energy sources.

CAP & TRADE CARBON PERMITS is a complex scheme where industrial concerns estimate the amount of CO2 they are currently spewing into the atmosphere and how much they could reduce those emissions by adopting new technology. Each country adopts a "cap" on the total amount of CO2 that may be emitted and imposes shares of the cap, as carbon permits, on individual companies. Companies that can reduce their emissions below their caps may sell the excess allocations to companies that cannot. The idea is that this will encourage companies to adopt new emission-reducing technology and use the money for the resultant sale of their carbon permits to pay for the costs of the new technology. This is an idea that is great in theory, but an invitation for cheating and scheming and massive government regulation and political influence.

REVENUE-NEUTRAL CARBON TAX is a simple scheme for taxing coal, oil and natural gas at the source (or at entry to the country) on the basis of carbon content. The money raised by that tax would be immediately refunded to the population, perhaps by reducing the payroll tax or by simply mailing a check to each holder of a social security card. The carbon tax will raise the price of energy (for example by about $1/gallon of gasoline and proportionately for coal and natural gas) and provide an economic incentive for industries and consumers to reduce their usage of fossil fuels and products that are manufactured using fossil fuels. Rather than have the government regulate and check on estimates of CO2 emissions, the carbon tax will allow industries and consumers to adapt according to their own benefit.


Those in favor of a revenue-neutral carbon tax include a broad range of people, including:

James Hansen of NASA (who I said has gone overboard in his dire predictions regarding human-caused Global Warming) wrote:
"In my testimony [to Congress] I noted that a 'Cap' raises the price of energy, just as does a simple honest carbon tax on oil, gas and coal at the first sale at the mine or port of entry. 'Cap' is a pseudonym, disguising the fact that it is a tax, assuming that the public is a bunch of dummies, who will never catch on. With all its hooks and eyes, Cap&Trade will allow a lot of funny business. At least we would get a few Wall Street millionaires back in business, via speculation and gaming the Cap&Trade system (funded by John Q. Public, of course). ...

"A Carbon Tax & 100% Dividend would not let Congress enrich their favorites or divine winning technologies. Instead, the winners would be innovators who invent products with improved energy efficiency or develop carbon-free energies, which allow people to reduce their carbon tax."

Charles Krauthammer (Right-winger, writing in The Weekly Standard):
"The Net-Zero Gas Tax - A once-in-a-generation chance. ... High gas prices, whether achieved by market forces or by government imposition, encourage fuel economy. In the short term, they simply reduce the amount of driving. In the longer term, they lead to the increased (voluntary) shift to more fuel-efficient cars. They render redundant and unnecessary the absurd CAFE standards--the ever-changing Corporate Average Fuel Economy regulations that mandate the fuel efficiency of various car and truck fleets--which introduce terrible distortions into the market. As the consumer market adjusts itself to more fuel-efficient autos, the green car culture of the future that environmentalists are attempting to impose by decree begins to shape itself unmandated. This shift has the collateral environmental effect of reducing pollution and CO2 emissions, an important benefit for those who believe in man-made global warming and a painless bonus for agnostics (like me) who nonetheless believe that the endless pumping of CO2 into the atmosphere cannot be a good thing. ...

"Today we are experiencing a unique moment. Oil prices are in a historic free fall from a peak of $147 a barrel to $39 today. In July, U.S. gasoline was selling for $4.11 a gallon. It now [Jan 2009] sells for $1.65. With $4 gas still fresh in our memories, the psychological impact of a tax that boosts the pump price to near $3 would be far less than at any point in decades. Indeed, an immediate $1 tax would still leave the price more than one-third below its July peak. ...

"What to do? Something radically new. A net-zero gas tax. Not a freestanding gas tax but a swap that couples the tax with an equal payroll tax reduction. A two-part solution that yields the government no net increase in revenue and, more importantly--that is why this proposal is different from others--immediately renders the average gasoline consumer financially whole."

Others in favor: The Wall Street Journal, Ralph Nader (pardon the expression :^), Exxon-Mobil, and me (July 2007, May, October, and November 2008).

Ira Glickstein


Bhuvan Chand said...

Combating climate change may not be a question of who will carry the burden but could instead be a rush for the benefits, according to new economic modeling presented at “Climate Change: Global Risks, Challenges & Decisions” hosted by the University of Copenhagen.

Contrary to current cost models for lowering greenhouse gas emissions and fighting climate change, a group of researchers from the University of Cambridge conclude that even very stringent reductions of can create a macroeconomic benefit, if governments go about it the right way.

“Where many current calculations get it wrong is in the assumption that more stringent measures will necessarily raise the overall cost, especially when there is substantial unemployment and underuse of capacity as there is today”, explains Terry Barker, Director of Cambridge Centre for Climate Change Mitigation Research (4CMR), Department of Land Economy, University of Cambridge and a member of the Scientific Steering Committee of the Congress.

JohnS said...

Ira, I also favor the Revenue Neutral Carbon Tax, however at this time any increase in the cost of gasoline or diesel would seriously harm small businesses, particularly those that must use large pickups or trucks as part of their business. It would seem that the cap and trade plan would be less of a burden on small businesses.

Maybe the best approach is to do nothing at this time. You and I have our doubts on the effect human generated carbon emission has on our climate. You are more concerned with CO2emissons than I am. However, I am in favor of anything that will hasten our move to alternate fuels.

There seem to be at least two directions which might be taken if it is decided to impose a Revenue Neutral Carbon Tax. Both would accomplish your goal and my concern. The first would provide a tax rebate for small businesses that must use large pickups and trucks as part of their business. This tax rebate provision limited to certain small businesses would expire in X years unless renewed by Congress allowing time for new technologies to replace their dependency on gasoline and diesel.

The second, which I don’t favor, would act something like the gas rationing of WWII. A small business would be issued a “gasoline tax credit card” that could be used at the gas pump to bypass the tax. This gasoline tax credit card would be limited in use for a reasonable amount of gasoline purchases per month depending upon the business and must be renewed monthly. I don’t like this idea; it is too open to favoritism and corruption and would create another governmental bureaucracy. Still, it is a possible solution.

Ira Glickstein said...

Bhuvan Chand, thanks for your comment - the first on this Blog from a person in India! I would be interested in a short explanation of how more stringent measures to reduce carbon gas emmissions would *not* raise the cost of energy and of products and services that require energy to produce, at least in the short term.

It appears the model you refer to assumes the unemployed and underused factories would be put to work building alternative energy technology and power generators and that would offset the current costs (welfare and crime, ...) of having so many unemployed and vacant factories?

I doubt most unemployed individuals would be capable of doing effective work in this technology area without expensive and time-consuming training nor that vacant factories could be converted to production of alternative energy without large capital costs.

Do you have information to the contrary?

Ira Glickstein

Ira Glickstein said...

Thanks John for your support of a revenue-neutral carbon tax.

Why do you think a revenue-neutral carbon tax would be more of a burden on small businesses that use trucks than a cap and trade regime? Both schemes would immediately raise the cost of energy - that is their very point - to raise energy costs so much that industries and individual consumers will conserve energy and flock to alternative energy sources that will be relatively more affordable.

The beauty of the revenue-neutral carbon tax is that all the money raised will immediately be paid out in lower payroll taxes. The price at the pump will rise by $1/gallon but the average take-home pay will also rise to cover the added costs. (Cap&trade also plans to return the money to the economy, but it will take longer and the amount is more uncertain.)

And, NOW is the right time to do something because consumers still remember $4 gasoline and $3 wil not seem that high in a relative sense. If $2 gas goes on for a year or two, $3 gas will seem excessive.

I like the idea of returning the carbon tax money directly to those on a payroll and would not like it to be returned via a tax rebate system to businesses that must use gasoline and diesel for their trucks. The rebate would cancel out the positive effect of raising energy prices - to encourage those businesses to use less fuel by buying more efficient trucks or using alternative energy to power their trucks.

I agree with you that any kind of WWII-type gas rationing is a non-starter.

Ira Glickstein

JohnS said...

Ira, you asked: “Why do you think a revenue-neutral carbon tax would be more of a burden on small businesses that use trucks than a cap and trade regime?” Because, this is a time of recession and many small businesses are already strapped by loss of income without having to carry the burden of high gasoline costs. An example, a construction worker who employs 3-4 carpenters and has two trucks he uses to haul lumber etc. A revenue-neutral carbon tax would place the burden directly on him while a cap & trade carbon program would spread the costs throughout the economy. It could also burden the 3-4 carpenters who have bought pickups to haul material when they pick up odd jobs. The higher tax could put all of them out of work.

I favor a revenue-neutral carbon tax; I don’t favor imposing it at this time. I don’t see the need to rush into it during a time of recession.

JohnS said...

Looking back to old blogs I found the following from Joel on Dec 6 2008
I wouldn't go with a "cap and trade" or "carbon tax" until we figure out what is actually going on. If it had to happen I would make the plan's implementation contingent on the final approval of ten new nuclear reactors. Governments can't even manage the world monetary system, how to we expect them to plan planetary temperature? See for an interesting recent take on the science.

I read the referenced story in which there is no firm proof indicating CO2 contributes to global warming, rather it indicates that warming precedes the rise in CO2. While there seems to be new information indicating that CO2 has some warming effect it is not a major contributor; It will not affect us in the near future nor will a delay accumulate CO2 in sufficient quantities to punish us in the future. Therefore, there is no need to implement either in the middle of a recession.

Ira Glickstein said...

John, I agree with Joel that the ice core data for the past several hundred thousand years shows only that warming comes first, then CO2 levels rise. Former VP Gore was mistaken to imply otherwise.

I also agree with Joel that we should get more of our energy from carbon-neutral nuclear. (Raising the cost of fossil fuels will help make nuclear relatively less expensive.)


The amounts of formerly sequestered carbon (coal, oil, natural gas) humans are now spewing into the atmosphere are historically unprecedented. Atmospheric CO2 levels are rising at a high rate (partly from the warming we have experienced over the past fifty years or so causing the oceans to out-gas CO2, and partly due to human activity that generates more CO2).

High CO2 can benefit some agriculture, but I am concerned that such a rapid rise could have bad side-effects on humans.


I am also concerned that so much of our energy comes from the unstable middle east and that Russia controls the spigot for much of Europe's gas and oil.

For all those reasons I favor cutting our dependence upon sequestered carbon fuels.


Europe already has a cap & trade system (reportedly not running well) and it appears to me the US Congress and President are following suit. Given a choice between cap & trade and a straighforward carbon tax, I favor the latter.

As for imposing a new tax in a recession, most of the proposals for a carbon tax call for the funds to be put back into the economy immediately by putting it into the payroll tax and thus into every worker's paycheck. (James Hansen calls it "carbon tax with 100% dividend", Krauthammer calls it "net- zero carbon tax".

That is why I favor a "revenue-neutral carbon tax".

Ira Glickstein

joel said...

It's ironic that politicians want a carbon tax to be revenue neutral. Here's an article by The Tax Foundation that talks about the need for disincentive for using carbon. They believe that revenue neutral means carbon neutral. However, we learned in high school that the Supreme Court said the power to manipulate taxes is the power to destroy. The carbon tax doesn't have to be ecologically effective. It only has to produce fear of what the government might do to those who dissent. ( -Joel

Ira Glickstein said...

Joel, I read your link and it produces more heat than light.

The revenue-neutral Carbon Tax takes money from those who use fossil-carbon sources of energy and products made with oil (such as plastics), making them relatively more expensive than alternative energy sources and recycled materials that use less fossil-carbon. Consumers and industries will voluntarily purchase more of the latter if they are cheaper, thus reducing dependence upon fossil-carbon (coal, oil, natural gas).

The other part of the equation is to address what John was rightly concerned about, namely the disruption of the lives of poorer people when prices rise due to the Carbon Tax. The plan is to make equal payments to all legal holders of Social Security cards. Those of us who have high-level life styles will recover only part of the cost increases, and feel more pain in our pocketbooks, leading us to make efforts to use less carbon-based energy. Those at the lower end of the economy will receive more than the cost increases they see, but they, being closer to bare subsistence, have less opportunity to use less carbon.

Regardless of how much we get from the Carbon Tax dividend, we are all still motivated to use less energy and to use alternative sources as carbon-based products become more expensive. Industry, which can probably make the most difference if they switch to alternative sources of energy, gets none of the Carbon Tax dividend, so they will be motivated to switch to alternative sources as the relative price dictates.

Your link is correct about the fate of the Carbon Tax in Canada and it is also correct that that is why the Obama administration is pushing Cap & Trade which does not look like a tax (but of course it functions like one, with the added burden of more government administration and distortion of the economy).

Carbon-Tax YES! Cap & Trade NO!

Ira Glickstein

joel said...

Ira said: The revenue-neutral Carbon Tax takes money from those who use fossil-carbon sources of energy and products made with oil (such as plastics), making them relatively more expensive than alternative energy sources and recycled materials that use less fossil-carbon.

Joel asks: Why would we punish the manufacture of plastics from fossil fuel? What better way of sequestering carbon than to put it into a virtually unweatherable material and ultimately bury it in a dump?

Ira Glickstein said...

WOW, excellent point Joel! It would seem plastic items do sequester carbon for a long time. Of course, the environmentalists want us to use new types of plastic that degrade over time so they are less damaging to wildlife. But, the degradation will release the carbon back into the ecosystem! OY!

The only reason I would put the carbon tax on oil destined to be turned into plastic is to make the system simple and less subject to "gaming". Impose the carbon tax at the well or mine or entry port with a single-rate that applies to all fossil fuels according to the amount of carbon they contain. Easy to measure and hard to cheat.

Like the value added tax or fair tax, once you make an exception for anything, the gates are open for the politicos and well-connected lobbyists for industry to "work their magic" and you've lost the point of a simple tax that will reduce government and influence.

Technically you are correct, but practially, you are wrong. (Assuming there is any practical possibility any government could impose a simple tax on carbon or a fair tax on new items.)

Ira Glickstein

Anonymous said...

Governments across the world are looking at implimenting "revenue neutral carbon tax" because it is quite frankly something they can be seen to be doing without actually doing anything.

The real problem with CO2 is deforrestation not taxing us on exhaling, and you only have to look at the projections for future supply of widely accepted environmentally friendly E10 fuel that will require more and more clear felling of rain forrest and the escalation of reduced supply in third world nations of valuable food grain to supply mandatory additive of ethanol to petrol.

The ethanol in one tank of fuel uses up the grain an adult would consume in one full year, ask yourself the question, how many adults went without so you could fill your tank this year?

What I can't understand is how much reduction in global warming are we going to get from all this money going back and forward, how cool will it get as i struggle to make ends meet, and how do know it's carbon dioxide that is polluting and causeing climate change when our (in Australia) experts on climate change are professors of economics working for one side of politics to try to raise revenue for them?

I personally am absolutely positive that man's actions on this planet can contribute to climate change, i do not for one minute believe that a carbon tax is anythig other than a scam to make governments appear to be doing something about it.

Ira Glickstein said...

Thanks Anonymous for your comment.

Do you have a reference or backup calculations for your assertion that one tank of Ethanol fuel uses up the grain an adult would consume in one year? Perhaps they were figuring only the amount of corn a typical adult eats in a year, and not counting the wheat and rice?

Even if they assumed pure Ethanol or E-85 (not E-10 or E-15 which is most common), and a fill-up of 20 gallons, which would cost less than $80, it does not seem to me that an adult eats only $80 worth of grain products (bread, cookies, pasta, etc.) a year. On the other hand, though I supported the Ethanol project, I now agree it was of no real value, except to the farm interests that pushed it through on a bi-partisan basis.)

I support a Carbon Tax as a way to defuse the Cap and Trade scam, which is a politicos delight for selling carbon indulgences. You can't fight something with nothing, so I think it is a skeptic's best strategy to push for an acrosss-the-board Carbon Tax that is revenue-neutral.

As for Global Warming, I do not think we can do much to reduce it because economic interests of people and businesses are in the direction of high-energy lifestyles, which will inevitably need more and more energy supplies, and, from a practical viewpoint, fossil fuels will have to make up the majority of the fuel, at least for the next several decades. While I agree with you that human activities (land use and burning unprecedented quantities of fossil fuels) are responsible for part of the warming of the past century: 1) I think most of it is due to Natural Processses and Cycles, which may turn to Global Cooling in the next few decades, and 2) We may come to realize that the warming and increased CO2 are, on a net basis, beneficial.

Nevertheless, an across-the-board Carbon tax will push consumers and industry to invent new ways to use energy more efficiently and also speed the development of non-fossil fuels. This will help reduce our dependence on the turbulent MidEast and other unstable areas of the world for petroleum.

Ira Glickstein