Cap and Trade vs. Carbon Tax

By Abel Collins

As large and complex an issue as fighting Climate Change is, I will tackle it in a series of posts in order to give it due attention. In the spirit of full disclosure, I feel compelled to say that I work for the Sierra Club, an environmental advocacy group that is devoting many of its resources toward averting global warming as much as is still possible. The Sierra Club is lobbying for strong legislation in Congress to address the issue this year. The plan the Club supports involves a cap and trade system. The views that I express here are not the views of the Sierra Club. These are my personal opinions.

Last year for the first time, the U.S. House of Representatives passed legislation to address the clear and present danger of Climate Change. Not only is Climate Change (or Global Warming) a current problem, costing some 200,000 lives and untold billions of dollars in damages annually; it threatens to become an apocalyptic catastrophe if we fail to act swiftly in reducing our output of Greenhouse gases.

The House and the Administration have been rightly lauded for belatedly making an effort to deal with this issue more than ten years after the rest of the world took action with the Kyoto Protocol. The key tool for reducing carbon emissions in both the House legislation and the Kyoto accord is a cap and trade system. The basic concept with cap and trade is to commoditize carbon emissions into carbon credits that represent a reduction in emissions. The ‘cap’ refers to the total amount of carbon allowed into the atmosphere. The ‘trade’ refers to the exchange of the carbon credits between industries, other businesses, and individuals through the carbon market. Carbon emitting industries can thus buy carbon credits to offset their pollution and thereby create incentives to cut carbon pollution.

The alternate policy for reducing carbon emissions that is sometimes mentioned but never seriously considered is a carbon tax. (Other options are conceivable, but given the pea sized brain with which governments operate, two choices seem to be the maximum that can be deliberated at any one time.) The carbon tax is just what it sounds like; a levy on industries, other businesses, and people who produce carbon emissions through their economic activity. It is a simple and direct way to make polluters pay proportionally for their emissions. The carbon tax is routinely dismissed, because, we are told, it is politically infeasible. The argument is that the tax would be too punitive on businesses that would then pass the huge cost along to consumers.

I contend that the Cap and Trade system is inherently inefficient and dangerously flawed. In practice, cap and trade has not produced the carbon reductions that were promised by the carbon credits. Furthermore, the carbon market is helplessly vulnerable to corruption through financial manipulation. If the nations of the world truly want to combat Climate Change, they need to consider implementing a carbon tax.