How should we tax all that carbon?

Here's how I would have liked to have introduced this post:

The good news is that, other than for an increasingly marginalized minority, the focus of attention on climate policy has shifted from the reality of global warming to the economic tools needed to address the problem.

Sadly, climate change denialism remains relatively robust and widespread, with more half of all Americans and popular columnists of George F. Will's stature still unwilling to accept the science. I have no choice but to acknowledge the task of getting everyone on board will require more time and energy, even while we grapple with the much murkier world of economics. So consider that done. Now, to the new debate. What will it be? A simple carbon tax or cap and trade?

I have no idea

1. which will be more effective;
2. why we can't have both; and
3. if there is some other alternative we're overlooking.

NASA climatologist James Hansen is convinced a carbon tax is the only reasonable way to get where we need to go. He cites the failures of the Kyoto Protocol, which called for but never delivered a cap-and-trade market, and the collapse of the European experiment in emissions trading. In a cover note to a new letter to the secretary of Australia's Department of Climate Change he explains his position bluntly.

Cap-and-trade is the temple of doom. It would lock in disasters for our children and grandchildren. Why do people continue to worship a disastrous approach? Its fecklessness was proven by the Kyoto Protocol. It took a decade to implement the treaty, as countries extracted concessions that weakened even mild goals. Most countries that claim to have met their obligations actually increased their emissions. Others found that even modest reductions of emissions were inconvenient, and thus they simply ignored their goals.

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Of course, a rising carbon price alone is not sufficient for a successful rapid transition to the post fossil fuel era. There also must be efficiency standards on buildings, vehicles, appliances, electronics and lighting. Barriers to efficiency, such as utilities making more money when we use more energy, must be removed. But the essential underlying requirement is a substantial rising carbon price. Building standards, especially operations, for example, are practically unenforceable without a strong cost driver. The carbon price must be sufficient to affect lifestyle choices.

648 pages [The length of the Markey-Waxman cap-and-trade bill now making its way through Congress] are not needed to define a carbon fee. It is a single number that would be ratcheted upward over time. It would cover all three fossil fuels at their source: the mine or port of entry. Consumers do not directly pay any tax, but the fee's effect permeates everything from the price of fuel to the price of food (especially if it is imported from halfway around the world).

Hansen points out that cap-and-trade mechanisms create opportunities for middlemen to "game" the system and get rich while loopholes undermine the primary objective of reducing emissions. I would emphasize that unless the mechanism is global or includes serious port-of-entry tariffs, it will have a hard time restraining relocation of energy production to cheaper venues.

Joe Romm of Climate Progress takes the other side of the argument. A recent post of his appears under the title "Memo to James Hansen: Your opposition to Waxman-Markey is ill-conceived and unhelpful. There isn't going to be a carbon tax nor should there be. Get over it and move on."

Romm has three reasons for preferring a cap and trade.

1. The political inertia favors it over a carbon tax.
2. A carbon tax won't be simple
3. We need emissions reductions goals, which taxes don't have.

No, Waxman-Markey won't get us to 350-450 ppm, but it takes us off of the business as usual path, which is the most important thing, and it accelerates the transition to a clean energy economy, which is the second most important thing, and it establishes a framework that can be tightened as reality and science render inevitable. That is, after all, the same way we saved the ozone layer. The original Montréal protocol provisions would not have done so. But they got tightened overtime. Hansen is right that it can take a few years (not decades) to establish a cap-and-trade system. That's why we need to start now.

If you compare Hansen and Romm's cases, you're left with a feeling they're not quite on the same wavelength, each coming at the problem from different takes on what's feasible and neither paying attention to the opposing argument. Neither is an economist, although one could argue that Romm's experience as a policy wonk makes him closer to one. But given the failure of economics to actually predict anything of consequence, that shouldn't be held against them.

From my point of view, I can see no reason why we shouldn't tax carbon at both ends. First, as part of policy that caps total emissions and levying a fee, as Hansen suggests, at the production or import point, and second at the retail end. Double taxation is now a time-honored tradition, in case you haven't paid attention to your income tax forms of late. This gets easier if you return the tax to the people in some form. Hansen calls it a dividend.

Up in British Columbia, where a provincial election May 12 may be won or lost on the fate of what has been described as the most effective carbon tax in the world, the current Liberal government is talking about keeping the fledgling tax and introducing a cap-and-trade system. The opposition New Democratic Party wants to kill the carbon tax, which is now just $10/tonne and scheduled to rise to $30 in a couple of years, but wouldn't replace it with a cap-and-trade until it's had time to think about it.

It's been fascinating watching the BC election campaign, if at a distance. The NDP used to be more environmentally aware, but it's lost the support of major leaders from the field, including David Suzuki and the Pembina Institute, because of its anti-carbon-tax stance. Nature magazine has just given the campaign a close look, with UBC journalism student Nicola Jones writing this week that the verdict on the tax's effectiveness is still out, due in part to recent drops in oil prices. Still:

Taxation has the advantage of being fast to implement, however. The British Columbia carbon tax came into force within 5 months of being announced in February 2008; the Western Climate Initiative cap-and-trade programme, a US-Canadian scheme including California, British Columbia, and several other provinces and states, won't come into force before 2012.

Mark Jaccard, an environmental economist at Simon Fraser University, near Vancouver, whose work informed the current carbon tax policy, says he has no particular preference for one scheme or the other. "I don't care. You just have to get a price on emissions," he says.

On that last observation everyone seems to agree. Some kind of price is on carbon is essential. Others have pointed out that cap-and-trade is really just a tax by another name, albeit one that comes with a cap that fulfills Romm's requirement that we see some real emissions reduction target.

Which brings to me my final question: Is a tax actually the best route? Romm writes that "we didn't accomplish the WWII mobilization through a pricing mechanism" to support his contention that simple taxes can't work. But the war wasn't won thanks to a market-based trading mechanism, either. It was won largely because the federal government decided what industry could and couldn't do. It told Detroit to stop building cars for four years, and switch to tanks and airplanes, for one thing.

Would this country swallow an executive (or Congressional) order to begin phasing out coal-fired plants? I am skeptical, but wouldn't rule it out.

One final thought. Everyone assumes that Americans are less likely to accept a new tax, which explains the use of the cap-and-trade alternative and language. But a recent New York Times Sunday Magazine feature by Jon Gertner suggests that conclusion might be too hasty.

While many economists favor the simplicity of a carbon tax, it seemed every person of influence in the United States government agreed that a cap-and-trade policy -- in which carbon emissions are capped and firms can buy and sell credits -- was preferable. Perhaps this was understandable: the poisonous associations of the word "tax" appear to doom it as a policy. And yet this assumption can obscure what actually happens in the minds of Americans on this issue. Not long ago, David Hardisty, a student of [Columbia University economics professor Elke] Weber's, led an experiment in which a 2 percent fee added to an airline ticket was described to various subjects as either a carbon "tax" or a carbon "offset." The subjects were told the fee would finance alternative-energy and carbon-reduction technologies. Hardisty predicted he would get different results from Democrats and Republicans, and that was indeed the case. Democrats were willing to pay a fee for an offset or a tax; Republicans were willing to pay for an offset but not a tax. Clearly, the tax frame affected the outcome -- very much so for Republicans.

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So in terms of policy, it may not be the actual tax mechanism that some people object to; it's the way a "trivial semantic difference," as Hardisty put it, can lead a group to muster powerful negative associations before they have a chance to consider any benefits. Baruch Fischhoff, a professor at Carnegie Mellon and a kind of elder statesman among decision scientists, told me he's fairly convinced a carbon tax could be made superior to cap and trade in terms of human palatability. "I think there's an attractive version of the carbon tax if somebody thought about its design," Fischhoff told me, adding that it's a fundamental principle of decision research that if you're going to get people to pay a cost, it's better to do it in a simple manner (like a tax) than a complex one (like in cap and trade). Fischhoff sketched out for me a possible research endeavor -- the careful design of a tax instrument and the sophisticated collection of behavioral responses to it -- that he thought would be necessary for a tax proposal to gather support. "But I don't think the politicians are that informed about the realm of the possible," he added. "Opinion polls are not all that one needs."

Sounds like an imagination deficit. Again.