Wednesday, April 18, 2007

The case for a global carbon tax

Over at Green Options, I wrote about a program on National Public Radio that featured Bill Chameides, Chief Scientist of Environmental Defense, making a strong case for a cap-and-trade policy to fight global warming. But over at Newsweek, Fareed Zakaria argues that a global carbon tax is the way to go.

Unless we get a handle on our coal problem - coal-fired power plants are a main contributor of carbon dioxide (CO2), a global warming pollutant - nothing else matters. So how do we slow the rapidly growing appetite for coal, especially in places like China and India? Zakaria answers his own question:
"[This problem] can be solved by the same simple idea—a tax on spewing carbon into the atmosphere. Once you tax carbon, you make it cheaper to produce clean energy. If burning coal and petrol in current ways becomes more expensive because of the damage they do to the environment, people will find ways to get energy out of alternative fuels or methods. Along the way, industrial societies will earn tax revenues that they can use, in part, to subsidize clean energy for the developing world. It is the only way to solve the problem at a global level, which is the only level at which the solution is meaningful."
On a cap-and-trade system, which has wide support among many economists, Zakaria isn't optimistic:
"Congress is currently considering a variety of proposals that address this issue. Most are a smorgasbord of caps, credits and regulations. Instead of imposing a simple carbon tax that would send a clear signal to the markets, Congress wants to create a set of hidden taxes through a "cap and trade" system. The Europeans have adopted a similar system, which is unwieldy and prone to gaming and cheating. (It is also unsustainable if Brazil, China and India don't come onboard soon.)"
Innovation is the only way to fight global warming, Zakaria argues, and to drive innovation we must make coal more expensive than clean, renewable energy. A carbon tax is much more market-friendly than the regulation and red tape supposedly involved in a cap-and-trade system.

But one issue that Zakaria doesn't address is how CO2 emissions can be thoroughly measured with a carbon tax. In a cap-and-trade system, a target cut of emissions is set by regulators and then industries are charged with reducing their emissions and are issued a certain number of credits if they cut further than required. Those credits can be sold to other companies who can't or won't cut emission far enough. This way, we can track the number of credits in the economy and how well we are progressing towards our targets.

Let's hear from readers: Carbon tax or cap-and-trade to fight climate change?


Sahil Bajaj said...
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