Cap vs. Tax Debate
Wyldon King Fishman
May 3, 2008
After all is said and done, “It’s the ecological crisis, stupid.” If energy efficiency could make us rich, we’d all be rushing there. The potential for carbon emissions to make us money is a bit more real today as the market already has a value of $30B.
It is a bit hard to believe people are still screaming the fix is too expensive. In its April “World Economic Outlook” report the International Monetary Fund declared cutting of emissions of carbon dioxide and other greenhouse gases is not just necessary, but it is also relatively affordable. As opposed to losing the entire rice production of Australia.
But, how? To soften the impact of added costs, which system, tax or cap, phased in, will give us time to adapt and effectively reduce carbon emissions? And, will it be by capping emissions, tax shifting, rebates, tax reductions and, most importantly will it be revenue neutral? We hear more about the caps on carbon than the taxes on carbon.
Forty of 47 economists polled by the WSJ said government should champion alternative fuels and not to rely on free market solutions or cap and trade this time since we are already in the danger zone. Economists say a tax puts on the pressure.
Paul Volker builds on this by saying if we don’t put on the pressure, the economy will go down the drain in 30 years.
San Francisco came out last week with their own tax on carbon to pay for energy efficiency and to create a base for financing renewables for their city.
In his March 2008 slide show, “New Thinking on the Climate Crisis” Al Gore says “Here’s the solution: we need a CO2 tax, revenue neutral, to replace taxation on employment, which was invented by Bismarck – and some things have changed since the 19th Century.” Gore is proposing great switch out of the income tax, business taxes, employees taxes and federal taxes for unemployment insurance. Replacing them with penalty taxes for spewing CO2 into the atmosphere makes for a revenue neutral equation and this equation is a solution that’s ever so tempting.
Despite years of firm denial by the White House that green house gases cause climate change, Wall Street has been wide awake to the action and you might want to get a piece of the action now. Proof is you can buy carbon emissions credits. And you can invest in companies like GE, DuPont or Johnson and Johnson, companies investing in reducing their emissions. When they reduce their carbon emissions they have something to new to sell. What’s missing are the regulatory caps.
The White House has not lead the way until a couple of weeks ago when they announced their first stab at green house gas emissions reduction. Coal is the winner as the president’s plan calls for investment in new technology and for high emission power companies to get the incentives. As Duke Energy president, James E. Rogers stressed, half of our power comes from coal. No tax plan, no cap plan to pay for anything.
The states are wide awake, too. They use the carbon trading system to fulfill state mandates for a mix of renewable energy especially wind.
How have our candidates weighed in? McCain is pro nuke and Yucca. Clinton and Obama seem to have a realistic view of renewables with Clinton stressing “let nuke die”. All three lean towards Cap and Trade. This week Clinton and McCain simultaneously agreed to suspend Federal gas taxes for the summer. Tom Friedman bit back with an Op-Ed in the Times on Monday about the lunacy of a gas holiday.
The Wall Street Journal even has a blog to report on the reports by the IMF and the US – EPA. The WSJ blogger uses our words “tackling climate change” to describe the driver behind corporations sniffing out profits amid the costs. In these days of post mortgage securitization who needs to be reminded that Wall Street money isn’t a picnic and the multiple kinds of fraud and unwanted regulatory bureaucracies are expensive to establish. Wall Street will never be sensitive to inequitable distribution of wealth.
Most of you know the science. Carbon is present in all fossil fuels because fossil fuel comes from massive pockets in the earth formed when huge ferns and animals like dinosaurs were swallowed up in one of earth’s many cataclysmic times. After we burn fossil fuel one of the gasses given off is carbon dioxide, CO2. CO2 is supposedly non-lethal. It hangs in the lower atmosphere since it’s quite light weight and it remains there. Some heat in the air use to escape our planet’s atmosphere but now it cannot because CO2 re-radiates heat back. It doesn’t heat the earth, it traps heat. It doesn’t kill polar bears, its cumulative effect kills polar bears.
We know exactly how much CO2 remains after coal, oil or natural gas is burned. Coal emits 80% more than natural gas and 30% more than oil. Therefore, the dirty coal plants are most effected and they will pay the most in a cap and trade system. Each year the cap for coal would become harder and harder to meet. Natural gas plants get off relatively easy. Natural gas would have more credits to sell and coal would have none. Coal is forced to spend to scrub the air coming out of its stacks and coal was counting on being the tremendously abundant cheap solution. Coal has a big team of lobbyists.
On the other hand a carbon tax would be levied on the producers of coal, oil and natural gas upstream either at the point of mining here in the US or as they are imported.
Taxes on petrocarbons where they are mined can swiftly effect consumption today. A uniform tax code ensures efficiency so all producers of commodities can make consistent decisions. Taxes go down for you and me since the producers will pass along their costs it’s not a free ride but now there’s a pot of money to help pay for solar on every roof. The renewable industry rightly fears that the taxes might go to nuclear and clean coal. The entity that collects the money will surely be lobbied heavily by the businesses that want the money. The Exxon-Mobil’s have big teams of lobbyists, world class profits and are allergic to renewables. The President spoke out sharply against taxes at the well head on Monday.
Carbon or petrochemicals used in plastic would not be taxed as it is not normally burned.
Carbon Cap and Trade hit the jackpot when it was first used in the Northeast to reduce emissions of sulfur dioxide, or SO2, the primary cause of acid rain. The gigantic key is a limited group. Within the limited group of utilities effected by the 1990 Climate Change Act, the system was very successful in reducing SO2 emissions. Outcomes were measurable. Insurmountable problems come with expansion and monitoring accountability scams. Satellites can see smoke from the highly polluting forest burning of Indonesia and Brazil but satellites cannot see carbon or smell or taste it. Even if it has an identifying fingerprint it’s a massive undertaking to monitor zillions of sites emitting carbon.
Cap and trade was so successful in the Northeast the European Union copied this system to handle their CO2 reduction. But, it suffers both from lack of transparency and the easy ability to have fraudulent outcomes. Cap and Trade has to have its own new bureaucracy or rely upon self-reporting. Carbon emissions come from hundreds of sources often high in the sky smoke spilling over, profits assured, taking our air.
Last year’s Bingaman – Specter bill, the “Low Carbon Economy Act” of 2007 centers around Cap and Trade based on the northeast’s 10 state coalition to cap sulfur dioxide emissions, RGGI. Sounds good, didn’t fly and remember, it’s not a small cluster of utilities to be monitored.
I know personally from my work in Texas these measuring devices are challenged by the utilities. Today permits to pollute are bought from governments that do not have the backbone to protect innocent citizens. Congressman Smokey Joe Barton of Ennis, Texas, and the Texas EPA protect the utilities and large polluting industries like Texas Instruments by selling them permits to allow hidden amounts of gasses to be emitted to the atmosphere we must breathe and all manner of pollution to be discharged into the waters we drink. This is why some environmentalists conclude Cap and Trade is a nightmare of administrative problems. It’s too easy to fool with the monitoring devices.
Straight out the Carbon Tax is simpler and its revenue neutral reduction in income taxes raises acceptability. Others believe a gas tax is the solution. Regardless, Carbon Tax is more rapid than Cap and Trade and more equitable. Unfortunately this opinion flies in the face of some of out best friends out there. They say a carbon tax discourages emissions with no target so many environmentalists oppose a carbon tax.
A cap is a cap and some big name environmental groups love the cap. Our true friend in solar, Fred Krupp head of EDF says in his new book “Earth: The Sequel”, “It’s the companies who will save the world. Profits got us into this fix and they will get us out.” Environmental Defense maintains carbon tax’s chances are zero. Surely the taxes collected would be distributed to one or two technologies (nuclear and fuel cell?) chosen for support. Anyone have a crystal ball? Unlike the economists, environmentalists fear a tax just takes money from the economy and that the marketplace is better!
Some say Cap and Trade strategy incentives all players to compete to discover the best ways to cut emissions. And, watch out, unproven carbon sequestration is thrown into the mix like it exists. It’s the FOX News right upfront knowledge base many Americans salute. Some see the Cap as a guarantee yet others see the opposite – as volatile, red tape, untransparant, inflexible.
Since government would have a small role who would police? An international body? International policing is the problem as it is slightly voluntary. The emissions cap restricts the amount of pollution allowed. A permit is granted to pollute. Their permit has financial value. But, those who reduce their emissions usually because it’s not very expensive to do, can turn around and enable those companies to continue to pollute since those companies have higher costs to fix their problem. Most often the sad results are companies choose to pay the fine since it is cheaper.
A Carbon Tax of $7 - $15 per ton yields about $15 - $25 billion annually. Our tax offsets no international scheme. Will Al Gore get everyone to plant trees so he can jet all over the country? Can anyone and everyone who does anything remotely energy efficient demand a tax credit?
Outspoken supporters of a Carbon Tax include Mayor Michael Bloomberg of New York and Senator Chris Dodd of Connecticut. The centerpiece of the Dodd presidential campaign was the “Save Our Climate Act” He proposed a $10.00 per ton of carbon charge on coal when the fuel is extracted or imported. The charge would increase $10.00 every year until US CO2 emissions have dropped 80% from 1990 levels.
Congressman John Larson of Hartford, CT, would tax emissions of CO2 at $15.00 per ton with a 10% annual increase and some inflation adjustments.
John Dingell supported the revenue-neutral theme… “Reduce employment and production (labor) taxes and begin to tax pollution.”
It’s just like when we use to rent phones. Ma Bell was the only belle in town and she had you by the calls. The utilities have seen the writing on the wall. Investors are choosing energy exchange funds or ETF’s . So far we have Trade but no Caps. PowerShares WilderHill, PowerShares Global Clean Energy, First Trust Nasdac Clean Edge and Market Vectors’ Global Alternative Energy make the new clean money. If you’d like to go shopping, check out the European Climate Exchange, The Euro Energy Exchange, the Chicago Climate Exchange and, the newbie, the World Green Exchange. All sell a form of renewable energy or green power certificates. No longer relegated to the fringe yet still subjected to the credit crunch this market keeps rebounding with jet propelled uptrends.
Energy is a $6 Trillion chunk of the world’s economy.
And we wait for the entrepreneurs and early adopters to arrive. Check. We wait for the capital to arrive. We wait for legislation to mandate a yearly 2% drop in heat-trapping pollution, we wait for the price of CO2 to be set into law and the US will finally signal with LED’s, not smoke signals, to the world that the race to make money lowering the parts per billions of carbon emissions in our atmosphere has begun.
Americans emit in one day what others emit in a workweek. The USA dwarfs even China the supposed bad boy at 7 times what the rest of the world emits. Sadly, it gets down to developing countries v. poor countries. Recently the market in China took a plunge, perhaps just a correction but India reports a slack in IT. So, we can’t hold onto the past even if it was just last week. The current recession is changing equations. Oil at $119 a barrel will have a retrenching effect.
“Real green people don’t buy carbon credits. If anything, they will sell them.” --- R. Komp