Carbon Fee & Dividend v. Cap & Trade

While any method to make all fossil fuel prices reflect the true cost of these energy sources would go a long way toward putting market forces to work in reducing the use of non sustainable polluting energy sources and encouraging the use of sustainable sources, there has been some questions raised about what the pros and cons are of the “fee and dividend” approach (promoted by the Citizens Climate Lobby and WA Carbon Tax, and implemented in British Columbia) and the “cap and trade” approach that has been proposed nationally and implemented in California.

Following are some links where information on these two options are discussed and some opinions about the benefits or challenges of each are brought up.   The “bottom line” is that supporting or both would be an improvement over our current economic situation where fossil fuels get subsidies and large profits while sustainable energy technology is outcompeted because all the costs (to health, environment, climate) are not included in fossil fuel costs.

The Gurdian:  Carbon Tax v. Cap and Trade: Which is Better?

Environmental Economics: The Cromulent Economics BlogECON 101: Carbon Tax vs. Cap-and-Trade.   Their conclusion:

In terms of the market failure, the negative carbon externality, both a carbon tax and carbon cap-and-trade will achieve the same level of increased efficiency by achieving the optimal abatement level at the minimum cost. The only difference is the distributional implications. The cost to the firm is lower for carbon cap-and-trade. The government receives tax revenue with a carbon tax. Both policies are preferred over techological or output standards (i.e., command and control regulation).

Nation Bureau of Economic Research:  Carbon Taxes vs. Cap and Trade: A Critical Review  Lawrence H. GoulderAndrew Schein

We examine the relative attractions of a carbon tax, a “pure” cap-and-trade system, and a “hybrid” option (a cap-and-trade system with a price ceiling and/or price floor). We show that the various options are equivalent along more dimensions than often are recognized. In addition, we bring out important dimensions along which the approaches have very different impacts. Several of these dimensions have received little attention in prior literature.

 A key finding is that exogenous emissions pricing (whether through a carbon tax or through the hybrid option) has a number of attractions over pure cap and trade. Beyond helping prevent price volatility and reducing expected policy errors in the face of uncertainties, exogenous pricing helps avoid problematic interactions with other climate policies and helps avoid large wealth transfers to oil exporting countries.

David Suzuki Foundation:   Carbon Tax or Cap and Trade?  

Article concludes in part that “A carbon tax also has one key advantage: It is easier and quicker for governments to implement. A carbon tax can be very simple. It can rely on existing administrative structures for taxing fuels and can therefore be implemented in just a few months. In theory, the same applies to cap-and-trade systems, but in practice they tend to be much more complex. More time is required to develop the necessary regulations, and they are more susceptible to lobbying and loopholes. Cap-and-trade also requires the establishment of an emissions trading market.”

Carbon Tax Center:

April 2009 updatesRobert Shapiro, chair and cofounder of the U.S. Climate Task Force and former Undersecretary of Commerce for Economic Affairs, makes a compelling political case that “the costs and lessons of the financial crisis may effectively swamp the prospects for cap-and-trade. If cap-and-trade has become a dead policy walking, those who care deeply about climate change will find that a carbon tax system has become the last, reasonable policy standing.” For the rest of Shapiro’s trenchant esssay, Is Cap and Trade a Dead Policy Walking?, click here.  For an in-depth critique of cap-and-trade that also articulates, quite brilliantly, the essentiality of pricing carbon emissions clearly and transparently, see “Economic Issues in Designing a Global Agreement on Global Warming,” Yale Professor William D. Nordhaus‘s keynote address prepared for an international meeting, Climate Change: Global Risks, Challenges, and Decisions, in Copenhagen, in March 2009.

CTC regards carbon taxes as superior to carbon cap-and-trade systems for six fundamental reasons:

  1. Carbon taxes will lend predictability to energy prices, whereas cap-and-trade systems will aggravate the price volatility that historically has discouraged investments in less carbon-intensive electricity generation, carbon-reducing energy efficiency and carbon-replacing renewable energy.
  2. Carbon taxes can be implemented much sooner than complex cap-and-trade systems. Because of the urgency of the climate crisis, we do not have the luxury of waiting while the myriad details of a cap-and-trade system are resolved through lengthy negotiations.
  3. Carbon taxes are transparent and easily understandable, making them more likely to elicit the necessary public support than an opaque and difficult to understand cap-and-trade system.
  4. Carbon taxes can be implemented with far less opportunity for manipulation by special interests, while a cap-and-trade system’s complexity opens it to exploitation by special interests and perverse incentives that can undermine public confidence and undercut its effectiveness.
  5. Carbon taxes address emissions of carbon from every sector, whereas some cap-and-trade systems discussed to date have only targeted the electricity industry, which accounts for less than 40% of emissions.
  6. Carbon tax revenues would most likely be returned to the public through dividends or progressive tax-shifting, while the costs of cap-and-trade systems are likely to become a hidden tax as dollars flow to market participants, lawyers and consultants.

Carbon Washington:  This organization is working toward getting a revenue neutral carbon tax on the Washington State ballot in 2014.  Following is their central message:

The best climate change policy in the world is British Columbia’s revenue-neutral carbon tax. (See our 2012 NY Times op ed, this 2012 Sightline post, the Economist in 2011, and note that one of our Steering Committee members helped make the BC carbon tax happen!)

Our vision is to bring a similar policy to Washington State to improve the state’s economy and the state’s environment. That means reducing the state sales tax by a full percentage point, funding the Working Families Sales Tax Rebate, eliminating the B&O business tax for manufacturers, increasing the small business B&O tax credit… and paying for all those tax reductions with a BC-style carbon tax of $25 per ton of CO2.

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