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Opinion

Cap and trade is still the right call

Forget trivial tax politics. When it comes to limiting pollution, cap and trade – not a carbon tax – has a record of success.

By Mark Lange / April 13, 2009



San Francisco

The great debate over how – and how much – to reduce the greenhouse gasses we emit while consuming energy is heating up. And in what passes for sport in Washington, wise policy is getting whomped by trivial tax politics.

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The Obama administration and House Democrats just lofted energy and climate legislation to create a "cap and trade" system for carbon dioxide. But then, stunningly, they ran the right play in the wrong direction – contending that cap and trade is somehow more politically plausible because it won't look as bad as a direct tax on emissions.

Republicans, sensing a fumble, have piled on. Ignoring the fact that cap and trade, which relies on market incentives, is essentially a conservative idea, GOP leaders have assailed it as a costly national energy tax. Other critics see a boondoggle for bureaucrats that will burden American industries. The administration is already giving ground to utilities, suggesting it might auction only a portion of pollution permits.

The stakes – to our national security, to our economy, and yes, to our environment – are too high for this sound policy to be undermined by a sidelines skirmish. Cap and trade is the only play that can work.

Cap and trade is a market, not a tax. It sets a hard limit on total emissions. Then a regulated exchange of tradable permits gives enterprise a choice: Invest in efficiency and better technology – or buy credits from more efficient players, underwriting their cleaner practices. Simple.

But advocating cap and trade largely because "it won't look like a tax" is a head fake that plays right into the hands of opponents.

The next time cap and trade defenders face a tax blitz, they should stand their ground on these points: Cap and trade is the only efficient way to contain emissions. It's more effective than a tax, because it creates real incentives for the right behavior. It engages the self-interest of individuals and industry in service to a greater public good – something both sides of the aisle can support. And it's more realistic and simpler to deploy than a carbon tax, politically and practically.

Why? Because a carbon tax, as seductively simple as it sounds, has never actually happened. Cap and trade has already been proven to work.

In 1989, environmental and market-oriented players from both sides of the aisle set up a cap and trade market for the emission of sulphur dioxide (SO2), a cause of acid rain. Remember acid rain? Greens groused that tradable permits were a license to pollute. Industry wailed about the cost. But within five years, SO2 was under control, down 45 percent. And the cost to utilities was only 0.6 percent of operating expense.

Cap and trade beats the taxing tradition of Washington's "make it so" command-and-control. It strips power from bureaucrats, because all of us tend to be smarter than any of us. It sets the right aggregate goals and incentives, makes a market in outcomes, regulates carefully, monitors diligently, and gets out of the way. And it's simpler than a carbon tax because it enlists private sector creativity in finding efficiencies rather than funding lawyers to make flamboyant end runs around the tax code.

Opponents cynically paint a market for carbon emissions in shades of credit default swaps (a fictional red herring, since that game of fantasy baseball was entirely unregulated). A carbon emissions exchange pegs prices to what a real, regulated market will pay – not a tax rate engineered by oil and coal lobbyists outbidding each other to manipulate members of Congress hustling for campaign cash.

A flat tax on carbon is a corrupt fix on a losing game. It inflicts expense with no defined emissions objective. And given the interests in play, volatility in fuel prices and shifting costs to contain emissions, there will be nothing "simple" about fixing a tax rate, untethered to some market reality. People have never been willing to pay a tax to breathe cleaner air. To imagine they will now, to address a climate threat that many feel is abstract, is to make hope a strategy.

Detractors try to spin cap and trade as a tax. By that standard, health insurance, workplace safety, and health inspections are taxes. They aren't – any more than minimal and effective regulation is socialism. And unlike a tax, industries such as health insurance, safety equipment, and environmental technology don't break windows to fix them – they create companies that generate real jobs. So along with being more efficient and fair, cap and trade outperforms any tax in terms of economic growth and employment.

Set up an exchange properly and even China might play. That's far more plausible than putting tariffs on carbon-intensive exports, hoping Beijing will reciprocate. We might as well tax the wind that blows smog across the Pacific.

The administration should stick to its convictions and explain why cap-and-trade is the right answer for the right reasons. Don't play to the shadows on the wall. Credit the public's intelligence. Set aggressive goals and support a carefully regulated exchange, a market that responds to real demand signals. That is the only way we'll keep the game clean, contain carbon emissions, and generate real jobs.

Mark Lange is a consultant and former presidential speechwriter.

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