What, another tax? Carbon Tax versus Cap-and-Trade: the quick on each.
Borrowing phraseology from The Week Magazine, the below may be seen as ‘Boring but Important’ and also…critical at this moment in history.
Perhaps, more relevant, given the momentum in Oregon to vote on some form of a Cap-and-Trade for Industry during the legislature’s short-session this February (2018), below is worth a quick read.
Which Type of Tax is Preferable?
You’ve probably heard both terms at various times if you’ve been following discussions about how to mitigate climate change. Carbon Tax is a fairly simple concept to understand but it is a hot potato politically. Cap and Trade is a market-driven (and hence, more palatable to conservative-minded capitalists) approach to regulating atmosphere-polluting industries (think: paper mills, electric utilities, cement producers) but its implementation is complicated and more opaque to understand. Both methods to tax carbon extraction and use are important and can be very effective in significantly cutting CO2 emissions into the atmosphere; which gives us a fighting chance to dramatically reduce greenhouse-gas emissions at the state and national level in order to make our personal (and yes, we should all consider the impacts of climate change personally) contribution to the global goal (a.k.a. the Paris Climate Accord of 2015) of keeping the earth’s global temperature rise below 2o C from pre-industrial levels. Below is a quick cheat-sheet, so to speak, on Carbon and Cap-and-Trade Tax schemes. Schemes in this sense are how these tax systems operate or function.
The quick on Carbon Tax:
- A carbon tax is a straight tax (think: a defined percent increase in the cost per gallon of gas) that will ultimately make the use of fossil fuel energy more expensive for the end-consumer.
- The tax would apply to all fossil fuel energy (petroleum, oil, coal, natural gas) that we use to power our automobiles, cool/heat our homes, and provide electricity for our various needs.
- The carbon tax can be applied at various levels within an economy, either “upstream” – to the companies that extract and refine fossil fuels – or “downstream” – to companies that utilize carbon energy inputs and to consumers (you and me).
- The idea of a carbon tax is to ‘incent’ individuals and companies to substitute their use of fossil fuel energy for something else, ideally, renewable forms of energy (i.e., solar, wind, tidal, geothermal, and hydro).
- To mitigate the increase cost of energy (required to heat/cool our homes and drive our cars and power our utilities), most carbon tax schemes call for a net transfer (or redistribution) of the revenue raised to be re-invested in public service projects (e.g., increased public transportation infrastructure) and income subsidies, that support consumers and communities most affected by the increased cost of energy, to support the switch to renewable energy sources.
- A carbon tax has to be sufficiently large to be effective in changing the “hearts and minds” of companies and individuals to make the switch from fossil fuel energy inputs to renewable energy options. Otherwise, people begrudgingly absorb the extra energy costs and keep the status quo of carbon energy use.
The quick on Cap-and-Trade:
- A Cap-and-Trade “tax” is applied to identified high greenhouse-gas (GHG) emitters or polluters. These emitters are usually medium-to-large companies within certain industry sectors.
- A cap-and-trade system is designed through the trading of (GHG-emitting) permits that companies buy and sell through an auction.
- A State (such as California) determines (or sets) the total level of CO2 emissions that will be allowed for any given year. Often, the state will decrease total allowable CO2 emissions incrementally over the course of the cap-and-trade time period (e.g., five, 10, 20 year periods).
- How the “tax” scheme works:
- Most companies have to purchase their tradeable CO2 permits for the year.
- For companies that emit less atmospheric CO2 than allowed, they can sell their “unused” permits to other companies for a profit.
- For companies that emit more atmospheric CO2 than allowed, they must buy “unused” permits from other companies for a fee, or…they must pay a penalty to the state for exceeding their permitted CO2 levels for the year.
- The benefits of a cap-and-trade system include:
- Established GHG emission reduction targets are set and can be effectively managed through the permitting system.
- The system, although state regulated, is a pro-market-driven scheme where companies control how they manage and mitigate their GHG emissions by allowing a “spill-over” valve through permit-buying as well as incremental target reductions to be met over a gradual period of time.
- Cap-and-trade is seen as an effective mechanism to foster company-driven technological innovation in order to meet GHG-emission reduction targets.
- Cap-and Trade Schemes are complicated to set-up and can take many years to successfully design and implement. Some of the variables that require deep consideration include:
- Total GHG-emission targets to set
- Number of permits to employ
- How permits are assigned, priced and purchased
- Identification of type and number of companies, sectors and industries to participate in scheme
- Enforcement of GHG emissions and targets to be met
Awareness and Citizen Activism Make a Difference
Lobbying efforts to congressmen by citizens about our feelings and preferences for these carbon tax options are worthwhile.
See below for the Cap-and-Trade Law currently in place in California:
Note: Oregon has introduced a Cap-and-Trade bill in the House for consideration: House Bill 2135: https://olis.leg.state.or.us/liz/2017R1/Downloads/MeasureDocument/HB2135
Greater citizen and industry awareness and support of the bill are necessary precursors for the mitigation of climate change.