Thursday, April 9, 2009

Tom Friedman: A Carbon Tax is the right approach

In his column in Wednesday's New York Times, Thomas Friedman suggests that Congress and the president should scrap "a plan to reduce greenhouse-gas emissions through a complicated cap-and-trade system" in favor of a simple carbon tax.

I agree.

Cap-and-trade is bureaucratic, litigious, prone to manipulation and won't get us anywhere. A decade after Kyoto, its signatories -- all of whom instituted cap-and-trade -- have failed to reduce their CO2 exhaust.

By contrast, a carbon tax makes economic sense: If you put a pollutant* into our common atmosphere, that pollution imposes a cost on the rest of us. A carbon tax forces you to internalize that cost. That gives you an incentive to pollute less (which means burn less carbon).
Since the opponents of cap-and-trade are going to pillory it as a tax anyway, why not go for the real thing — a simple, transparent, economy-wide carbon tax?

Friedman outlines the plan he favors:
Representative John B. Larson, chairman of the House Democratic Caucus, has circulated a draft bill that would impose “a per-unit tax on the carbon-dioxide content of fossil fuels, beginning at a rate of $15 per metric ton of CO2 and increasing by $10 each year.” The bill sets a goal, rather than a cap, on emissions at 80 percent below 2005 levels by 2050, and if the goal for the first five years is not met, the tax automatically increases by an additional $5 per metric ton.

If only the United States has a carbon tax, won't that encourage manufacturers to move overseas, where there is no tax?
The bill implements a fee on carbon-intensive imports, as well, to press China to follow suit.

A carbon tax should be implemented globally, not just here. We may be the biggest polluters, now. But soon enough, the CO2 produced in India and China will swamp our output. Once we get serious about this issue, the U.S. should press the WTO to make a global carbon tax mandatory.

Ideally, the money generated from a carbon tax should subsidize the use and development of technologies (like solar, wind, nuclear and so on) which replace fossil fuels. However, the Larson bill has a more populist approach (which might make it more politically viable than mine):
Larson would use most of the income to reduce people’s payroll taxes: We tax your carbon sins and un-tax your payroll wins.

Friedman thinks most people will now support a carbon tax. I do. But I have my doubts about my compatriots:
Americans will be willing to pay a tax for their children to be less threatened, breathe cleaner air and live in a more sustainable world with a stronger America. They are much less likely to support a firm in London trading offsets from an electric bill in Boston with a derivatives firm in New York in order to help fund an aluminum smelter in Beijing, which is what cap-and-trade is all about. People won’t support what they can’t explain.

*It's fair to question whether carbon qua carbon is "a pollutant." After all, every terrestrial form of vegetation requires CO2 in the atmosphere to live. Trees, shrubs, flowers and so on inhale CO2 and offgas oxygen, making the Earth livable for people and all fauna. Yet given what we know about the hazards of too much carbon in the atmosphere, it's fair to classify excess carbon as a pollutant. We get excess carbon in our air by extracting minerals -- coal and oil -- which have sequestered carbon, and burning those minerals. Thus, a tax on fossil fuels rightly taxes the pollution component of carbon.

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