Don’t bet the planet on carbon taxes

THE HILL, April 9, 2015

LAST MONTH, the Obama administration pledged that, by 2025, the U.S. will cut greenhouse gas emissions 26 to 28 percent from 2005 levels, the same commitment it made in its deal with China last fall. The pledge is both heartening because it keeps the international negotiating process moving, and depressing because, even if achieved, it is (according to most scientists) far too little to avert climate catastrophe.

So the question remains: is there any imaginable way that U.S. political action could go further? Or are we betting the planet on a potpourri of rules and regulations that, even if fully implemented, are highly unlikely to solve the problem?

Many economists argue that a tax on carbon is the ultimate climate solution. In this view, the failure of markets to charge appropriate prices for carbon causes everyone to burn too much of it. Let government add a tax—ideally a steadily rising one—and the problem is solved.

The argument certainly has a logic to it. And a carbon tax has the advantage of being both economy-wide and simple to enforce. But in the real world, would it actually save us from climate catastrophe? There are good reasons to believe that it wouldn’t.

The first is that a carbon tax would be only one factor in the total prices of fossil fuels, and in the case of oil, a small one. As a rule of thumb, each dollar per ton of a carbon tax adds about a penny per gallon to the price of gas at the pump. So a carbon tax that rises $15 a ton per year (as has been proposed by Rep. Jim McDermott) would raise gasoline prices by about 15 cents a gallon per year, a modest fraction of the current price.

For at least the next decade, the signal from such a tax would be lost in the volatility of other, larger components of the pump price. And after that, its impact would likely be limited. Even if there were no political backlash against the tax, as there was recently in Australia, the cumulative tax rise over thirty years would be around $4.50 a gallon, meaning that (other things being equal) the price of gas in the U.S. in 2045 would be below the average price in Europe today. That might nudge Americans out of their Jeep Wranglers, but not out of their Mini-Coopers.

Even if fuel prices went higher than that, a look at the last twenty years suggests that price signals alone aren’t a sure bet for the next twenty. Between 1994 and 2014, the global price of oil tripled, yet U.S. oil burning barely budged. While higher prices spurred efficiency and reduced per capita consumption, they didn’t cut aggregate consumption because our population and economy steadily grew. And now that oil prices have plummeted, whatever impact higher prices made in the past could easily be wiped out.

Cutting aggregate use of fossil fuels is, of course, what’s required. Indeed, the math says that aggregate use has to verge toward zero by mid-century. So there’s little time to lose in installing an effective and reliable carbon reduction tool.

IF A CARBON TAX is a bad bet, is there a better one? Fortunately,there is: a declining carbon supply limit, with the allowed supply allocated by the market. Permits would be sold not to emitters, but to companies that bring carbon into our economy. The reason is that if carbon doesn’t come into our economy, it can’t go out. To avoid leakage, there’d be no tradable offsets. And to avert political backlash, the money raised by selling permits would be returned equally to every American with a Social Security number.

Unlike a carbon tax, a declining carbon supply limit would send two messages to the market rather than one. A carbon tax says to the market,“Fossil fuels will get more expensive over time.” Many polluters can live with that, knowing they can shift higher costs to consumers or use fossil fuels more efficiently. By contrast, a declining supply cap sends a price signal and a physical one: “In the not-too-distant future, fossil fuels won’t be available at any price.” That makes everyone get serious about carbon reduction and substitution.

THIS BRINGS US to the bill introduced recently by Rep. Chris Van Hollen of Maryland. Called the Healthy Climate and Family Security Act, the 27-page measure combines a descending supply limit with dividends. Van Hollen introduced a similar bill in 2009, but it was lost in the battle over cap-and-trade. Now it stands alone as the only bill that would physically limit carbon burning while retaining broad popular support.

As long as climate deniers are running Congress, Van Hollen’s proposal won’t get very far, but it merits our attention nonetheless. It reminds us that, when nature’s voice is finally heard, there is a way to kick our carbon habit that’s guaranteed to work. Let’s remember that when hurricanes strike, droughts linger and forest fires rage.