Sunday, November 09, 2008

Now more Hot Air- Carbon taxes now!

Sep, 2008
A taxing problem

Speculator IR magazine, Sept 2008

Ian Williams argues against cap and trade

In Kyoto, 10 years and many hurricanes ago, when most governments began to suspect there might be something in this climate change business, the carrot that drew the Washington donkeys nibbling a little way down the road was the idea of a carbon emissions market.

It was the high tide of the neo-liberal consensus, before the tech bubble, Enron, Bear Stearns, and so on. Taxes were toxic and then-President Clinton's briefly mumbled invocation of carbon taxes was drowned out by clamorous coal and oil lobbyists who could call for backup from the host of voters who saw taxation of any kind as an unconstitutional, cruel and unusual punishment. Clinton did what he did so well and so often: he folded.

Instead, the argument went, companies and countries would set caps on emissions and efficient companies or countries would be able to trade what they saved with those that went over their caps. In the US, with some cities smelling and looking like Beijing in an off-Olympic month, the coughing citizenry and the acid rain pock-marking car bodies and killing trees had provided the political impetus for a cap-and-trade system for sulfur emissions that worked quite well.

However, until recently it looked like the people in underdeveloped tropical countries would be the first to suffer the greenhouse-induced drought or drown syndrome, so who cared? Certainly few worried enough to swap their SUV for a hybrid, or to turn down the A/C. Then, this year, the price of oil finally sent what economists call 'a signal' loud enough for American consumers to receive. People began to drive less and use public transport, while Detroit suddenly realized that the game was up for gas-guzzling behemoths.

Environmentalists point out that a higher oil price sends other signals as well - to the producers, the miners of coal and tar sands, both huge sources of emissions, whose otherwise marginal profitability is boosted by oil prices. Meanwhile, between the bankers, the traders and the green lobby, carbon trading is suddenly the fashion of the year, with confident predictions that any new administration will implement it.

But let's take our foot off the pedal for a moment. The debate on the failed Warner Lieberman bill in the Senate this summer showed the complexities of a cap-and-trade system. This is not a market for tangible commodities between consumers and producers but for permissions from a government creating a whole new class of regulators, rentiers and arbitrageurs.

In fact, a straightforward carbon tax would be much more market-friendly, despite the residual bad karma attached to taxation. It would invoke real market mechanisms that would restrain consumption and make innovation and pollution control directly profitable for producers.

If a new president and Congress introduced carbon taxes, would gangs of oil tycoons swarm aboard tankers in Boston Harbor and dump the cargo overboard? Probably not. A few more Katrinas should send the appropriate signal, however. The time has come to reconsider taxation.

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