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Ask the Conservationist

April 2009: Cap-and-Trade vs. Carbon Tax

Cap-and-trade, carbon tax — almost every day a new story appears in the media debating the pros and cons of each. So which is really better for reducing the impacts of climate change?

The Nature Conservancy's Michael Wolosin tackles this big question — and fills readers in on the Conservancy's stance on the issue.

Find out his answer in our monthly column "Ask the Conservationist." And when you're done reading, send us your questions on any conservation subject for one of the Conservancy's 720 staff scientists. (Note: We regret that we can only answer one or two questions each month and that we cannot answer the others offline.)
Larry Ahlgrim of Norfolk, VA, asks:

“Will cap-and-trade legislation really be effective in reducing carbon emissions, or is it just political grandstanding with enough loopholes to make it meaningless? Or would a straight carbon tax be more beneficial because it would be without the bureaucratic red tape & shenanigans? I can't tell if anyone in Congress is really serious about it or just trying to score political points for their parties. What is The Nature Conservancy's stance on these proposals?"


Michael Wolosin:

The debate in Congress has really shifted in the last year or two from one centered on the science of global warming and the need for action, to one focused on solutions. Members of Congress on both sides of the aisle are dedicated to solving this problem that threatens both our human and natural systems, and that is a real step forward.

In fact, comprehensive climate change legislation is beginning to move through Congress and will likely be a hot topic all summer. Bob Bendick, the Conservancy's director of U.S. government relations, recently discussed the new legislation on The Nature Conservancy's blog, while Andrew Deutz, the Conservancy's director of international government relations, weighed in on the international implications of proposed legislation.

The Nature Conservancy strongly believes that a cap on carbon emissions is the right way to reduce emissions, and is working hard to ensure that cap-and-trade legislation in Congress is strong enough to meet science-based targets and is designed to be effective in meeting those goals.

There are several reasons that we support a carbon cap approach rather than a carbon tax.

Most importantly, a carbon cap approach delivers a sure environmental outcome. The whole purpose of climate legislation is to achieve levels of emission reductions that science tells us we need in order to avoid the worst impacts of climate change. The goal is an environmental outcome, and a cap program puts that goal front and center with a firm target.

A carbon tax, on the other hand, requires the government to guess what level of tax would generate the right economic change to meet the environmental goal. The tax level would need to be updated because there would be substantial pressure to set the initial tax lower than required — because economic conditions change and because our understanding of the tax level needed to meet the environmental goal would improve. This would require Congress to repeatedly raise the carbon tax rate — a daunting task.

The Benefits of a Cap-and-Trade Program

Climate change is a global problem that requires a global solution. Carbon cap legislation in the United States can be informed by, relate to, and influence cap programs already in place in Europe and can ultimately be part of a global standard. Cap-and-trade programs can readily be linked to establish a single comparable global market, and these links can reduce the overall economic costs of achieving our global goal. They can also catalyze greater action by other countries, including activities such as reducing deforestation in the developing world.

It is also important that cap programs automatically adjust to economic conditions. Unlike a carbon tax, which would take an act of Congress to adjust, the price of an allowance in a cap-and-trade program depends in part on the overall economic activity in the country. During recessions, emissions decline with economic activity, and allowance prices would decline automatically. Conversely, higher allowance prices during times of economic expansion means we pay for the reductions during those times we can most afford it.

One of the arguments that is made in favor of a carbon tax is that it would be simpler than a cap program. But history suggests that Congress has difficulty enacting simple changes to the tax code — and there is as much of an opportunity for loopholes and complications in the tax code as in any other form of legislation. A carbon tax would likely be tangled up quickly with other tax provisions, leading to a diluted ability to drive carbon reductions.

Finally, in addition to all of the above reasons to prefer a carbon cap to a carbon tax, there is the simple realpolitik issue of getting legislation passed. While the obstacles to enacting cap-and-trade legislation are substantial, enacting a carbon tax in the current political environment seems unlikely. (Indeed, many of those who suggest it is preferable to a cap-and-trade approach are not clear that they themselves would support a tax.) Shifting the policy discussion from a cap to a tax could engender years of delay.


About the Conservationist

Michael Wolosin is the Conservancy's climate change policy advisor.

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