The Attack on Carbon Caps

I am not going to beat around the bush: my side on the issue of climate change is getting hammered. At first, it looked as though there might be a real chance to set up a system of carbon permits—just for fossil fuels, no offsets, all permits auctioned, the money redistributed back to the public. This is approximately what Obama proposed when he ran for president, and back in those days, whenever I would give a talk about climate change mitigation and outline the program, nodding heads could be seen everywhere. (And not falling asleep either.)

But that was then. Once the proposals started getting hashed out in Congress, it was one disaster after another. Permits were pushed downstream, with bickering over which activities should be under the cap. They were given away rather than sold. Nearly all of them could be offset. What little permit revenue remained was dangled in front of special interests to get them to sign on. Our simple, clean efficient carbon cap was in ruins.

And now I am being clobbered by the Left. Without a question, those who denounce “carbon trading” have won the debate among activists, as illustrated by today’s New York Times op-ed from Jim Hansen, the climate science guru. A carbon cap means cap-and-trade, and this means trade, which means market ideology and financial legerdemain, says Hansen, repeating the now-dominant line. What we need, he says, is a tax, which is pure, unsullied by grubby politics, and sure to be handed back to the people the way we (me and my ilk) wanted permit revenues to be.

So what will it be? Stick with my old beliefs and watch them fade into irrelevance, or join the new activist army that opposes mandatory carbon caps?

I’ve decided to keep on fading. They say it is a sign of mental illness to continue repeating behavior that doesn’t do any good, but once again I will make the arguments that have failed to persuade in the past.

1. A comparison between a nasty, highly compromised carbon cap and a pure, hypothetical carbon tax is meaningless. Once the carbon lobby gets its hands on a tax, the picture will be just as ugly. You can bet that whole industries will be exempted from the tax. You will be able to dodge the tax by making contributions to tree-planting or some other activity across the globe (offsets). The tax revenues will go into the same special interest trough that permit revenues have trickled into. And of course the tax will be much, much too low.

2. How on earth did activists come to believe that adopting a tax approach to environmental problems instead of a mandatory permit system was “resisting the market”? Think about this for a moment. What does it mean to rigorously enforce a tax? It means that people really have to pay it; the tax can’t be evaded. How that translates into carbon reduction, however, depends on the market. Maybe the price effects of the tax will be enough to get the reduction we need, maybe not. It is a big experiment, and favoring a tax means you are willing to take the chance that price adjustments alone will not be enough to decarbonize industrial economies after centuries of increasing carbon density. A rigorously enforced cap, however, is exactly that: it guarantees that no more than that amount of carbon will be allowed to enter the marine-terrestrial-atmospheric carbon cycle. The experiment, in that case, is on the side of prices—we will find out, through trial and error, how much prices have to rise for this to happen. So which approach places more trust in markets? And which puts a priority on meeting ecological goals rather than economic ones?

3. Offsets, under either caps or taxes, vitiate the whole effort. A ton of carbon temporarily diverted from the atmosphere (and lodged in a sink like a forest) is not the same as a ton sequestered from the carbon cycle in geological time (hydrocarbons under the earth). Determining additionality (that projects wouldn’t be undertaken without the offset) is a practical and metaphysical impossibility. Incentives to deceive and cut corners are rife. Many offset projects have other, detrimental effects, like driving traditional peoples from their forest homes or creating local pollution hotspots. The cap vs tax debate, in this context, is a distraction, since either mechanism can be undermined by offset loopholes.

4. Upstream controls are simplest, fairest and most effective in forestalling catastrophic climate change. Policy should target the sources, not the uses, of carbon inputs. This means controlling the extraction of fossil fuels and, in a national context, their importation as well. There are few companies in this business, and hardly any sophisticated technology is needed for monitoring. Doing this avoids the pork barrel debate over who should or shouldn’t be covered under the system, and it offers the most comprehensive option, with the greatest impact on mitigation. Once again, the cap vs tax debate is a distraction, since either approach has to deal with how upstream or downstream the implementation will be.

5. It is essential that all revenues collected from the system be recycled back to the public. It is now clear beyond dispute that there will never be sufficient political support for effective carbon policy as long as it is believed that household budgets will pay the price. No politician has the courage to risk the electoral backlash from high energy prices, not only in the US, but also in Europe, where programs have been gamed to keep impacts minimal. There is only one way out: promise to return to the public all the money sucked in by higher energy prices, and build that promise into the architecture of the system, so it is truly credible. Hansen is right that a simple per capita distribution of the revenues captured by carbon levies would do the trick, but, one more time, this is not simply about caps vs taxes. True, taxes at least avoid the problem that carbon permits may not be auctioned (and this is in their favor), but there is nothing intrinsic to tax collection that guarantees that the money will go where Hansen and I both want it to.

6. The biggest drawback to taxes compared to caps is political, however. If we have learned anything in the last few years, it is that there is immense inertia that stands in the way of serious climate policy. This is due above all to the power of the carbon lobby, but also to the complexity of the issue and genuine nervousness on the part of the public over the potential economic effects of so sweeping a change. It is essential, then, to pay attention to how the debate is framed. I think Bill McKibben is exactly right about this: we must put the scientific evidence at the center of the argument and demand policies that meet physical targets for climate mitigation. We may lose that battle, but it’s our best chance. If we go for a tax system, however, the debate centers around how big a tax we should impose. This pushes science into the background and foregrounds economic effects. I am surprised that Hansen prefers to wage that battle; I think it’s a loser.

One minor quibble about Hansen’s article, although it illuminates the rush-to-judgment taking place among climate activists. He writes:

"Consider the perverse effect cap and trade has on altruistic actions. Say you decide to buy a small, high-efficiency car. That reduces your emissions, but not your country’s. Instead it allows somebody else to buy a bigger S.U.V. — because the total emissions are set by the cap.

"In a fee-and-dividend system, every action to reduce emissions — and to keep reducing emissions — would be rewarded. Indeed, knowing that you were saving money by buying a small car might inspire your neighbor to follow suit. Popular demand for efficient vehicles could drive gas guzzlers off the market. Such snowballing effects could speed us toward a pollution-free world."

Hansen is a very smart guy, but here he makes several elementary mistakes. (1) His definition of altruism is weird. Most of us would think that if you voluntarily take on an extra share of a collective burden, allowing others to take on less, you were being altruistic. (2) There is an implicit and irrational moralism just below the surface: driving an SUV is wrong and the people who do it are bad. But SUV’s are a problem only because of their environmental effects; if the rest of us, by cutting way back on fossil fuel use, make it possible for a few to continue to drive these dinosaurs, so what? You know, maybe there are people who really need a big, heavy vehicle for the kind of work they do or where they live. Driving a big car is not intrinsically sinful, but only if it comes at the expense of the common good. (3) So let’s redefine altruism in Hansen’s way, as curbing climate impacts even beyond the targets set by policy. This is not difficult in a system of carbon permits. Put some money into a mutual fund whose purpose is to buy permits and retire them unused. (4) If there is a demonstration effect from switching to more energy-efficient technologies, this will work under a permit system exactly as it would under a tax. In either case, energy will become more expensive, and people will be looking to save. Hansen is right that herd effects could be extremely powerful, and this is why we need some system, whether caps or taxes, to get a critical mass of new technology adopters.

None of these arguments is very complicated, and I’m sure with a little reflection Hansen would have seen them too. But there was no reflection. What we have is an ideological stampede, with powerful framing and peer effects. Rational discussion has been overwhelmed, and within a few months we have seen virtually the entire activist climate community converting to a new party line: the solution is to abandon “carbon trading” and pledge allegiance to a carbon tax.

Everywhere I go I hear echoes of this line. Nothing I say makes any difference, because the debate is already over. My activist friends smile at me tolerantly, knowing that they don’t have to come up with answers because everything I say is irrelevant.

So here I am, wallowing in my dysfunctionality, making the same arguments that have failed to convince time after time. Can you think of a Plan B?