In the battle over global warming, California is trapped by its own gaseous
political climate, unable to take the most effective and obvious step in the
process of controlling carbon emissions: a carbon tax.
Actually, let’s call it a carbon-permit fee, since the concept of “tax” is
anathema not only to the governor, but also to those Republicans for whom a
charge on carbon should be understood as a market-based alternative to
Putting a charge on pollution is one of those rare principles where
economists and the public agree. The public has always supported “polluter
pays”–that is, those who cause the mess should pay for its clean-up or be
charged for the cost–including ourselves. Economists talk about making sure
that pollution bears its full costs in the market, so as to create the
appropriate incentives to clean up.
Charging for carbon emissions immediately sends a signal that emissions can
be costly, and that putting out fewer emissions will be economical. It uses
the powerful incentives of the market so widely touted by conservatives,
harnessed to saving the globe–the ultimate win-win. It creates a market for
those hyped new technologies that, wonderful as they may be, will not get
adopted unless the economics are right.
Unfortunately, when then-Vice-President Al Gore proposed carbon taxes in
1993, he was so far ahead of his time that only a few environmentalists and
economists understood what he was talking about. (Ultimately, we will have
lost 16 years of Al Gore’s leadership on this issue, not just the last eight
years of inaction without Gore as president). From the conservative side,
President Bush’s former chair of the Council of Economic Advisors, economist
L. Glenn Hubbard, who supported all of the Bush tax cuts, has recently
written that a carbon tax is the one tax he would support and that we should
There are a number of approaches to setting a carbon permit fee. The
Oakland-based group, Redefining Progress (www.rprogress.org) has a
relatively rigorous discussion of the process of setting a cap on emissions,
and then auctioning the permits. Redefining Progress notes that the result is an
increase in economic efficiency, not damage to the economy, by getting the
price of pollution set correctly.
Charging a fee has many virtues. Clearly, the less you emit, the less you
pay, this year and the next, whether consumer or producer. And as the cap
tightens and the cost of emissions rises, the incentive to adopt new
technologies or increase fuel efficiency grows rapidly.
Redefining Progress estimates that at an appropriate market-clearing price, the fee would generate about $2.5 billion per year. Charging drivers and electricity
users (yes, all of us bear some responsibility for carbon emissions) can
have some difficult distributional effects on the poor. Some of the revenue
can be used to mitigate those costs, through, for example, an earned-income
tax credit and the extension of the current electricity low-income subsidy.
Revenues also can be used to ease the transition for businesses heavily
dependent on carbon emissions. And revenues can help develop technological
alternatives, which are also provided real economic incentives by the
underlying permit system to use them.
Right now, the fight over AB 32 is mostly about regulation. The governor
wants to create a hydra-headed alternative to the obvious regulator, the Air
Board, and wants to make sure that no action is taken that may have negative
economic impacts. Democrats want a tough regulatory bill.
Is it possible that charging $2.5 billion for carbon permits will not have
negative economic impacts? It’s not only possible, but likely: It will
create a highly efficient market for lowering carbon emissions and it can be
used to mitigate any dislocation, all at a far lower cost than regulation
or, not least, the eventual disruption from global warming.
Is it likely to happen? Like Bush, Schwarzenneger likes to tout new
technologies, not the underlying economic changes that would make the
technologies useful. And, of course, we have to get by the Sacramento
mindset that, Phil Angelides notwithstanding, actually raising revenues is a
bad thing. But occasionally in politics, an idea that is correct, practical
and popular wins out. So, Al Gore, you still have a chance of being heard.