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Cap and Trade versus a Carbon Tax: Where is Bill Gates Sr. When We Need Him?

Posted in Climate Change

Climate change deniers continue to be with us. But the release on June 25 of “Risky Business,” a comprehensive report on the risk to American business and political life from climate change, suggests that the reality and risk of climate change is increasingly clear to intellectual leaders of both parties. The committee that commissioned the report included three former secretaries of the treasury, two of whom served Republican presidents. When cap and trade becomes perceived as a threat to business and the economy, it will have a better chance of generating bipartisan concern.

The core question, of course, is what to do about climate change, once you recognize it’s a problem. Assuming one doesn’t stop with “throw up your hands, go hide under the covers and hope somehow in the morning it will have disappeared like the boogeyman,” the compelling need is to convert from a fossil fuel dependent economy to an economy that both promotes conversion to alternative sources of energy and spurs the development of not-yet-imagined technologies to make life without fossil fuels work.

And the next core question is how do you do that? There, the mantra “think globally, but act locally” probably has a fair amount of credence. There have been in the past, and will need to be in the future, global treaties governing climate change. In the absence of global cooperation, the actions of any one state or nation will be overwhelmed by the greenhouse gas emissions from other countries. China is now the world’s largest emitter of carbon, with India and other parts of the world that are developing a growing middle class fast behind. The United States cannot limit greenhouse gas emissions enough to avoid the worst effects of climate change without the cooperation of the world’s other large and growing economies.

But, one of the persistent arguments of the developing world is that unless and until the United States takes significant action to limit its carbon emissions, they will not compromise the development of their own middle class. The reality is that much of our standard of living has depended on cheap and unrestricted use of fossil fuels, and developing countries very much want to provide their people with the same standard of living that the United States has achieved. In 2012, the United States emitted 17.31 tons of carbon dioxide per person, while China emitted 5.43 tons per person and India emitted 1.39 tons per person. China has a lot more people – but to bring China and the other major emitters to an international solution, the United States will have to make major progress in reducing its per capita emissions.

Which brings us back to “acting locally.” Governor Jay Inslee has a task force working on development of a carbon-trading market – presumably a relative of the cap-and-trade system promoted by the Western Climate Initiative (WCI), and the subject of several years of legislative debate during the administration of former Governor Chris Gregoire. SB 5735, the last phase of Governor Gregoire’s effort, died in 2009, as legislators of all parties recognized that a cap and trade system would necessarily raise prices for gasoline, home heating oil and electricity, and in the depths of the Great Recession, no politician was willing to run for re-election having taken a vote that hurt the Washington economy. At the time, they also hoped that the Obama Administration was about to push the United States as a whole to a cap and trade system. But the bottom line for legislators in 2009 was that they weren’t about to raise prices for consumers and they weren’t about to put Washington at a jobs disadvantage relative to other states.

Has that political calculus changed since 2009? The economy is clearly better. But the very difficult thing about efforts to restrict use of fossil fuels is that doing so will raise consumer prices, at least initially. The new technologies that have to replace the use of fossil fuels would be here now if it weren’t that fossil fuels are cheaper. As I’ve written before, while ultimately Washington may have much to gain from new jobs in a post-fossil fuel economy, those gains are not likely to be evenly distributed, and the increase in costs of gasoline, heating oil and electricity will fall hardest on those least able to adjust.

Which brings me to the alternative – a carbon tax. Rather than capping carbon emissions and then forcing businesses that need more emissions to buy them from parties that can reduce their emissions more efficiently, a carbon tax simply makes carbon more expensive. Fossil fuels have been cheaper than alternatives at least in part because of their hidden externalities – the price at the pump does not include the cost of more severe weather or a need to be involved in Middle Eastern politics so long as we need Middle Eastern oil. So increasing the cost of carbon arguably puts some of those hidden costs back onto carbon and levels its playing field with alternative sources. And, it does so with greater simplicity and a more even hand than a cap and trade system.

But that is not the primary attraction of a carbon tax to me. A cap and trade system is both complex and expensive. It forces conversion to alternative forms of energy, but the cost of that conversion basically goes from one business to another. A carbon tax, by contrast, generates revenue, and that revenue could be used to do two things that are important to the people who are hit hardest by increasing the price of carbon. It could lower Washington’s sales tax and it could provide the missing funding for public education that the Washington Legislature has been unable to muster.

Back in 2010, Bill Gates Sr. took the gutsy step of getting out front to support adoption of I-1098, which would have imposed an income tax on Washington’s highest earning individuals. He argued that was necessary to provide $2 billion in underfunded public schools and health care facilities in Washington. He argued that Washington’s tax structure, with its dependence on the sales tax and property tax, was regressive, with the lowest income households paying 15.7 percent of income in taxes while the highest income households pay 4.4 percent for the same taxes.

By the same reasoning, any system that raises the cost of energy will be regressive, because low income people pay a higher percentage of their income for fuel and transportation, and are least able to avoid or reduce those costs. So if we must – and we must – raise the cost of carbon, why not do it in a way that can pass the benefits on to those most affected most directly? If the revenue from a carbon tax were used to lower Washington’s sales tax, it would offset the increase in costs of energy to consumers by decreasing the cost of other goods and services. At the same time that it spurred consumer efforts to lower their carbon use, it would make other necessities more affordable. If it generated revenue to improve Washington’s education system, again, the primary beneficiaries would be the children of lower income citizens, who must depend on public education for their future. What we need is for a true statesman – as Bill Gates Sr. is a true statesman – to step forward to combat the political aversion to anything with the word “tax” in its name.