Lots of big ideas – think the minimum wage, women’s suffrage, abolition, fair labor standards – take years or decades from when they are first proposed to their final adoption. The fact that it takes a while to bring enough of society around to actually adopt a new idea doesn’t mean it wasn’t a good idea from the inception.  Other ideas arise when a problem is just beginning to emerge. They are based on the best thinking at the moment. But a couple of decades later, enough is, or should be, known about them so that a late adopter ought to be able to come to smarter decisions.  It seems to me that cap and trade as a means of reducing carbon emissions in Washington falls into that latter category.

Governor Inslee has had a task force working since last spring to develop a cap and trade program for Washington. The recent election may make that effort moot. A Republican Senate and a House that is barely Democratic are unlikely to be willing to cooperate in giving the Governor credit for bold new initiatives. They have school funding and transportation to deal with first, and any bold new plan is likely to need to have something both sides can claim as a “win.”

But in the wake of the public clearly expressing its distaste for politics in which polar opposites prefer doing nothing to doing something that is good for the public but where both sides get credit, perhaps it is time to look again at a revenue neutral carbon tax.  Recognition of the need to address climate change is not a Democratic monopoly.  When the Kyoto Protocol first proposed cap and trade in 1997, debate raged, and the United States refused to sign the Kyoto Protocol. But while today there remain “climate change deniers,” most serious thinkers on both the right and the left increasingly recognize that reducing carbon emissions is both a moral and economic imperative. The issue of principle that divides the parties is more one of the size and scope of government than whether government must address the issue.

A revenue neutral carbon tax could be used to lower Washington’s sales and B&O taxes, thus reducing the general tax burden on individuals and businesses, which should appeal to both parties, but particularly Republicans. It places decisions about carbon reduction in the hands of consumers, without needing a significant new bureaucracy; the “market” makes the decisions. That is a structure that Republicans can embrace. So perhaps there is an approach that could allow Governor Inslee to achieve his goal of making a major commitment to addressing climate change, while also allowing Republicans to take credit for achieving their goals.

Cap and trade was first developed by the EPA as a means of reducing the sulfur emissions that were the cause of acid rain, killing forests across much of the Eastern United States. By all measures, it was successful in that task.  Because of that success, it became one of the centerpieces of the 1997 Kyoto Protocol, which was one of the first major global efforts to combat carbon emissions at the heart of climate change.

Europe has embraced cap and trade as a means of achieving its commitments under the Kyoto Protocol. The states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont have formed the “Regional Greenhouse Gas Initiative” (RGGI) to cap and reduce CO2 emissions from the power sector. California has a cap and trade process in place. What each of these regions has in common, however, is that they started with a significant share of their electrical supply being generated by fossil fuels – particularly coal. Coal-powered electrical generation plants provide low hanging fruit for carbon reduction.

Europe has invested heavily in wind and solar – particularly distributed solar energy (aka, solar panels on the roofs). The New York Times recently reported that Germany will soon get nearly 30% of its electricity from sustainable sources – wind and solar. It also reported, however, that the transition to renewable power threatens to upend utility price structures, as utilities are forced to raise rates in order to pay for the coal fired plants that increasingly must be kept merely on standby for the times when the wind doesn’t blow or the sun doesn’t shine. RGGI states have succeeded in meeting their carbon reduction goals largely because the drop in natural gas prices, as hydraulic fracturing (fracking) has caused natural gas supplies to skyrocket, has made it cost-effective to convert coal-fired plants to natural gas.

While fifteen years of experience with cap and trade in Europe and the Northeast have shown that it can work, it has also shown that it has costs that may not have been anticipated at the time of the Kyoto Protocol. But the key distinction when considering a cap and trade system for Washington is that Washington doesn’t get its energy from coal fired power plants. The state has made a deal to close its last coal fired power plant, in Centralia, by 2025. Nearly four and a half times as much of the state’s power comes from hydroelectricity as from fossil fuel fired electrical plants. If you add in the 18 wind projects currently operational or under construction, more than five times as much electricity in Washington comes from renewable sources as from fossil fuels. Thus Washington doesn’t have the low-hanging fruit that cap and trade has been exploiting in Europe and the Northeastern states. Coincidentally, this is also the reason that Washington will not have a problem meeting the proposed limits under EPA’s Clean Power Plan.

Cap and trade also requires a considerable bureaucracy. It requires that major energy providers either reduce their carbon emissions by investing in new plant or equipment that directly reduces those emissions, or purchase carbon credits from other parties who can reduce carbon emissions more cost-effectively. Thus a steel producer in Seattle might purchase carbon credits from a landowner in the Amazon basin who agrees not to cut down a piece of the rainforest, or from a wind farm in Idaho, producing electrical power to sell onto the grid to supply electricity to California. While both of those parties selling carbon credits may be reducing carbon emissions, a bureaucracy is needed to in fact verify that the land in the Amazon basin hasn’t been harvested, or that the wind farm is operating. Cap and trade creates entire new consulting industries of organizations that trade, verify, securitize and sell emission credits. Consultants aren’t free, and their costs are passed on to consumers. There have been concerns that large-scale energy credit trading could lead to Enron-style efforts to manipulate the market that could add costs to consumers without any climate benefit.

The cap and trade system is assumed to pass its costs on to consumers of power. Of course a carbon tax passes an increased cost to the consumers as well. But while the cap and trade system puts the obligation to reduce carbon emission in the hands of the power suppliers, a carbon tax puts the choice to reduce carbon consumption on consumers. Cap and trade requires large carbon credit generating projects, while a carbon tax works by tipping the price scale in favor of lower emissions on a consumer-by-consumer basis. It will lead to more individual decisions to make minor reductions in carbon demand, rather than being focused on requiring major energy producers to make major carbon reductions. Some consumers will have more success than others in avoiding carbon use and thus carbon emissions than others. But the virtue of a revenue neutral carbon tax is that all consumers receive off-setting tax reduction in the sales and B&O tax, whether or not they can reduce their carbon emissions.

Neither cap and trade nor a carbon tax is a silver bullet for reducing carbon emissions. But in light of the recent elections, a revenue neutral carbon tax might be an example of how legislatures and governors used to work together to address major issues. Cap and trade, by contrast, is likely to result in nothing more than the hyper-political rhetoric that the electorate has said quite plainly they have had enough of.

  • Yoram Bauman

    Elaine I agree with your conclusion but I think the relevant arguments are a bit more subtle. For example, both carbon taxes and C&T can be used to generate revenue (C&T by auctioning permits) and both carbon taxes and C&T can include offsets (this is typically not done in the case of carbon taxes, but it would be easy to give tax credits to entities that planted trees or whatever). Overall, as I note in my cartoon climate book, the best way to think of C&T is as a funny-looking kind of carbon tax: http://standupeconomist.com/cartoon-climate/

    But Elaine you’re absolutely right that the politics of the two policies are different, and that there’s a chance to pursue a bipartisan approach with carbon taxes in Washington State…. and that we should jump at that opportunity!

    Regards,
    Yoram Bauman
    Carbon Washington
    http://carbonwa.org/

  • Green Avenger

    Can you name the serious Republicans that currently hold office who recognize climate change as a moral and economic imperative and would back legislation for a revenue carbon tax? They are sure keeping mum if they’re out there! I don’t see any of the current elected Republicans embracing any type of carbon pricing, not matter what it is.

    Also, I don’t get why Washington has to have a lot of coal for cap and trade to work. Aren’t the other point sources of emissions just as coverable by a cap?

    And the link you pointed out about Europe’s problems don’t really show that cap and trade was the issue. It was the fact that permit prices were low. All you gotta do to fix that is lower the cap! It’s just like if the rate of a carbon tax was too low and not encouraging investment in clean energy, you just raise the tax. Cap and trade and a carbon tax can actually achieve the same result.