Trade versus Tax

Senator Joe Lieberman, for all his flaws, is no slouch on environmental issues. He’s tried twice already to push through legislation to reduce carbon emissions, and last week he launched a third attempt, unveiling plans for a US carbon-trading market. By auctioning off the right to pollute and allowing the greenest companies to sell leftover allowances, Lieberman’s bill would aim to reduce emissions by 70 percent by 2050, and raise almost $70 billion for research into green technologies.

Having watched his previous attempts crash and burn on the floor of the Senate, Lieberman has carefully crafted a bill that’s got a good chance of becoming law. He’s recruited centrist Republican John Warner of Virginia, who opposed both his previous efforts, as his wingman. Together, under the watchful eye of the U.S. Senate Committeee on Environment and Public Works' chair Barbara Boxer, they’ve cherry-picked many of their rivals’ best ideas, including a measure that would force importers to buy allowances if goods were produced in a country that doesn’t have a carbon trading scheme of its own.

To greens, the Lieberman-Warner legislation looks pretty good - and certainly better than the business-friendly rival plan proposed last month by Jeff Bingaman, chair of the Senate energy committee. The Lieberman-Warner plan sets stricter targets and, crucially, doesn’t give polluters a “safety valve” when carbon prices start to rise.

But while the new proposals do give greens plenty to smile about, it’s worth remembering that while carbon trading programs are better than nothing, they’re far from ideal. As Europeans recently discovered, carbon markets need to be carefully calibrated when they’re first established, and it’s very difficult and expensive to correct their course once they’re under way. Even a perfectly designed carbon marketplace is likely to be highly volatile, unresponsive to economic shifts, and in need of strict and costly policing and regulation.

But there is a cheaper, simpler, and safer alternative to all this: the carbon tax. A growing group of economists now say a tax on carbon production would be more effective and easier to regulate than a cap-and-trade scheme. After all, it’s far easier to tweak a tax rate than to overhaul an entire marketplace. But introducing a carbon tax would require telling inconvenient truths to American consumers--few on the Hill have the stomach for that battle.

And so we’re left with senators Lieberman and Warner, who with the support of the Senate leadership hope to bring their cap-and-trade bill before the full Senate in the fall. It looks like the third time could be the charm for Joe Lieberman -- and second best for the rest of us.

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