Max Greenblatt
Debate Paper #2: Carbon Cap vs. Tax
EEVP Fall 2011
Nate Fisk
Cap-and-Trade vs. Carbon Tax
Never before has the problem of carbon emission and the subsequent issues of limitation of,
policy concerning, and ecological and economic effects been more critical than in today’s global
setting. With global carbon emissions exponentially increasing and presently over 30 million
kilotons (Google public data explorer, 2007) there has been outcry not only from subcultural
groups but also mainstream cultural and political spheres worldwide. As the global landscape
becomes more interconnected and limits of expansion can be realized in physical fashion in
many places for the first time in human history, the emergence of the need for policy that
drastically reduces and ideally extinguishes carbon emission has been made real and become a
deeply discussed topic among policy making bodies of power worldwide. More recently the
realization that the eventual existence of our race is threatened by such unchecked release of
carbon into the earth’s atmosphere has contributed greatly to the emphasized importance of the
issue. Due to the scope and nature of the problems posed by policymaking with respect to
reducing carbon emissions only few options have survived various arenas of debate and both
include economically based models for slowing the increase in carbon emissions and eventually
reducing such emissions. Two such proposals for policy that would curb emissions that have
been discussed and in some cases even implemented are the policy known as the ‘cap and trade’
system and policy that involves the taxation of carbon emission. Each set of policies involve
complex systems in which monitoring, enforcement and adjustment would be heavily stressed as
integral to success of the system, however the extent to which are more and less complex can be
disputed. Furthermore, each system also has differing implications for local, national and global
involvement, economic impact, and lifestyle impact. The following text will provide insight as
well as analysis of contemporary documents and articles surrounding each of the two
aforementioned sets of policies as well as providing a position for what actions should be
considered priority in seeking to solve the issue at hand of human carbon emissions.
The first point of analysis is related to the July 2009 edition of the Sightline Institute’s Cap
and Trade 101 Federal Climate Policy Primer. Based on the report the cap and trade system
places emphasis on the synthesis of a limit on carbon emissions in a particular economy and
issues permits for certain allowances of carbon emission to certain known polluters such as
harvesters of fossil fuels or operators of certain large-scale carbon emitting processes. This
function of the policy is the ‘cap’ portion of cap and trade and acts as a solid limit that can be
adjusted at certain times either proactively or in a responsive nature. The ‘trade’ piece of cap
and trade refers to the legal transactions between companies that would allow for transfer of
credits or portions of credits thus allowing certain companies to profit off of cleaning up and
others who couldn’t clean up as much but still afford to trade for more credit the ability to
continue to operate under such a system. Also a point of emphasis in the document was that
such a system would include various protections for the less influential stakeholders such as
families or individual citizens by offering energy rebates and certain realistic incentives for
participating in a cleaner energy economy. The major point of difference from many other
ecologically and economically minded carbon emission limiting policies is that the cap and trade
system places a real limit on emissions and provides a collective vision for regional and global
carbon emission reduction. The policy described above provides the framework for doing so
Max Greenblatt
Debate Paper #2: Carbon Cap vs. Tax
EEVP Fall 2011
Nate Fisk
through a five-module system. The modules of the system include: Tallying greenhouse gas
emissions (the Congressional Budget Office estimates US companies tracked to fossil fuel points
of entry into our economy), setting a cap (how much CO2 will be allowed into the atmosphere),
distributing permits, enforcing the cap, and gradually stepping the cap down. Evidence brought
up to support the system included the case from the early 1990’s in which release of sulfur
dioxide, a major contributor to the acid rain problem of the Northeast United States, was limited
and commoditized in cap and trade fashion. After a few years of implementation the system had
caused drastic decreases in the amount of sulfur dioxide in the atmosphere as well as reducing
acid rain episodes. The document also pointed to the evidence that as opposed to many other
proposed systems for reducing emissions of CO2 into the atmosphere the proposed cap and trade
system fosters a comprehensive system in which complementary policies and programs would
play an important role in the reduction of costs for companies in obtaining permits.
Although the journal edition referenced above provides a comprehensive proposition and
factually solid basis for a plan to reduce carbon emissions while providing means for continued
economic expansion, there are issues brought up in the argument for implementation of cap and
trade policies that are considered by many to be faulty characteristics or episodes in which
evidence has been mishandled. One such way in which the cap and trade system is criticized is
in its propositions and that was brought up in the journal referenced above is the fact that such
credits for carbon emission rely on relatively stable prices of carbon. Being that the cap and
trade system is set up in a market system, it is susceptible to speculation by buyers and sellers,
fluctuations in market prices and similarly volatility in the market. With such aforementioned
woes surrounding the cap and trade system, parties that opt into the system are put under yet
another economic stress related to market volatility. Another weak point in the argument
presented by the journal article is the point that was made that the cap and trade system would
take a long time to start up and get operating smoothly. Unfortunately with the nature of the
problem at hand, time is of the essence and the cap and trade system is admittedly time intensive
and volatile in the early stages of implementation.
The second item of analysis supports the implantation of policy establishing what is
commonly known as a carbon tax. Gregg Easterbrook’s argument in the article The Debate
Zone: Carbon Tax V. Cap and Trade is both compelling in the sense of persuasion toward
support of a carbon tax as well as faulty in some areas. The argument put forth stresses many
things but one point consistently: the simplicity both economically and psychologically that a
carbon tax represents. Repeatedly the reader is reminded that the simple illustration that taxing
things reducing consumption and Easterbrook backs up this claim with supporting evidence.
Simplicity is seen as a big payoff in the area of enforcement. Being that the proposed tax would
be a flat tax placed on the extraction of carbon emitting resources, the logistics and enforcement
of taxation would be far simpler than a cap and trade market system. Furthermore both political
and cultural embracement of the idea would be simpler due to the intuitive nature of the tax.
Another major note stresses in the article is that of voter support for a tax of this nature. Taxing
consumable that people want more of such as labor and income is unpopular, however taxing and
generating revenue off of an activity that is substitutable and good for the earth is estimated to
drive higher support from voters than proposed taxes related to other consumer services and/or
goods.
Max Greenblatt
Debate Paper #2: Carbon Cap vs. Tax
EEVP Fall 2011
Nate Fisk
Although convincing and strong, the argument in Easterbrook’s contribution to the debate
does have weak points. First, although simple and easily understood, a carbon tax still charges
companies and industries with accurate and consistent monitoring of carbon emission.
Engineering processes and equipment that can precisely monitor the output of carbon into the
atmosphere would be both costly and timely and would require an intense effort by such
companies and industries to create the infrastructure to do such monitoring. Secondly, and more
credible as an accusation of weakness in Easterbrook’s argument is the idea that because there is
no cap on carbon emission that certain taxable emitters of carbon would just be able to pay a tax
and not reduce emissions. Of course this idea comes natural to any proposition surrounding a tax
because as with any tax there is a curve related to tax effectiveness at reducing the metric at
hand. This idea plays heavily in favor of the cap and trade system because as stated earlier, the
tax places no concrete limit on the emission of carbon and simply generates revenue from an
activity; revenue that must be politically and socially agreed upon as far as allocation and
application of generated funds.
Our third point of analysis comes upon the examination of Felix Salmon’s article Why CapAnd-Trade System Beats a Carbon Tax. In his article, Felix aims to persuade readers why cap
and trade is a better alternative to carbon tax. In doing so, he makes it apparent as to how the
system would work under scenarios of various levels of participation from certain countries.
Furthermore he stresses the fact that a cap and trade system would in fact involve certain forms
of taxes and certain activities would be taxed to differing extents. By creating a more
comprehensive system, society is placed in an environment that fosters responsibility as well as
involvement in the solution to the carbon problem. By setting up a suite of solutions rather than
a single policy meant as a fix, the problem becomes more tangible and realistic to accomplish
progress toward fixing. As the article progresses, Salmon proceeds to further support the trade
portion of the cap and trade policy. He reiterates the idea that the system places a cap on
emissions and then allows certain carbon emitters to participate in the market to trade credits
(analogous to the tax portion of the carbon tax) in order to achieve proper limits.
As the aforementioned analyses of the articles above have demonstrated, action if needed
immediately for the reduction of carbon emission due to human activity. No longer can systems
for such action be discussed but policy must be implemented. It is my firm belief that neither the
sole implementation of a tax nor a sole implementation of a cap and trade system work, but
rather a comprehensive suite of solutions is needed that provides a cap and trade market system
as well as various taxes on emissions and/or activities that produce carbon. I feel as though a
system that affects not only producers but also consumers is needed and that this will have the
most impact on the social and political views on the issue. It is an immense task to reduce
carbon emission, requiring a gargantuan cooperative effort both culturally and economically but
I believe that with an array of sub-solutions, a large scale, effective solution will emerge and be
improved upon by a combination of both market and political forces. The future may hold
serious trials of human will and cooperation; however with the application of modern technology
and open-mindedness, a solution can be attained.
Max Greenblatt
Debate Paper #2: Carbon Cap vs. Tax
EEVP Fall 2011
Nate Fisk
References:
. "Debate: Cap-and-trade versus carbon tax." Debatepedia. Debatepedia, 04/10/2011. Web.
<http://debatepedia.idebate.org/en/index.php/Debate:_Cap-and-trade_versus_carbon_tax
Durning, Alan, and . "Cap and Trade 101." Sightline.org. Sightline Institute, July 2009. Web. 13
Dec 2011. <http://www.sightline.org/research/energy/climate-pricing/cap-and-trade101/Cap-Trade_online.pdf>.
Easterbrook, Gregg, and . "The Debate Zone: Carbon Tax V. Cap and Trade." What Matters.
McKinsey&Company, n.d. Web.
<http://whatmatters.mckinseydigital.com/the_debate_zone/carbon-tax-vs-cap-and-trade
Salmon, Felix, and . "Why a Cap-And-Trade System Beats a Carbon Tax." Portfolio.com.
Portfolio.com, 19/14/2007. Web. <http://www.portfolio.com/views/blogs/marketmovers/2007/04/19/why-a-cap-and-trade-system-beats-a-carbon-ta&xgt;.
EPA, , and . "Cap and Trade: Acid Rain Program Results." EPA.gov. Environmental Protection
Agency, n.d. Web. <http://www.epa.gov/capandtrade/documents/ctresults.pdf>.