Friedman on a Carbon Tax

New York City -- In today's Times, Thomas Friedman, who has been writing about environmental technology for some time and is well credentialed in this space, not only due to his platform at the Times, but also due to his relentless exploration of energy issue, expresses his support for a carbon tax in lieu of a cap and trade plan to put a price on carbon. 

In so doing, he joins others with true green environmental credentials such as Al Gore who supported a carbon or BTU tax before cap and trade was even invented and many economists, including NDN's Rob Shapiro who has written extensively on the subject. 

It is important to recall that Al Gore, arguably the father of the carbon tax, also supports cap and trade and indeed the two approaches need not be mutually exclusive. Several European countries including Denmark, widely praised for its switch to renewable fuels, have a carbon tax and participate in the EU cap and trade system. 

However, as with the Yankees and the Mets, cap and trade and a carbon tax both have passionate advocates.  An advantage of a carbon tax, supported by many economists, is that taxes -- something the government has long experience collecting and companies paying -- are probably easier to administer than a system for trading carbon credits.  With financial markets less esteemed than only a year ago, opponents of a carbon tax worry about gaming of the carbon market. Supporters of a tax also argue that it may result in less price volatility in energy at the expense of less precision in reducing emissions since it fixes price rather than quantity.

Most environmentalist scientists consider a cap and trade system to be critical to addressing climate change because in theory it imposes an absolute cap on emissions.  If one takes seriously the science on the issue, the argument runs, we have less time and leisure to avert major damage to the climate than commonly believed and only a fixed cap provides certainty about lowering emissions.  Companies could -- under a tax regime -- continue polluting and simply pay more tax which, in some cases, they might be able to pass onto consumers, giving them broad license to continue emitting.

Of the two approaches, cap and trade has gained far more traction. It is already in use in the European Union. Ten northeastern and mid-Atlantic states recently launched a mandatory cap and trade system called the Regional Greenhouse Gas Initiative (RGGI) and a similar initiative is underway in California and other western states. However, carbon taxes --generally smaller ones than those that would be needed to achieve deep carbon reduction --are employed in Denmark and, indeed, most European countries, in several US states and, indeed at the national level, by commodity, as in the retail tax on gasoline.

Rather than take a position on these cross cutting arguments, Friedman focuses on the immediate politics of the issue: the fact that coal companies and others are now trying to paint cap and trade as a tax to block its passage. If opponents are calling it a tax, he argues, why not just go ahead and pass a tax?

In fact, many of the staunchest supporters of cap and trade such as U.S. Rep. Ed Markey who oversees a key subcommittee and, with House Energy and Commerce Chairman Henry Waxman, has introduced cap and trade legislation has indicated he understands the arguments for a carbon tax as well as cap and trade but believes that one must be mindful of political realities which, for the time being, favor cap and trade.

Friedman argues that a tax could be sold to the American people by marketing it as vital to America's defense and economic priorities. In supporting Congressman John Larson's proposal to tax carbon but cut the payroll tax by an equal amount (an idea proposed by Rob Shapiro) he advocates employing the President's National Security Advisor, General James Jones, to make the case. (Jones worked on climate policy for the US Chamber of Commerce prior to entering the Administration, to the consternation of some environmentalists).

Is Friedman right?

Here is my view on the issue of how to proceed on putting a price on carbon. Ultimately, cap and trade and a carbon tax have more similarities than differences. Both put a price on carbon and neither one invalidates the potential value of the other.

Cap and trade will probably pass the House this year and needs about four to five more votes in the Senate than it has yet to achieve cloture and become the law of the land.  It will enjoy the deserved support of the vast majority of environmentalists as debate unfolds in coming weeks and months. It is important that the carbon tax not be used to undermine cap and trade support.

However, a carbon tax also deserves a hearing and the idea of reducing payroll taxes with the revenues is particularly appealing.  It should receive, at the appropriate juncture, the full attention of the Congress to determine how much support it has at what level of tax.  We probably need at least a ten cent increase in the gas tax later in the year to restore the Highway Trust fund to solvency and one legislative approach might be to include this as part of a wider carbon tax proposal.