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Tax on Carbon Emissions Gains Support
Industry and Experts Promote It as Alternative to Help Curb Greenhouse Gases

By Juliet Eilperin and Steven Mufson
Washington Post Staff Writers
Sunday, April 1, 2007

As lawmakers on Capitol Hill push for a cap-and-trade system to rein in the nation's greenhouse gas emissions, an unlikely alternative has emerged from an ideologically diverse group of economists and industry leaders: a carbon tax.

Most legislators view advocating any tax increase as tantamount to political suicide. But a coalition of academics and polluters now argues that a simple tax on each ton of emissions would offer a more efficient and less bureaucratic way of curbing carbon dioxide buildup, which scientists have linked to climate change.

"We want to do the least damage to the growth of GDP," said Michael Canes, a private consultant and former chief economist for the American Petroleum Institute, who led a Capitol Hill briefing on the subject in late February sponsored by the conservative George C. Marshall Institute. Between a cap system and a carbon tax, "a carbon tax will be the much more cost-effective way to go," he said, though he added that there are other ways to reduce emissions.

Robert J. Shapiro, a private consultant who was a Commerce Department official in the Clinton administration, agrees. A cap-and-trade system -- involving plant-by plant-measurements -- would be difficult to administer, he said, and would provide "incentives for cheating and evasion." And the revenue from a carbon tax could be used to reduce the deficit or finance offsetting cuts in payroll taxes or the alternative minimum tax.

A carbon tax offers certainty about the price of polluting, which appeals to many economists and businesses. William A. Pizer, a senior fellow at the centrist think tank Resources for the Future and a former senior economist for President Bush's Council of Economic Advisers, estimates that the benefit-to-cost ratio of a tax-based system would be five times that of a cap-and-trade system.

"You're going to pay one way or another, whether it's a tax or a permit program," Pizer said, adding that while a cap would provide more certainty on how much emissions would be cut, "the consequences of being uncertain about emissions over any short period of time just aren't that serious."

Under a cap-and-trade system, the government would set an overall limit on emissions and allocate permits to emitters. If one plant reduces its emissions more quickly than another, it can sell its credits to the other emitter. A carbon tax would simply increase the cost of emitting each ton of carbon, which could then be passed on to consumers.

While Democrats have vowed to push through some sort of carbon dioxide control in this Congress, Bush has consistently opposed mandatory limits, so it remains unclear whether the United States will adopt any system before the next election.

Moreover, the fact that many economists back the tax approach is no guarantee that it will prevail over the five cap-and-trade plans already proposed in the Senate.

The complexity of the cap-and-trade system is part of its virtue for some politicians, since it may mask the system's impact on prices. Such a system also appeals to conservative lawmakers who like the idea of letting the market determine the price of carbon, while keeping revenue out of the hands of government. Some economists say it would channel capital to the most economically worthwhile projects first.

Environmentalists are split on a carbon tax. Fred Krupp, president of Environmental Defense, which is handing out baseball caps emblazoned with the slogan "Just Cap It" on Capitol Hill, called such a tax "an interesting distraction."

"It doesn't give us the guarantee the emissions will go down," he said.

But Carl Pope, executive director of the Sierra Club, said: "It will be more effective if people know that in year 'X' they will pay this much. Companies are highly motivated by costs." Moreover, he worries that rationing carbon allowances based on historical emissions would reward companies that spew out the most greenhouse gases now and did the least to limit them in the past.

Dan Becker, director of the Sierra Club's program on global warming, said the nation may need to adopt a carbon tax in several years but "we're not there yet."

Some industries that have historically opposed carbon limits embrace the idea of a tax because their sectors would not be singled out for regulation. "A poorly constructed cap-and-trade system can be as punitive as a regressive tax," said Scott Segal, an electric utilities lobbyist.

Red Cavaney, president of the American Petroleum Institute, told a National Press Club audience in February that his industry prefers that lawmakers explore a range of policy options before imposing a cap.

"A cap-and-trade system isn't necessarily the be-all and end-all," he said. "A carbon tax, everything, should be on the table from the beginning."

Few lawmakers, Democrat or Republican, have the stomach for a carbon tax, however. Some are still smarting from a vote in the early 1990s when President Bill Clinton persuaded the House to adopt a BTU tax -- a tax on the heat content of fuels -- only to abandon the effort in the Senate.

Democrats such as House Natural Resources Committee Chairman Nick J. Rahall II (W.Va.) say they have no desire to revisit the issue. "I'm not an advocate of a carbon tax," Rahall said. "That's going to be passed on; the consumer would end up paying for that."

Some analysts said former vice president Al Gore's endorsement of both alternatives in testimony before Congress last week was so politically unpalatable that it was a sign that he is not seriously thinking of running for president.

Only one House Democrat, Rep. Pete Stark (Calif.), has drafted a carbon tax proposal. Stark, who first proposed such a tax 16 years ago as a way to ease the nation's energy crunch, plans to introduce a bill in April that would levy a tax of $25 per ton of carbon released for five years.

"It's more efficient, more equitable, and it's less subject to gaming, I might add," Stark said, estimating that it would raise the cost of gasoline by 10 cents a gallon.

As Congress debates how to regulate greenhouse gases, however, several European officials have said it would be a mistake to choose anything but a market-based trading system that could be linked to the emerging carbon market in Europe.

"Political leaders in the United States need to make a decision, and make it quickly, whether they want to be left behind in a market that is going to evolve, or whether they want to get involved quickly," said Stephen Byers, a member of Britain's Parliament who helped establish the European Union's trading system. "Wall Street could become the world center of carbon trading."

And Stavros Dimas, the E.U. environment commissioner, speaking at a recent lunch hosted by the D.C.-based European Institute, called it ironic that the United States would question the cap-and-trade system, because U.S. negotiators essentially forced Europe to agree to such a system in the Kyoto Protocol negotiations in 1997.

"There was suspicion about market-based instruments," Dimas said. "In a way you did us a favor, because now we also are familiar with these market-based activities. It's functioning very well, actually."

"If we would go together into a world tax regime, that would be preferable," Jos Delbeke, the top E.U. official on climate change, said after a Senate Energy and Natural Resources Committee hearing Monday. "But practically speaking, it is not a likely way to go. Emissions trading is a very solid second best."

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