World-wide, business has always tried to “externalize” their costs, whenever and wherever possible passing costs on to the public. This has been especially true of the waste resulting from the manufacture and use of goods produced. Business has been able to increase its profits by dumping their waste products in our waterways, land and air; passing on treatment, or cleanup, costs to the public. Likewise, until recently business has had little, or no, incentive to produce energy-efficient and environmentally “clean” products. As energy costs have risen, and government regulations implemented energy-efficiency is now an accepted business consideration. In response to concerns about climate change, many nations are now addressing the disposal of carbon dioxide into the atmosphere by large businesses. Unfortunately many have chosen to do so by means of a “cap and trade” scheme, which the United States government is currently considering (the euphemistically named “American Clean Energy and Security Act of 2009“).
There are three basic options that governments can implement to regulate pollutant discharges: “cap and trade”, “cap” and “tax”.
Under a “cap and trade” scheme the government establishes a “cap” on the amount of pollutant, say CO2, that an industry can discharge into the environment. The cap is lowered at regular intervals, thus reducing the total amount of pollutant that can be discharged. Businesses must then buy “allowances” to discharge, either from the government or at specially created, open market “trading” exchanges (comparable to a stock exchange).
- The selling of allowances has the potential to generate vast sums of money for the government. It is thus in the governments interest to sell more allowances during difficult fiscal times, with fiscal needs and politics becoming the driving factor.
- Proponents claim that the selling and trading of pollution allowances “moniterizes” the pollutant, or turns it into a commodity with a defined value.
- Cap and trade requires the establishment of a vast bureaucracy to establish and regulate the caps and to establish and regulate the trading exchanges.
- Cap and trade creates a vast new constituency of lawyers, lobbyists, traders, investment banks, hedge funds and other speculators; all of whom have a vested interest in perpetuating the scheme.
- A cap and trade scheme is inherently complex few, in any, individuals being in a position to have a good understanding of the entire operation. Consequently cap and trade creates large opportunities for graft, fraud and abuse.
- Due to the complexity of the scheme, cap and trade is usually applied only to large companies, leaving vast numbers of individual and businesses free to pollute as much as they want.
- Under a cap and trade scheme, the cost of the required large bureaucracies will be passed on to the taxpayers. Businesses and utilities will also pass on to the consumer the cost of their allowances, whether purchased from the government or at trading exchanges. And, when the cap is lowered to the point that available allowances will no longer cover a businesses discharges, companies will be forced to install new equipment or otherwise reduce emissions; at a cost which will again be passed on to the consumer. Note that it is only this last, of three, cost that provides any benefits to the consumer.
- Cap and trade schemes have not proven to be universally successful, especially as the profit motive both on the part of governments and trades often obscures the intended purpose.
Under a “cap” or “regulatory” scheme the government would merely place a “cap” on emissions and issue discharge permits to businesses and utilities. In essence such a scheme would be no different than the current processes used to regulate discharge of pollutants into waterways. In the United States, the government has just placed a “cap” on 2016 tailpipe emissions of CO2 from vehicles of 250 grams per mile, a 34% reduction from the 2009 models. There appears to be no justifiable reason that a government could not just as easily place a CO2 cap on all CO2 discharges, including those from industry.
- Under a pure regulatory cap, the government would not receive money from the sale of pollution allowances.
- There would be no trading exchanges, since there would be nothing to trade, and thus no establishment of a constituency dedicated to preserving the right to pollute. And the opportunities for graft, corruption and abuse would be greatly decreased.
- Essentially all developed nations have an environmental regulatory agency, so there is no need to establish a new, separate bureaucracies as required under a cap and trade scheme. No doubt, the existing regulatory agencies might need to be expanded, but new agencies and their associated costs would not be needed.
- The governmental costs borne by taxpayers would be minimal compared to a cap and trade scheme, and there would be no costs of allowances for businesses to pass on to consumers. Consumers would share only the costs of new equipment and practices to reduce pollution, as passed on by businesses. Thus consumers would pay only one cost, rather than three, to obtain the desired environmental benefits.
- Since a purely regulatory cap removes profit opportunities, opponents claim that it would be politically unpalatable. But the fact remains that in the long run, a pure regulatory cap would be just as effective, and far cheaper for all involved, that a cap and trade scheme.
While there are several variations, a carbon tax is by far the simplest means of lowering CO2 emissions. Most tax proposals are for a “rising”, “rebated” tax under which the tax would be steadily raised (just as a cap is lowered), and the collected tax dollars are rebated to consumers. As the cost of energy increases, market forces would lower carbon fuel consumption, and thus reduce CO2 emissions. In theory, consumers would choose energy-efficient products and adopt conservation practices, while energy efficient businesses would have a competitive advantage. In practice, CO2 emissions in the United States actually decreased 2.8% in 2008 – a decrease attributed to high gasoline prices and a sagging economy. Upon closer examination, we find that CO2 emissions of the transportation sector actually decreased by 5.2% and that CO2 emissions per dollar of economic output decreased by 3.8%; both decreases indicating that the high cost of energy was the major contributing factor rather than the economic downturn.
- Virtually all developed nations have a well established, and experienced bureaucracy dedicated to the collection and rebating of taxes. While the tax agencies might need to be expanded to cover an increased workload the cost would be minimal.
- Any added cost would be minimal.
- Opportunities for fraud, corruption and abuse would be no greater than under current tax practices.
- If the tax is equally rebated to taxpayers, those who consume an average amount of energy would break even, while those who consume less energy than the average would actually make money, thus providing an economic incentive to conserve energy. Also, while all surveys show that energy usage tends to increase with income, those with a low income would tend to receive a larger rebate than their energy taxes paid. (More lower income people utilize public transportation than drive Hummers.)
- The base cost of energy and any increased cost of manufactured products would be driven by competitive market forces.
- As the energy tax rises, and oil consumption decreases, more dollars would remain at home, rather than being shipped to the oil producing nations.
- Any additional tax would be difficult to implement since citizens of all nations abhor taxes. Therefore implementation of a rising, rebated tax scheme will require political foresight and courage. However, a rising, rebated tax scheme is by far the cheapest alternative, and of proven effectiveness.
The need to address climate change is urgent. We do not have the time to experiment with various schemes to lower CO2 emissions, but rather must get it right the first time. Citizens should inform themselves on the issues and possible actions, and demand that our political leaders have the courage to do what is right, not what is “expedient”.
