CLIMATE:

Carbon tax advocates make their case with warnings of cap-and-trade chaos

The carbon tax: Economists love it, most politicians hate it.

But Washington is hearing a lot more about it as President-elect Barack Obama takes office with a pledge to overhaul U.S. global warming policy.

Just before the new year, Rep. Bob Inglis (R-S.C.) and a former Reagan administration budget official penned a New York Times op-ed declaring the carbon tax as the bridge that would win over conservative Republicans reluctant to support climate legislation.

At a reception last week to launch the new Congress, a member of the House Democratic leadership likened cap-and-trade legislation to the Madoff securities fraud scandal. And then came the CEO and chairman of the world's largest oil company, who spoke up about the need for a carbon tax rather than the cap-and-trade system that Obama and Democratic leaders on Capitol Hill support.

"It seems to me it's simpler," explained Rep. Pete Stark (D-Calif.), a sponsor of carbon tax legislation dating back to the 1990s. "It doesn't have a bureaucracy. It's infinitely adjustable. My guess is if we're going to do anything seriously to reduce carbon emissions, it'll end up as the least objectionable alternative."

Carbon taxes popped up again yesterday when Sen. Bob Corker (R-Tenn.) asked Stephen Chu, Obama's Energy secretary designee, whether he backed a straightforward levy for fossil fuels or cap and trade. Chu smartly stuck to his script and endorsed Obama's cap-and-trade approach.

"Is that the best decision, or the politically best decision?" Corker asked.

To laughter from the audience, Chu replied, "You're far more experienced at answering that question than I am."

Wrestling with the question

Carbon tax advocates netted a big fish last week in Rex Tillerson, the chairman and CEO of Exxon Mobil Corp. "As a businessman, it's hard to speak favorably about any new tax, but a carbon tax strikes me as a more direct, transparent and effective approach," he said (E&ENews PM, Jan. 8).

Other key players in the climate policy debate are trying to stay noncommittal, or at least they are wrestling with some of the instrumental differences between the two approaches.

Jim Mulva, CEO of oil major ConocoPhillips, said yesterday that a carbon tax and cap and trade are equally intriguing. "Both can work," he said. "The devil is really in how they are designed."

Treasury Secretary Henry Paulson did not bite when asked for his preference earlier this week during an event at Resources for the Future. "I want something that's fair, credible, efficient, transparent and all of those things," Paulson said. "I'd say to you there are, depending on how this is done, it's a distinction without a difference. Under various schemes, you can get something that achieves a very similar result."

Corker has not yet made up his mind either, though he is sending strong signals that he likes the idea of a carbon tax.

"We all spend a lot of time here on cap and trade, and I'm actually open to it as long as every penny generated from that is returned to the citizens, a cap and dividend kind of program," he said at a hearing last week. "But wouldn't we be much better off just with a carbon tax and just be, you know, clean with the American people and let them know, look, we're taxing carbon, and you're going to burn carbon, it's going to cost you money?"

Sen. Evan Bayh (D-Ind.) has concerns about the complexity of cap-and-trade legislation and also is struggling with which policy approach to take.

"Why is the cap and trade the most efficient way to get to where we want to go?" Bayh asked last week during the same Senate hearing. "Having seen some of the proposals that come up here that seem awfully complicated, very indirect and susceptible to leakage here and there, I'm just curious."

So what is with all of the inner soul searching? Experts say it is a byproduct of a legislative vacuum right now where no clear bill has emerged as a front runner for action on Capitol Hill.

"There seems to be a lot of conversation going on within the business community about if this becomes a public policy priority to address carbon emissions, what's the best way to address that?" said Eric Ueland, one-time chief of staff to former Senate Majority Leader Bill Frist (R-Tenn.).

Inglis' article suggests that he is trying to appeal to conservatives who have not yet weighed in on the global warming issue.

The six-term congressman proposed a carbon tax linked with an equal and offsetting reduction in income taxes or payroll taxes. "A carbon tax that isn't accompanied by a reduction in other taxes is a nonstarter," Inglis wrote. "Fiscal conservatives would gladly trade a carbon tax for a reduction in payroll or income taxes, but we can't go along with an overall tax increase."

Robert Shapiro, former Commerce Department undersecretary for economic affairs during the Clinton administration, challenged cap-and-trade advocates to make their case to the public.

"Let's have the debate," Shapiro said. "That's all I want. This is a complex and huge democratic system. None of us can control the outcome of this. Not Barack Obama, much less little old me. What I want is to have the most informed debate possible. And then let the political system decide. If it chooses cap and trade, it chooses cap and trade."

An MIT coup?

Despite the carbon tax talk, cap-and-trade advocates have the upper hand when it comes to a show down with the carbon tax.

To start with, there is the environmental certainty that comes with a cap-and-trade law. While a tax may be better at forcing companies and individuals to change their behaviors, it cannot guarantee that heat-trapping emissions will fall to any specific level. That is a criteria environmentalists insist must be the main factor when establishing targets for a new U.S. climate policy.

"Setting a tax is a guessing game," said Tony Kreindler, a spokesman at the Environmental Defense Fund, which supports cap-and-trade legislation. "If you guess wrong, you're going to have a lot more trouble solving the problem."

Some cap-and-trade proponents say they are dubious about the recent push for a carbon tax, especially when it comes from longtime skeptics on the global warming issue. Exxon, for example, has been a longtime financial sponsor of outside organizations that challenged the science on climate change.

"We do hear a lot of people who are not big fans of climate action talking about a carbon tax," said Manik Roy, director of congressional affairs at the Pew Center on Global Climate Change. "It's hard to escape the feeling they're doing that because they're trying to delay climate action in general."

And there is also the political reality.

Former President Bill Clinton was the last national political figure to give carbon taxes a serious try when he asked Congress in 1993 to pass legislation taxing energy based on its British thermal unit output.

The Btu tax, as it was known, made it narrowly through the Democrat-controlled House but ran into trouble in the Senate. Well-financed opponents from the National Association of Manufacturers and others helped to kill the measure.

On Election Day 1994, Democrats were swept out of power by Republicans and some say the energy tax did not help their cause.

Entering the 111th Congress this year, all of the key Democratic lawmakers engaged in the climate debate back cap and trade.

"I favor cap and trade, as you know," said Senate Environment and Public Works Chairwoman Barbara Boxer (D-Calif.).

Asked his preference, House Energy and Commerce Chairman Henry Waxman (D-Calif.) replied, "Everything is going to be on the table, but I'm for cap and trade."

House Speaker Nancy Pelosi (D-Calif.) is a cap-and-trade supporter as is Obama, who specifically endorsed that approach during his presidential campaign.

One of Obama's top climate advisers, Jason Grumet, may have summed it up best in June 2006 when he described the political weak spot linked to a carbon tax.

"If the MIT Economics Department somehow has a coup and becomes installed as the law of the land, I think it would move quickly," said Grumet, the executive director of the National Commission on Energy Policy. "Absent that, I think we will be talking about cap and trade for the foreseeable future."

'Everybody's second or last choice'

Tax advocates are trying to capitalize on the confusion and complaints about cap and trade, including the complex methods for auctioning off what are potentially tens or hundreds of billions of dollars in emission credits.

"It sounds an awful lot like Madoff instead of a straight forward leveling with the American people," said Rep. John Larson (D-Conn.), lead sponsor on one carbon tax proposal, referring to the Manhattan businessman accused of securities fraud.

Larson, now the chairman of the House Democratic Caucus, is the highest ranking lawmaker in Congress to publicly support a carbon tax. In an interview last week, he predicted that environmentalists would eventually come around to the carbon tax approach -- once they see it has support from large sectors of the public.

"Let's be honest about it. Most of them never thought a carbon tax, too direct, would never have a ghost chance of passing," Larson said. "But if there's a chance to do cap and trade, and all three presidential candidates are advocating it, pragmatism will kick over. The same goal will be achieved."

Larson introduced a bill in August 2006 that would have imposed a $15 tax in its first year for every ton of carbon dioxide emissions from the oil, gas and coal industries, with the tax rising 10 percent annually while also keeping pace with inflation (Greenwire, Aug. 14, 2006). He predicted action on a new version of the legislation later this year in the House Ways and Means Committee.

Inglis, who co-wrote his tax article with Reagan economic adviser Arthur Laffer, said he does not see the votes lining up for cap-and-trade legislation this year or next. He cites the 48-36 procedural Senate vote last summer that failed to advance a bill from Boxer, Sen. Joe Lieberman (I-Conn.) and former Sen. John Warner (R-Va.).

"I don't know why cap and trade would meet a different result now," Inglis said. "In fact, I think it'd go down."

Tax advocates also say they are not concerned about the lack of big name endorsements from Democratic leaders like Pelosi, Boxer and Waxman.

"It doesn't bother me at all," said Shapiro, who now runs Sonecon, an economic consulting firm. "I'd prefer to have their support. I believe, in the end, I think Obama will support a tax shift because it makes profound economic sense and this is an administration that'll be judged on its faculty in managing the economy."

Pressed to size up their chances, most tax advocates see their proposal winning out if and when the cap-and-trade debate falters.

"It will be a fall back," said Stark, the California Democratic congressman and second most senior member of the powerful Ways and Means Committee. "It'll be everybody's second or last choice."

Senior reporter Michael Burnham contributed.

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