Lessons from Europe
This is precisely the right question to ask as Congress considers climate legislation, and the answer is straightforward. Much of Europe adopted a cap-and-trade system, the European Trading Scheme (ETS); and at least in its initial rounds, it has utterly failed to reduce greenhouse gas emissions. One reason is the scheme's complexity, which leaves it especially vulnerable to pressures to include countless special exemptions -- Germany overlooks new coal-fired plants, for example -- and exotic offsets from other places. It's also proved to be easy to game, by setting the baseline emissions against which future reductions are counted at a time when emissions were unusually high. That was a main reason why the Kyoto Protocols imposed so little constraint on most countries' emissions.
By contrast, Sweden adopted a carbon-based tax in 1990; and the country's emissions were 8 percent less in 2008 than 18 years earlier, even with an economy 50 percent larger (in real terms). Tax systems can adopt special exemptions or offsets as well; but a tax on carbon is so much easier to understand that instances of special treatment are more obvious. Perhaps most important, the incentives that businesses will need to develop and then adopt more climate-friendly fuels and technologies depend on a known and fairly stable price for carbon. That's something that cap-and-trade can never deliver -- in fact, the price of the permits to emit carbon under Europe's cap-and-trade scheme have moved up or down by an average of 17 percent per-month. But it's the essence of a carbon-based tax.
Posted by: irvnx | November 15, 2009 11:07 AM
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