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Robert J. Shapiro
Chairman, U.S. Climate Task Force

Robert J. Shapiro

Robert Shapiro, Under Secretary of Commerce in the Clinton administration, is chairman of the U.S. Climate Task Force and Sonecon, an economic advisory group. ALL POSTS

Recycle taxes with a carbon-based tax system

Q: If the Senate moves away from a climate bill that includes cap-and-trade -- a strategy, which allows companies and organizations to buy and sell pollution credits to meet a national limit on greenhouse gas emissions -- what alternatives should be included in the bill instead?

Since this debate began decades ago, the major alternative to cap-and-trade has been a carbon-based tax system, especially one in which the revenues are recycled to reduce other taxes. This was the approach that Al Gore endorsed 20 years ago in Earth in the Balance -- and again two years ago in his Nobel lecture. It's also the strategy long favored by most economists. The reasons are not hard to appreciate: To begin, it sets a known and stable price for carbon, which can give companies the powerful incentives they will need to develop more climate-friendly fuels and technologies, and give everyone else real incentives to adopt those fuels and technologies. It also avoids the additional volatility in energy prices built into cap-and-trade, which inevitably would seriously weaken those incentives -- as well as the financial trading system at the heart of cap-and-trade, at a time when everyone must recognize the potentially enormous costs and dangers of playing with derivative markets. Finally, the record shows that carbon based taxes work. Sweden adopted it in 1991, and since then its emissions have fallen by 8 percent even as its economy grew 45 percent (adjusted for inflation). That's why France, Ireland, Australia and others are now looking seriously at their own carbon-based tax systems. By contrast, the cap-and-trade system adopted across much of Europe hasn't reduced greenhouse gas emissions at all -- which is hardly surprising since the European system, much like the Waxman-Markey bill passed by the House of Representatives, is encumbered by hundreds of special-interest exemptions and exceptions.

But for this era's political paranoia about taxes, this approach would and should have been Plan A for climate change -- especially a version in which the assessment on carbon is balanced by cuts in payroll or other, distorting taxes. In fact, with CBO recently reporting that cutting employers' payroll taxes is the single most powerful policy tool available for creating jobs, a revenue-neutral carbon tax could address two of our largest problems at once.

By Robert J. Shapiro  |  March 5, 2010; 9:54 AM ET Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati  
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A revenue-neutral carbon tax is absolutely the best means by which to reduce emissions. It will not only avoid the evasion and market manipulation of cap and trade, it will reduce emissions, incentivize "green" R&D AND return the revenue to families already struggling under the weight of the current economic downturn.

Posted by: SallyVCrockett | March 8, 2010 1:49 PM
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No tax, however it is phrased or written in its original form can be immune from future political manipulation. I have a personal perspective that one should never try to stand between a politician and a revenue source.

Just as today's global warming/climate change crisis which is "accepted by all scientists" needs immediate solution, or health care crisis which is a major fiscal as well as political issue are major economic challenges, there will be another crisis in the future that somehow needs massive amounts of money to solve. Does anyone who has ever read this paper believe future politicians won't do anything and everything possible to divert and/or raise taxes to fix those crisis?

The point being that somehow taxing carbon is going to fix the atmosphere - including Chinese and Indian atmosphere who are subsidizing emissions - yet in the future will be diverted to solve a crisis that is yet to evolve.

Taxes are annuities for government. They provide the necessary 'energy' to power government program and to pay the millions of government employees. Look no further than medicare and social security taxes. Their distribution is currently in play to solve some other problems. Better government does NOT result from higher taxes.

Finally we must remember that taxes are collected at the point of a gun so to speak. There are consequences for failure to pay taxes, including imprisonment in some cases.

If government MUST force its citizens to comply with rules (taxes, at least say this directly and establish non-monetary limits, such as fines which would also be collected at the point of a gun.

Set the carbon limits - if there really is a crisis - coupled with a series of fines. Those who comply will incur no additional costs and those who fail will pay and ultimately go out of business.

And the politicians will have to look elsewhere for their annunities.

Posted by: jdonaldson1 | March 7, 2010 3:16 PM
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Climate change is a scam . Al Gore is a bigger confidence man than Bernie Maddoff .

Posted by: alanr1 | March 7, 2010 1:52 PM
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Robert Shapiro, like any good liberal, believes taxes are the panacea for the imagined, catastrophic ill of climate change.

He, like others, attempts to make it sound painless because they will "recycle" the tax from the peoples' left pocket to their right pocket. They don't mention the fact that there will be a substantial "handling" fee in the process.

I would rather "recycle" my own money though.

Posted by: spamsux1 | March 7, 2010 11:52 AM
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”I don't know if a tax is easier to manipulate than cap-and-trade - I think there are potential weak points in each scheme.”

Can the market trust that there will be in place an agressive GHG tax policy during the next 10 – 15 years? If not, then it’ll take easy and temporary solutions to limit emissions. Here in Sweden, where the confidence in the tax is relatively high even, we’ve not seen determined moves to green technology when compared to Germany, for example (and keep in mind that temporary solutions give quick results, while real solutions often take a long time to show reductions).

Cap-and-trade is like a machine to hold in place an increasingly agressive emission reduction policy. That’s perhaps why some look at it like an unnecesarily complex solution to the problem. A tax is easy to understand, but it’s (almost therefore) relatively easy to put in place, manipulate and repell. Cap-and-trade is a market with it’s own bourses and international connections. It’s very hard for politicians to manipulate it without causing too much problems (and perhaps the United States is incapable of implementing one just because of that).

The market won’t start properly investing before it’s confident in the emission reduction policy. But of couse, a tax policy is much better than no policy at all.

Posted by: hence3150 | March 7, 2010 8:55 AM
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I'm happy to see cap and trade die. It hasn't been successful in Europe, and it would open the door to all sorts of Enronesque financial manipulation with derivatives and collateralized debt obligations. Those financial manipulations are great for Wall Street but don't help clean up the environment or help the 99 percent of us not working on Wall Street.

A carbon tax is a much better alternative, in that it offers certainty for both polluters (so they can determine their best options to reduce pollution) and adopters of clean technology. Investment in clean energy is severely hampered by uncertainty.

A carbon tax also offers a mechanism to bring our serious federal budget deficit closer to balance.

Yes, the fossil companies will pass the costs on to us, but the tax code can be adjusted so those with lower incomes pay lower income taxes.

And any thoughtful person knows that he or she can reduce energy usage by a lot. Mostly we don't because we don't think the savings are worth the trouble. A gradually growing carbon tax would encourage each of us to do better.

Fossil fuels pollute not only the air but everything else, so we'll all be healthier. Other benefits can be better education, better transportation with mass transit and high speed rail, less conflict in petrocountries, quieter streets, and more employment than in the low labor fossil producers.

Finally, the U. S. would be more secure if we didn't have to import all that oil.

Posted by: jcschaef | March 6, 2010 10:21 PM
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For anybody to believe in this junk science anymore is foolishness. GLOBAL WARMING IS A SCAM People!!! It is about Socialism. It is about re-distribution of wealth. The sad part is Environmentalist and Commie Progressives will never admit they are wrong. They have made Global Warming their religion and the Earth has become their god. Ridiculous.

Posted by: Senator_Salesman | March 6, 2010 9:15 PM
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Those who deny that carbon emissions are changing the climate, why are you always anonymous? Do you deny that the natural greenhouse gas layer affects the earth's climate? That the combustion of fossil fuels has added significantly to the natural layer? That there is a clear trend of global warming? What are your views on the impact of tobacco on cancer? On evolution? Have you actually read any of the reports of the National Academies of Sciences?

Posted by: jayhakes | March 6, 2010 9:04 PM
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Hence3150,

Interesting post. I don't know if a tax is easier to manipulate than cap-and-trade - I think there are potential weak points in each scheme. One of the concerns that people have with cap-and-trade is that the initial set of permits may be given out too cheaply (i.e., free). The articles that I've seen in the Economist over the past few years favor a preference for a carbon tax, and the Economist doesn't seem to be a climate change denier.

Posted by: apn3206 | March 6, 2010 8:45 PM
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The premise that carbon is the cause of climate change is a fallacious argument. ALL life on this planet is carbon based - plants and animals. In fact, both plants and animals have a symbiotic relationship offering o2 and co2 as a counterbalance to each other. But here's the crux - overpopulation. Until this sticky issue is resolved, there remains a threat that over-utilization of the planet's resources may (and I do say may) contribute to warming. So, I ask, why is a Rube Goldberg cap and trade model being proposed to counter a non-threat? Looks like an economic scam to me. Then too, what is the purpose of a carbon tax? Just how is that supposed to help anyone? Tax what? For Whom? The scientists? Wall Street bankers? Looks like a seamy effort to redistribute world wealth. Then let's take a look at what is supposed to pass for green energy, wind and solar power. Wait 'til all those windmills and solar power plants need servicing and/or repairing - talk about sucking American resources dry - for a paltry amount of energy produced - in comparison to the tremendous amounts you can get from nuclear, natural gas and clean coal on much smaller foot prints. It seems such a shame the green nazis have such a weak command and knowledge of physics.

Posted by: shangps | March 6, 2010 8:41 PM
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Hello!!! What rock have you been hiding under? Haven't you heard that the whole Gorebal Whining thin is a fraud??? Even without the stuff from that U. in England, it's easy to scientificaly rip it to shreds. It just doesn't stand up under scrutiny.

The whole crap and tax thing has no basis in science. It should be put there right next to the flat earth society!!!

What really gets me is how dumb you Libs are. If you guys dropped the Albore nonsense and started talking patriotism, positive balance of trade, self-reliance, etc., and were willing to compromise on oil drilling in Anwar and offshore, you could probably get 80-90% of what you want and come out smelling like nationalistic patriots. However, you losers are too dumb to do that.

VOTE REPUBLICAN!!!

Posted by: A1965bigdog | March 6, 2010 8:21 PM
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Posted by: randomsample | March 6, 2010 6:38 PM
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“What exactly are other countries leading? Why would we care if we 'fall further behind'?”

Germany, along with some other European countries, and China. And you should care because a vast new international economy is being constructed right now, and the U.S. is not a very important player in it. This green economy will stand for a substantial portion of growth in the near future, so much so that it can rewrite the world’s economical landscape.

Posted by: hence3150 | March 6, 2010 5:56 PM
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The premise that carbon is our problem has not been proven and is only theory. The globe may be warming, has since the last ice age, but no one has PROVEN carbon is the cause. If it were, why has the trend stopped or even starting reversing over the past decade while carbon continues to increase. This is nothing more than a way to take money from one group and then give it to another group that will hopefully vote in for those in power.

Posted by: rdtshop | March 6, 2010 5:34 PM
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Given the size of the federal deficit, it's simply laughable political cowardice to suggest that what we need is yet another another "revenue-neutral" tax.

What we need is the courage of our collective ambitions and convictions. And a new, strong revenue stream.

To pretend we are going, one day, to cut significantly either domestic or military spending, faced with an aging population and a volatile world, is the worst kind of lie because one all sides like to tell.

We need to cut to the chase and resolve to pay for all We the People manifestly cannot do without.

What better way to do so than a new source of tax revenue that improves overall financial efficiencies through rapid federal debt reduction, while moving our productive economy and consumer markets in a long-term sustainable direction.

Posted by: washpost29 | March 6, 2010 2:28 PM
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"you’ll fall even further behind the leading countries. "

What exactly are other countries leading? Why would we care if we "fall further behind"?

Seems to me the ideal situation is to force everybody else to raise their energy costs and keep our costs lower.

Posted by: Ombudsman1 | March 6, 2010 2:07 PM
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Carbon taxes could be phased in over time, beginning a year or two from now, in order to minimize any negative impacts to the economy, and allow everyone to plan ahead. However, cuts in payroll taxes to balance the carbon taxes should happen right away, to jump-start the economy. This difference in timing should also improve the odds of congress passing a shift in taxes from income to pollution.

If the payroll tax cut is to Social Security withholding, an especially regressive tax, the SS fund could actually be increased at the same time instead of reduced. Here's how: eliminate the SS withholding on the first $30,000 earned, and remove the cap on withholding for earnings above the first $100,000. The vast majority of incomes would be taxed less, but more than made up by increased withholdings from higher incomes. This shift in funding for SS would allow its payments to retirees to be changed to a pension, rather than based on with-holdings from their incomes.

By making SS a flat tax on incomes above a floor, instead of below a cap, most take-home incomes would increase by 6%. If the employer contribution was also given to the same employees, they would get a 12% increase in after tax income. Another use of the employer contribution could be to stablize the medicare fund.

Taxes on fossil carbon would be the simplest, most straight forward, and non-regulatory means our government could use to lessen emissions. By offsetting the carbon taxes with cuts in payroll taxes, giving the payroll tax cuts first, and phasing in the carbon taxes over time, the economy could be quickly revitalized and placed on a sustainable path.

Posted by: lewisbaker2 | March 6, 2010 8:50 AM
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Tax and dividend has several advantages over cap and trade. It is more easily understood. Industrializing nations are more likely to accept approaches that don't have the word "cap." If the public gets to like the dividend, acceptance for the tax part might grow.

There are hopeful signs that tax and dividend could attract some votes not available for cap and trade. The big problem remains, however. Can a good bill with either approach go through the legislative process without being gutted by loop holes? We need to make some allowances for energy-intensive industries that compete in international markets. Other than that, we just need to just say "no" to the lobbying for special protection.

Posted by: jayhakes | March 6, 2010 8:06 AM
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Cap-and-trade is a much better option in the context of the United States, simply because a tax is easy to manipulate based on politics (and that’s why global warming deniers like it), while a trading mechanism is something the market can trust in (politicians can’t easily dismantle it, unlike the tax).

But never mind, just do something. Before a signal is sent to the American market to aggressively build a green economy, you’ll fall even further behind the leading countries. Cap-and-trade takes longer to build and get running, but it’s also a much clearer signal.

Posted by: hence3150 | March 6, 2010 6:38 AM
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