California faces carbon conundrum

Left for dead years ago, the idea of taxing greenhouse gases has sprung back to life in Washington, as politicians look for ways to tackle global warming and tame the deficit.

It’s welcome news for environmentalists, desperate for federal action on climate change. But the proposed carbon tax could pose a problem for California.

The state has taken a different approach to fighting global warming, last month launching a cap-and-trade system in which companies buy and sell the right to pump greenhouse gases into the air.

Both approaches – a carbon tax and cap and trade – put a price on the emissions that are heating the planet. But they do it in different ways. Use both systems at once, and companies could end up paying twice for the same pollution.

“You either have one or the other – you don’t have them both,” said Jasmin Ansar, climate economist with the Union of Concerned Scientists, an environmental group. “You’d have the danger of, in effect, double taxation.”

The chance of Congress adopting a carbon tax still seems remote. Many Republicans, doubtful about climate change, remain adamantly opposed to the tax, saying it would do little more than raise gasoline and electricity prices. The conflict with California’s cap-and-trade system may never happen.
But it’s enough of a chance that officials at the California Air Resources Board, which oversees the cap-and-trade program, have started discussing it, even if they’re not sure how to respond.

“We are aware that it is a possibility, and we have been considering it as of late,” said board spokesman Stanley Young. “We want to make sure that California companies continue to transition into the program without any sort of disadvantage.”

One possible fix, suggested by some carbon-tax advocates, would involve Congress exempting California companies from the tax if they’re already participating in cap and trade. Young said the board would also be willing to tweak its own system, if necessary, to harmonize it with any federal global warming legislation.

“We promote the possibility of the federal government addressing climate change,” he said. “And on our part, we’re prepared to align our program in a way that allows California to move forward.”

Differing approaches

With cap and trade, the government sets a limit on the amount of greenhouse gases the economy can produce, lowering that limit year by year. Companies buy and sell a declining number of permits to emit those gases. The marketplace determines the price.

With a tax, the government charges a fixed amount for each ton of carbon dioxide spewed into the atmosphere. There’s no limit, just a strong financial incentive for companies to cut their emissions.

Each approach has its merits – and problems.

For environmentalists, cap and trade’s main selling point is the cap. The system promises specific cuts in greenhouse gas emissions – something a tax can’t do. At the same time, the process of trading emission permits, called “allowances,” provides flexibility to the business community. Anyone who can’t easily cut emissions can buy extra allowances from someone who can.

A tax, however, is simpler. It’s relatively easy to administer and easy for the public to understand. Cap-and-trade systems, in contrast, are fiendishly complex, full of rules meant to thwart market manipulation and protect specific industries from price shocks. California’s system took six years to design.

In addition, a tax is easy for businesses to predict. They know what they’ll be paying for emissions years from now. Forecasting the future market price for emissions under a cap-and-trade system is far harder.

“Cap and trade provides more clarity on the level of emissions, and a carbon tax provides more clarity on costs,” said Mark Muro, a senior fellow at the Brookings Institution who recently co-authored a proposal for a federal carbon tax. “You have a non-moving target, and that’s very appealing to businesses.”

A carbon tax even has the backing of Rex Tillerson, chief executive officer of Exxon Mobil Corp. He prefers the predictability of a tax to the wild price swings possible under cap and trade.

Clear, uniform cost

“As a businessman, I have to take a deep breath every time I speak about this, because it’s hard for me to speak favorably about any new tax,” he told the Economic Club of Washington in 2009. “A carbon tax can create a clear and uniform cost for emissions in all economic decisions.”

California looked at both approaches after the state passed its landmark 2006 global warming law known as AB32. A carbon tax, however, would have required two-thirds approval in the Legislature, making it a political nonstarter. Plus, the law called for a specific cut in greenhouse gas emissions, bringing them back to 1990 levels by 2020.

“The structure of AB32 gave us a very finite limit that we had to hit, and that impacted how we would get there,” Young said. “With a tax, you know what you’re paying, but you don’t know how many reductions you’re getting. With cap and trade, you know exactly how many reductions you’re getting.”

A carbon tax was assumed to be politically impossible at the federal level as well. So congressional Democrats decided to push cap and trade instead. A bill to create a nationwide cap-and-trade system narrowly passed the House of Representatives in 2009 but died the following year in the Senate.

Interest in a carbon tax resurfaced this summer as part of the broader debate about taxes triggered by the presidential race and the looming “fiscal cliff.” President Obama has downplayed the idea and said he isn’t pursuing it. But several think tanks and advocacy groups have promoted it as a way to raise new revenue. It could be part of a grand bargain on taxes, providing enough cash to let the government cut other taxes while still addressing the deficit.

Some GOP support

And while many Republicans reject the idea, that opposition isn’t universal. Arthur Laffer, former economic adviser to President Ronald Reagan, and Gregory Mankiw, chairman of the Council of Economic Advisers under President George W. Bush, both support carbon pricing.

“There is an impeccable conservative lineage for this thing,” Muro said. His proposal calls for a carbon tax of $20 per ton, rising 4 percent each year. Of the $150 billion raised annually, $30 billion would go toward clean-energy research, while the rest would go to cutting other taxes and reducing the deficit.

California officials always hoped their cap-and-trade system would lay the groundwork for a national carbon market. But if the federal government decides on a tax instead, the two approaches could be made to work side-by-side, tax advocates say.

“What Congress could do and probably would do, given the strength of California’s delegation, is say, ‘OK, if you’re participating in the (cap-and-trade system), you don’t have to pay the tax,’” said Shi-Ling Hsu, a law professor at Florida State University and author of the book “The Case for a Carbon Tax.”

“For sure, they’re not going to make those companies double pay,” he said.