Tuesday, December 12, 2006

The Cost of Overheated Hysteria - Today's NYT presents an article that makes the case that in order to provide an incentive for corporations to reduce their emissions of CO2, either a carbon tax or a "cap-and-trade" system would need to be implemented as a means of forestalling global climate change.

Global warming can be seen as a classic "market failure," and many economists, environmental experts and policy makers agree that the single largest cause of that failure is that in most of the world, there is no price placed on spewing carbon dioxide into the atmosphere.
The article goes on to say:
Economists like William D. Nordhaus of Yale and Mr. [Richard] Cooper of Harvard advocate a tax as the clearest price signal to the energy marketplace, and less susceptible to political tampering and market manipulation than a cap-and-trade system. It could also be used to raise revenue to offset other taxes.
Indeed, most of the economists cited seem to agree that some sort of new revenue stream - on the order of 1 to 2 percent of U.S. GDP per year - would be needed to offset the total cost of reducing and/or reversing the growth of CO2 emissions, as well as to encourage the development and use of "cleaner" energy sources. For his part, Mr. Cooper estimated that a tax of $14 per ton of CO2 would generate $80 billion in the U.S., and would add 12 cents to the cost of a gallon of gasoline.

The NYT piece attempts to present several good arguments in favor of some sort of market incentives for corporations to reduce their CO2 emissions, but it sidesteps the most glaring deficiency peculiar to a carbon tax scheme. The very thing that makes a tax less susceptible to "market manipulation" - it's implementation via statute, as opposed to the voluntary nature of a cap-and-trade system - would also make companies subject to such a tax less able to deal with economic counter-incentives, such as lower cost competition from foreign companies not similarly impacted. By design, a carbon tax would affect certain industries disproportionately, with affected companies unable to indemnify themselves by distributing the costs of CO2 emissions reduction across the economy.

If there is any good news to be found in all of this, it is the fact that free markets are coming to the rescue, as they often have in issues regarding the environment. (Even the NYT conceded that "caps and trading have a record of success in combating acid rain.") Several states in the Northeast are looking at implementing a "cap and trade" strategy for the area's power plants that assign each plant an emissions quota, and then allow the use of offsets and emissions-credit trading that would simplify compliance and reward energy producers that reduce emissions below established levels. We can also be encouraged by the Asia-Pacific Partnership on Clean Development and Climate, an emerging alliance between the U.S. and several countries in Asia and the South Pacific that is intended to reduce greenhouse emissions through economic growth and investments in cleaner energy sources, such as hydrogen fuel cells and solar technologies.

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