Cap and trade has been the focus of all of the climate legislation given serious consideration by Congress, and will be at the heart of the major climate bills Congress is expected to consider this year. However, critics contend that despite politicians' traditional antipathy to taxes, Congress ultimately will impose a carbon tax rather than enact a cap-and-trade program.
"Cap and trade will fall flat on its face," in part, as a consequence of the Wall Street meltdown, said Charles Komanoff. "The last thing the public will want to see is a new trillion dollar market in some esoteric financial instruments that is going to be conducted behind closed doors with no transparency."
Komanoff, an economist, co-founded the Carbon Tax Center "to give voice to Americans who believe that taxing emissions of carbon dioxide -- the primary greenhouse gas -- is imperative to reduce global warming."
The Center's characterization of an opaque carbon market subject to "manipulation and exploitation by special interests and perverse incentives," casts cap and trade in the most negative light.
However, David Doniger, policy director with the Natural Resources Defense Council, said a tax regime could be distorted in much the same way. "When has Congress passed a simple, pure tax bill?" he asked. "They have exceptions, they have exemptions, and they have loopholes. Every single interest that would be looking for special consideration under cap and trade would be looking for the same special consideration under a tax bill. We disapprove of giveaways that lead to windfalls and exemptions and we're trying to avoid those defects in the design of cap and trade."
Cap and trade and carbon taxes are market-based options to reduce emissions that contribute to climate change. A tax sets a fixed price on carbon emissions but does not directly limit emissions; cap-and- trade programs imposes emission reduction targets, but do not establish a fixed price.
A tax would be based on the carbon content of the fuel -- the higher the content, the steeper the tax. The tax could be levied at any point of the supply chain, from the coal mines and oil wellhead to consumers. Entities and consumers using the fuel -- presumably acting in their own economic interests -- would shift to less expensive, cleaner burning fuel and to energy efficient technologies. The assumed result: lower consumption of high carbon fuels and reduced emissions.
"The tax would motivate entities to cut back on their emissions if the cost of doing so was less than the cost of paying the tax," the Congressional Budget Office said. However, Doniger said, "If you use a tax, you're guessing at the (emission reductions) you'll get." And it will be difficult to increase the tax in the event "you're not limiting carbon the way you need to."
Under cap and trade, the government sets a limit on greenhouse gas emissions. Over time, those limits become stricter, until an ultimate reduction goal is met. A facility covered by the program receives an emissions allowance for every ton of carbon it emits. Companies that emit less than their allowance could sell their extra allowances to companies that do not meet their reduction target, with the market setting a price.
CBO said a tax on emissions "would be the most efficient incentive-based option for reducing emissions and could be relatively easy to implement." However, depending on its design, a cap-and-trade program can also be relatively efficient and easy to implement, CBO said.
There is scattered support in Congress for a carbon tax, but there has been little, if any, formal debate about cap and trade versus a tax. A spokesperson for Representative John B. Larson, Democrat-Connecticut, said he plans to reintroduce legislation he offered in 2007 imposing a carbon tax, and to use the funds for a payroll tax rebate. The bill had 12 co-sponsors and died in committee without a hearing. The spokesperson said Larson believes "the tide has changed and the legislation will get traction."
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