WASHINGTON - Today, Presidential Candidate Chris Dodd responded to the Climate Change Science Program Report:
"I appreciate the efforts of the panel's participants to get to the bottom of where we stand on global warming, but unfortunately this report reveals disappointing results. Like many of its other policies, the Bush Administration's strategy with regard to the environment and the earth's changing climate has been terribly misguided. Instead of putting into place a rigorous, responsible plan to curb global warming, the President is retreating from the technology and innovation that scientists have developed to help address this problem. I have put forth an energy plan that will address climate change head on, by imposing a tax on corporations for their carbon emissions. This is one example of the bold solutions our country needs to get us back on track - and one I fear our current leadership is too ignorant or cowardly to propose."
For a supporting opinion on the merits of a carbon tax, please see the article below, published in the Wall Street Journal last month:
A Carbon Tax Would Be Cleaner
By Nicole Gelinas
August 23, 2007; Page A11
Though skeptics may still grumble that the science isn't settled, some 84% of Americans think humans are contributing to climate change, with 78% (and 60% of Republicans) saying we should do something about it "right away," according to a recent poll.
The political answer to all this anxiety has arrived. Prominent politicians -- including first-tier Democratic and Republican candidates -- are embracing a national "cap and trade" program to cut greenhouse-gas emissions. Powerful corporate leaders are right behind them; and even the Bush administration, led by Treasury Secretary Henry Paulson, is reportedly considering the costs and benefits of various cap and trade proposals after years of opposition.
The mechanics of such regulation are complex, but one result is certain: It will exact a toll on our economy.
Cap and trade enjoys support from many free marketers and moderate politicians because it seems, at first glance, market-friendly. If the perceived problem is power plants and factories heating up the planet by spewing too much carbon dioxide and other such gases into the air, why not impose a cost on them for those emissions?
But before one accepts such reasoning and rejects alternatives, such as perhaps a carbon-emissions tax, it's important to look under the hood. Here's how a cap and trade system would likely work, assuming that the feds start with electricity generation and heavy industry, two energy-hungry sectors of the economy:
To avoid shock, the government sets a generous cap in the program's first year. It asks every factory and power plant how many tons of greenhouse gases it released into the atmosphere during the previous year, and then makes the cumulative total -- say four billion tons -- the initial cap. Each plant or factory can emit the same tonnage as in the previous year.
Since the government wants to cut these emissions by as much as half over the next half-century, however, the feds reduce the cap by, say, 5% overall to 3.8 billion tons in five years; and each company's cap will decline by the same proportion. After another five years, the government will cut the cap again, and so on. Because the companies know that the cap will keep tightening, the theory goes, they'll make their operations more energy-efficient.
But what if a factory can't reduce emissions? Maybe it was efficient already, and its orders are up. That's where the "trade" part of cap and trade comes in.
Suppose that a power plant elsewhere does have room to cut waste by replacing its 30-year-old generator with a cleaner model. Now that the plant can produce the same power with fewer emissions, it has extra greenhouse-gas permits and can -- under the new regime -- sell them to the humming factory, which needs to push past its own limit.
What happens if all the firms can't cut emissions enough to stay below the cap? That's where the system goes global. A Chinese factory coughs up 10 million tons of greenhouse gases each year, but an upgrade would cut emissions to eight million. The Chinese plant can sell those two million tons' worth of emissions "savings" to American firms for cash -- and use the money to pay for the upgrade.
Lawmakers have introduced nearly a half-dozen bills this year to create a version of the above scenario, including a bill sponsored by Sens. Jeff Bingaman and Arlen Specter, and another bill sponsored by Sens. John McCain, Barack Obama and Joe Lieberman. Hillary Clinton, John Edwards and Rudy Giuliani have expressed interest.
Some of the nation's largest electricity generators support a national program, including American Electric power, North Carolina's Duke Energy, and Pacific Gas and Electric. They figure the faster they sign on, the more opportunities they'll have to shape it.
As in Europe's two-and-a-half-year-old cap and trade system, American power-company executives would like a generous initial cap and want to pass on to customers the cost of upgrading their equipment and of buying emissions allowances on the market. Financial firms also favor a national program, anticipating the opportunity to trade a new asset class worth $50 billion to $300 billion annually, depending on economists' estimates of the eventual price-per-ton of carbon. And companies ranging from start-ups to GE recognize the profit potential of emissions-credits projects in developing countries.
Executives and politicians certainly prefer a cap-and-trade program to a carbon tax: With a tax, power companies and industrial energy consumers fear that they would suddenly face a huge, non-negotiable cost to doing business. Under cap and trade, at least a plant operator unable to spend tens of millions to upgrade his plant might buy carbon credits from a company that can slash emission more readily.
As for the politicians, a cap-and-trade program is a no-brainer. Most people don't understand how it would work, or the costs it would impose on them or their standard of living. And it doesn't carry the same electoral risk as suggesting a new tax.
But the reality is that any program strict enough to cut emissions growth -- never mind slashing emissions! -- will raise power prices in America. In fact, hiking power prices is the point of cap and trade. Because burning coal -- the cheapest way to make power -- creates so much carbon, coal-fired power plants would have to pay far more than cleaner competitors to continue business as usual as the government tightened the cap.
The Energy Information Administration estimates cutting expected emissions growth by half by 2030 would mean a real price of electricity higher than it would otherwise be by 4%-6% in 2020 and by 11%-13% in 2030. Power companies would spend money both upgrading power plants and buying the emissions credits they'd need if they choose not to upgrade.
Carbon cap and trade has pushed wholesale power prices in Europe up 5%-10% just since 2005, says Phil Hare, director of U.K.-based Pöyry Energy Consulting. If Europe lowers its initially generous cap enough to encourage companies to switch permanently from coal to gas power plants, prices there could rise 20%-40% over a decade or so.
Power prices under cap and trade would depend on political decisions. The first is how generous the government would be with its total carbon cap. Another involves determining which emissions-reduction projects in the developing world investors could fund to get carbon credits.
Europe has allowed the United Nations to make some of those decisions. The U.N. carbon-credits program has already proven wildly inefficient.
In an article in February's Nature, Stanford University's Michael Wara noted that the U.N. initiative is spending billions in Western carbon-credits money to do work that should cost much less. Upgrading refrigerant plants, a popular way of winning carbon credits to sell in the European market, is so cheap and easy that many Third World firms were doing it voluntarily until the cap-and-trade West started paying them to do it. Now there's evidence that some firms may be purposely increasing emissions so they can win Western money to decrease them.
Back in the U.S., the Energy Information Administration assumes that power producers in the U.S. would respond to the new cost of carbon by switching from coal to cleaner technologies. It predicts that the nation's power generators would boost nuclear generation by 50% over the next 23 years -- five times the growth expected without a cap -- and increase natural gas-fired power generation 20% above the expected level.
This scenario, however, requires politicians to let American power companies build new nuclear plants and natural-gas import terminals to feed new natural gas plants. Both of these measures politicians, often heeding not- in-my-backyard concerns, regularly oppose on a bipartisan basis.
If America caps emissions and encourages power companies to build cleaner plants and natural-gas terminals, power prices will go up to pay for their construction. But if America caps emissions and caps new generation through political obstacles, prices will go way up.
What about switching to new-fangled "clean" coal instead? This is surely a possibility -- but the technology of "clean" coal is as yet unproven on a commercial scale and the costs are substantial. So are the potential political hurdles.
One promising technology, for example, involves sequestering CO2 emissions from coal plants. This could require power-plant operators to lay underground pipelines to depleted natural-gas fields where the CO2 could be stored -- triggering local opposition, property-rights disputes at now-dormant gas fields and investor worries about liability.
And then there is the collision between cap and trade and global competition. In the real world, small changes in certain prices can determine, say, whether a businessman keeps his manufacturing plant in upstate New York or places his orders instead with a factory in China.
At the end of the day, a strict cap-and-trade program would have the same effect as a carbon tax, one that's high enough, eventually, to encourage switching to cleaner generation, but that's gradually imposed over a decade so that companies have plenty of time to plan.
Such a tax would make emissions more expensive; discourage carbon-intensive power generation; and it would allow the market to decide which environmentally more-friendly technologies would be competitive enough to take its place. A tax per ton of carbon would mean higher power prices, too, but without direct subsidies to developing nations by paying for their power-plant upgrades.
Nor would a carbon tax create a new multibillion-dollar global commodity whose value would depend on political manipulation. The feds could use the revenues from such a levy to reduce other taxes -- including dividend and capital-gains taxes further to spur the massive private investment needed to build the next generation of power generators -- while ensuring that they're also creating a political and regulatory climate to encourage such mass-scale construction.
If it's true that a global warming consensus really exists -- and not just in press releases and speeches -- politicians and business leaders wouldn't be afraid to suggest such a tax. They would insist on it.
Ms. Gelinas is a contributing editor to City Journal, from whose Summer issue this piece was adapted.