The EU-27, U.S., U.K., and China should dump cap-and-trade as a policy option and adopt a carbon tax with reinvestment to reduce global emissions.

Author:Sewalk, Stephen
Position:III. Carbon Tax B. Why Carbon Tax Beats Cap-and-Trade 3. Revenue Neutrality through VI. Conclusion, with footnotes, p. 552-578
  1. Revenue Neutrality

    Another clear advantage of a carbon tax based program for reducing carbon emissions over cap-and-trade based programs is that a carbon tax, no matter the form, will create revenue. (207) For example, a very low tax of only $10 per ton of carbon will generate approximately $50 billion for the EU per year. (208) Of course, the higher the tax levied on the carbon emitted, the greater the revenue amount for the regulator. (209) The use of this revenue would be very determinative of how the regulated population felt toward the legislation. One of the biggest criticisms against the carbon tax approach is that it has the potential to be jeopardized by becoming regressive. (210) The cap-and-trade approach has the same drawback.

    Low-income households spend a greater percentage of their income on energy needs than higher income earning households. (211) Accordingly, the brunt of any rise in the energy price will be felt more severely by low-income earning households. Also, certain nations are more dependent on coal and will participate more in the carbon emissions reductions set forth in the program. (212) The best policy for the EU, or any regulating entity around the world, is to accommodate these political and economic issues while not compromising the principles that make the program cost-effective. (213) If enacted correctly, with price stability, carbon taxes will generate revenues that may be utilized to provide compensation to those most affected by the tax.

  2. The Impact on the Environment

    While we may become lost in the focus on economics and politics, remembering the underlying cause concerning this legislation is important. The goal is to protect the environment and the public's health. In terms of climate change, everyone is a polluter, though not everyone pollutes to the same extent. (214) Perhaps the biggest downfall for the proposals to date in the cap-and-trade approach and carbon tax is that neither has provided proof that there will be a real reduction of carbon emissions if either is adopted. Both merely propose a reduction of carbon emissions will likely follow the adoption of the program. Cap-and-trade assumes market-based implementations will provide enough incentive for emitters to invest in and utilize new "greener" technologies. (215) Proponents of cap-and-trade believe this incentive will lead to an overall reduction in carbon emissions. (216) On the other hand, carbon taxation is based on the theory that by increasing the cost of carbon production throughout the chain of distribution, the use of carbon-intensive products will be less desirable and the public will be prompted to purchase items with a lower carbon intensity or usage. (217) Estimations and educated guesses as to the effect of any particular program's efficiency in lowering GHG emissions jeopardize the credibility of the approach as a whole, and may jeopardize the environment as well.


      1. Everyone Emits, Everyone Pays Under a CTR

        Both cap-and-trade and carbon taxation are not capable of reducing GHG emissions with any certainty. If the EU and other nations and unions are to have a resonant impact on carbon emissions in the future, it is imperative that the system approaches lowering GHG emissions aggressively. The EU ETS has shown that a program without a certain approach may struggle to achieve its emissions-reduction goals. To ensure emissions are indeed lowered, new legislation must look to regulate all emitters and not just a certain subset of them. (218) A better alternative to both the cap-and-trade and carbon tax approaches is the CTR. (219)

        A CTR is unique because it directly targets all carbon consumers and taxes them through a downstream strategy. (220) A CTR looks to incorporate the societal costs of GHG emissions, and promote emissions reduction. (221) The most obvious difference with this program is the reinvestment piece, which will work to nullify any doubt that the proposal will achieve the goals of benefitting society through environmental and health implications. (222) The monetary payment acts as a payoff of the environmental costs imposed by destructive emissions of carbon, and it serves to send an undeniable message about how seriously curbing GHG emissions will be taken. (223) The construction of environmentally friendly energy production facilities only furthers the message the tax itself sends.

      2. Cost and Benefit Certainty

        One of the most striking aspects of the CTR is its simplicity. For example, the tax could start at $5 per ton of carbon contained within the product based on emissions intensity. (224) The tax can be assessed either at the source or at the border on the good or service based on the emissions intensity (GDP/ton of C[O.sub.2]), with the tax eventually paid by the consumer, as is always the case for a carbon tax or cap-and-trade. (225) Because everyone is an emitter based on carbon intensity, no one is exempt from the tax. (226) Following the implementation period, the tax rate increases systematically and is known to provide certainty to industries and consumers for their investments and planning purposes. "Despite an analysis remarking on the ability of increasing taxes to reduce future- and short-term emissions, the carbon tax with reinvestment does not rely on public option to reduce GHG emissions." (227) Unlike with the cap-and- trade system or the carbon tax, the CTR is not linked to the mere possible acquiescence of the power sector to adopt greener means of production. (228) The revenue from the taxation will be funneled into building new infrastructure for energy production. (229) Wind, geothermal, nuclear, solar facilities, and other renewable and clean sources of power will be built, taking the place of power plants that rely on carbon-emitting processes. (230) This alleviates the need to provide tax credits or incentives to develop and build these industries, rather real orders are placed for their products to be manufactured and installed. (231)

        Further, because the revenue for the construction of these facilities will come from the tax implemented by the program, there will be no disadvantage for utility providers, as they will not bear the burden of paying for building new plants. (232) Perhaps even more significantly, there will be no loss of jobs or production. (233) The construction of new infrastructure will actually create new jobs, estimated at over 1.3 million for construction and over 5 million direct, indirect, and induced jobs for the United States, EU, and United Kingdom. (234) By transforming old power installations into new low-to-no emissions facilities, the CTR program will quickly force emissions down without having to rely on market forces. (235) Strategically, this tax is designed to phase out over time. Although the tax rate rises from $5 to $50 per ton over a 10-year period, the tenth year marks a peak in total tax followed by a rapidly declining period of tax collection as a percentage of the economy. (236) This occurs, as shown in Figure 4 below, because as new power plants replace older power plants, the level of emissions declines significantly. Figure 4 is a flow chart that explains how the funds are collected and used. The model is based on all taxed GHG emissions. The taxes raised are used to order and construct new power plants. These power plants replace existing power plant infrastructure, which reduces emissions, resulting in lower future tax revenues. (237)

      3. Economics of a CTR

        The economics of mitigating emissions vary significantly. We know from the EU ETS that due to misallocations of emissions the EU cap-and-trade system failed to reduce emissions, yet cost the public (i.e., the EU taxpayers) $287 billion. (238) At the peak, a ton of carbon traded on the EU ETS for 30 [euro], which was equivalent to approximately $38 per ton.

        America's Climate Security Act of 2007 (also known as the Lieberman-Warner bill) proposed a cap-and-trade program to reduce U.S. emissions approximately 30% within twenty years. (239) Simulation models estimated the carbon tax would rise quickly, starting from $20 per ton in 2012, rising to $50 by 2020, and $70 by 2030. (240) The estimates showed millions of jobs lost and estimated added costs of $467 per year per household to purchase energy for the first eight years. (241) Other estimates showed carbon costs would have to rise significantly to curb demand and force utilities to produce cleaner power. (242) The multiple models showed price ranges from $25 to over $150 per ton by 2030 to reduce emissions under the cap. (243)

        The next U.S. cap-and-trade proposal was the American Clean Energy and Security Act (commonly referred to as the Waxman-Markey bill). (244) Models estimating the impact of Waxman-Markey on the U.S. economy included an aggregate reduction in GDP over twenty years of $7.4 trillion, a loss of 844,000 jobs, an increase in electricity prices by 90%, increased gasoline prices of 74%, and raising an overall average family's annual energy bill by $15 00. (245) The American Enterprise Institute noted that to reduce emissions at the rate Waxman-Markey required would result in the United States turning the clock back more than a century in terms of emissions per capita, as provided below in Table 2.

        Under the typical proposals of cap-and-trade, the costs to society are very expensive and the benefits are doubtful. Additionally, carbon-tax legislation generally seeks immediate revenue neutrality, meaning taxes are collected and then returned equally to all of the payers, thereby technically incentivizing individuals to minimize their use of fuels and goods that result in high emissions.

        Figure 5 illustrates how the economics of the CTR work in detail. Under the current scenario (i.e., no tax) the United States emits approximately 0.4 tons of carbon per $1000 of GDP. In other words, the United States creates $2500 of GDP per ton...

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