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Kamarck: Gore’s Carbon Tax Shift’ Beats Cap-and-Trade

In late June, the House of Representatives narrowly passed a historic climate change bill. Now, the Senate has taken up the task of creating its own version of this enormous and complex legislation — an endeavor that’s likely to face many challenges. In fact, passage is far from certain.

[IMGCAP(1)] That’s why at this critical juncture, everyone interested in meaningful action on global warming sooner rather than later should step back and consider improvements and alternatives to the current bill. One of the best alternatives isn’t new. I’m talking about a carbon tax.

When Al Gore wrote his best-selling book “Earth in the Balance,— he proposed putting a tax on energy based on its carbon content (which would raise the price of energy) and then cutting the payroll taxes of average Americans so they would not suffer economically while having new incentives to conserve. But over the years, Gore’s “tax shift— proposal lost favor.

The energy tax proposed by the Clinton administration in 1993 died a quick and brutal death (it raised taxes on energy but did not cut other taxes), while the cap-and-permit trading scheme for sulfur dioxide (which causes acid rain) turned out to be very successful. So by the time the Democrats were back in control of Congress and the White House, cap-and-trade had become the preferred way to deal with climate change, and even Gore had moved away from the tax shift idea.

The bill now moving toward markup in the Senate sets a cap on the total amount of greenhouse gases emitted and gives out permits that can be traded to entities that emit them.

But times have changed and herein lies the biggest challenge before this bill.

At the core of the cap-and-trade approach is a new financial market in carbon permits. The economics of a cap mean that permit prices will be very volatile, inviting a frenzy of financial speculation by Wall Street. As Americans suffer through the worst recession in their lifetimes, they will find it hard to trust the fate of the planet to the same individuals who brought us credit default swaps, subprime mortgage securities and other exotic financial instruments.

Democratic pollster Stan Greenberg conducted focus groups on this topic for the Third Way, a liberal think tank in Washington, D.C., and found that “the more voters hear about [cap-and-trade], the less supportive they become because it sounds like big polluters will just buy their way out of doing the right thing. And trade’ conjures up all the Wall Street practices that voters believe have drained their 401(k)s.—

The more voters hear about cap-and-trade, the more they are likely to flinch and the more politicians are likely to back off. Consequently, we all need an alternative, a “Plan B.—

Washington would be well-suited to go back to Al Gore’s original idea — tax carbon and cut payroll taxes. This is the preferred policy for most economists and for many environmentalists too. Once Congress looks past the word “tax— in the title, it’s easy to see the important political advantages this policy has over a cap-and-trade system.

For starters, a carbon tax is predictable and easy to understand. It could be phased in over a period of five to 10 years. Businesses and consumers would know exactly how much the carbon in their energy and gas would cost, enabling them to plan accordingly.

The second major advantage of a tax is that its costs to households could be directly offset. Citizens can see exactly how much more they will have to spend on energy and exactly how much more of their paychecks they’ll get to keep from the corresponding payroll or income tax cuts.

This carbon tax-shift is a much better way to go about putting a price on carbon than a cap-and-trade system. And fortunately, there’s still an opportunity for the Senate to acknowledge this and to improve its version of the climate bill.

Though Congress has included a lot of good environmental policies in the 1,400 pages of the American Clean Energy and Security Act of 2009, its proposed carbon market isn’t one of them.

We don’t have time to get this wrong. We don’t have time to wait another five years — the time it has taken Europe to discover that its cap-and-trade system has failed to effectively reduce emissions.

The future of our planet is too important to rush headlong down policy paths that may not provide the most effective solutions. Cap-and-trade isn’t the only idea on the table. A carbon tax looks better in comparison. Our leaders in Washington need to take pause and consider all the options available to make sure we enact the right policy.

Elaine Kamarck — a lecturer in public policy at the Harvard Kennedy School of Government and co-chair of the U.S. Climate Task Force — is the author of the newly released report “Addressing the Risks of Climate Change: The Politics of the Policy Options.—