Joe Biden’s climate plan proposes carbon pricing, but the details on what this actually means have not been forthcoming. One possibility is a cap-and-trade pricing mechanism, but the other alternative is a traditional carbon tax. So, what are the advantages of one over the other? We can examine that against some unconventional measures: obscurity and grift. But first, let’s have a look at how much tax money is involved.
A recent Forbes article by Ed Hirs estimated the following monthly consumer cost increases assuming a tax rate of 4.45 pennies per pound of CO2 released:
An automobile using 30 gallons of gasoline per month: $27
coal sourced electricity (Average home): $86
Natural gas sourced electricity (Average home): $36
Wind, solar, or nuclear sourced electricity (Average home): $0
Obscurity, in this case, refers to “the quality of being difficult to understand.” It’s legitimate to ask why obscurity should be a viable measure on which to gauge anything? The reality is that obscurity is a bonus for some groups who are influential in any carbon pricing scheme. Politicians are probably top on that list.
Americans are an extremely tax-averse group of people—wanting extensive government services but not wanting to pay for them is an ongoing topic in the national conversation. Politicians are particularly sensitive to this voter aversion since indelicate handling of discussions about more taxes can get you thrown out of your job.
Cap-and-trade pricing is quite obscure. Firstly, it is applied at an industrial level far removed from the view of average voters. But removed from view doesn’t mean voters don’t pay. They do, but it is indirect and filters down through the economy as rising prices on various products.
Cap-and-trade is also complex and complicated to track, requiring significant bureaucracy for implementation and maintenance of the system. This complexity adds to the obscurity and creates a volatile carbon credit trading market where hedge fund managers and speculative traders can play.
However, a carbon tax is easier to administer and more transparent than cap-and-trade. Fossil fuels would be taxed at their source. A tax on oil, gas, and coal would qualify as a carbon tax. That, of course, would raise the cost of gasoline and possibly electricity, depending on the primary source for electricity in your area. It is safe to assume a certain amount of voter outrage will follow if taxes rise. But this may not be a bad thing. Voters would pressure politicians into requiring clean, lower-cost electricity, and consumers may tilt favorably towards purchasing more electric vehicles.
Cap-and-trade’s lack of transparency easily lends itself to questionable practices. Determining appropriate caps is difficult, and politicians like to use the assignment of caps to curry favor with corporate and business supporters. Lobbying and corporate information campaigns will distort the system to ensure that it has less to do with actual carbon usage and more to do with politics. Caps are also difficult to enforce and provide room for unscrupulous companies to leave taxpayers holding the bag for unfulfilled obligations.
The carbon tax system is more difficult to cheat. The system has a higher degree of transparency, and enforcement is easier than in cap-and-trade. Also, economists find it easier to gauge the final results of a carbon tax system.
If the final goal of carbon pricing is to reduce fossil fuel use, then our unconventional measures indicate direct carbon taxes win the day. If, however, the goal is to levy stealth taxes on consumers and encourage political cronyism, then, by all means, we should lean towards cap-and-trade.
Electricity, a pressure point for mitigating climate change (Source: ArcheanWeb) – https://archeanweb.com/2020/07/26/electricity-a-pressure-point-for-mitigating-climate-change/ Also:
What Will An American Carbon Tax Cost You? (By Ed Hirs; Forbes) – https://www.forbes.com/sites/edhirs/2020/07/21/what-will-an-american-carbon-tax-cost-you/#22e5bc146c76 Also:
Feature Image: Texaco gas pumps (Modified) – By The Library of Congress from Washington, DC, United States – Texaco gas pumps, Milford, Illinois (LOC), No restrictions, https://commons.wikimedia.org/w/index.php?curid=65794575