The Case for the Carbon Tax: How to Overcome Politics and Find Our Green Destiny

!e things we touch have no permanence. The Case for the My master would say, there is nothing we can hold onto in this world. Only by letting go can we truly possess what Carbon Tax: How is real.1 n the movie Crouching Tiger, Hidden Dragon, martial arts warrior Li Mu Bai (Li) decides to give up his legend- to Overcome ary sword, Green Destiny, because of truths revealed to Ihim during meditation. He asks Yu Shu Lien (Yu) to deliver Politics and Find the sword to Sir Te in Beijing. After Yu delivers the sword to Sir Te, a thief breaks in to steal Green Destiny. "e thief is Jen Yu (Jen), who is a student of Jade Fox, the murderer of Our Green Destiny Li’s master. After many adventures, Jen is caught by Li, who takes Green Destiny from Jen and throws it into a waterfall. Green Destiny could be a metaphor for the health of the earth, where Jen and Jade Fox represent those who want to make use of it, Li and Yu represent those who want to protect it, and Sir Te represents those charged with regulating it. "e earth su!ers from climate change. "ere are ways to restore the earth’s health: regulations and economic solu- by Roberta F. Mann tions including cap-and-trade systems and carbon taxes. Roberta F. Mann is Professor of Law, University of Oregon.* But those ways threaten the thieves of Green Destiny. "e thieves seek to pursue pro#ts without restriction from those who would protect Green Destiny. "e thieves are masters of persuasive arts and have deep in$uence with those who have the duty of protecting Green Destiny. "is Article will argue that the carbon taxes a!ord the best protection for Green Destiny. It will #rst compare a federal carbon tax with a federal cap-and-trade system for Editors’ Summary greenhouse gas (GHG) emissions. "en it will explore bar- Economists generally consider pollution taxes to be the riers to implementation of a carbon tax. Finally, the Article will propose methods for overcoming those barriers, taking gold standard of market-based instruments, while cap- into account likely opportunities posed by expiring tax pro- and-trade systems are less e!ective and more complex visions. "e conclusion will introduce the concept of recy- to implement than pollution taxes. "erefore, following cling carbon tax revenues, which can be applied to meet an economics argument, implementing a carbon tax in urban environmental challenges. the United States will a!ord the best protection against climate change. However, signi#cant impediments to I. Global Climate Change Update introduction of a carbon tax in the United States exist. Atmospheric carbon has increased much more quickly than "e most problematic of these, perhaps, is the United anticipated. In 2007, total atmospheric carbon reached 384 States’ cultural aversion to taxes. Opportunities such as parts per million (ppm).2 "e most recent Intergovernmental expiring tax provisions and recycling carbon tax rev- Panel on Climate Change (IPCC) assessment noted that the enues o!er incentive to overcome such impediments to global atmospheric concentration of carbon dioxide (CO2) carbon tax implementation. increased from a pre-industrial value of about 280 ppm to 379 ppm in 2005.3 Since the drafting of the United Nations

* A version of this Article was presented at the Ninth Global Conference on 1. C%&'()*+, T*,-%, H*..-+ D%/,&+ (Sony Pictures Classics 2000), directed by Environmental Law in Singapore, in November 2008. "anks to Sven Rudolf Ang Lee, based on the book by Wang Du Lu (no English translation). for his helpful comments, and thanks to the University of Oregon School of 2. C/%0&+ D*&1*.- I+2&%3/4*&+ A+/567*7 C4%., O/8 R*.,- N/4’5 L/0. Law for supporting my attendance at the conference. Finally, thanks to Widener (ORNL), R-(-+4 G%--+)&'7- G/7 C&+(-+4%/4*&+7 (2008), available at University School of Law for supporting my development as a teacher and http://cdiac.ornl.gov. scholar over the past 10 years. 3. IPCC, C5*3/4- C)/+,- 2007: S6+4)-7*7 R-9&%4 37 (2008), available at www. ipcc.ch/pdf/assessment-report/ar4/syr/ar4_syr.pdf [hereinafter IPCC 2007].

Framework Convention on Climate Change (UNFCCC), U.S. presidential election in 2008 may result in the United annual CO2 emissions from burning fossil fuels and manu- States having a more realistic view of its role in stemming facturing cement have grown by 38%, from 6.1 billion tons global CO2 emissions, as President-Elect Barack Obama has of carbon to 8.5 billion tons in 2007.4 From 1970 to 2004, advocated climate change legislation.15 5 global annual CO2 emissions grew by 80%. China has overtaken the United States as the top GHG emitter, spew- II. Comparing Carbon Cap and Trade With ing an estimated 1.8 billion tons of carbon into the atmo- Carbon Taxes sphere, versus the U.S. 1.6 billion tons.6 In 1992, the 38 developed countries included in Annex I of the UNFCCC 7 We should tax what we burn, not what we earn. !is is accounted for 62% of global CO2 emissions. In 2007, those 16 8 the single most important policy change we can make. countries accounted for 47% of global CO2 emissions. "e main drivers of increasing CO2 emissions are global eco- Scientists worldwide share the view that climate change is nomic growth and global population growth.9 From 1970 to real, and a real problem.17 Last year, former Vice President

2000, CO2 emissions per unit of energy decreased, but that Al Gore and the scientists for the IPCC shared the Nobel trend reversed after 2000.10 One possible explanation for Prize for their work “in creating greater worldwide under- the reversal is the developing world’s reliance on ine:cient, standing of the measures that need to be adopted [to curb dirty coal plants for energy generation. China accounted climate change].”18 Commenting on the award, John Ash- for more than one-half of the increase in global CO2 emis- ton, Britain’s special representative for climate change, said sions over the last year, mostly due to a surge in construc- that the award showed that “the international community tion of new coal-#red plants.11 In arguing against joining the now understands that [climate change] is not only an envi- Kyoto Protocol, the U.S. government objected to the lack of ronmental challenge . . . it is a fundamental challenge to emissions limitations for developing countries.12 China and international peace and security.”19 Congress has expressed other rapidly industrializing countries cannot be expected concern about climate change, and the most popular pro- to curtail emissions unless the United States leads the way.13 posed solution involved a cap-and-trade system.20 It appears "e U.S. failure to take action to reduce carbon emissions inevitable that Congress will enact some sort of federal cli- could be viewed as a hidden subsidy to energy-intensive U.S. mate change legislation in the next few years.21 Two assump- industries, in violation of international trade rules.14 "e 15. Both candidates in the 2008 presidential election favored a carbon cap-and-

4. Press Release, Oak Ridge Nat’l Lab., CO2 Emissions Booming, Shifting East, trade system. See C&'+(*5 &+ F&%-*,+ R-5/4*&+7 I77'- T%/(8-%, T)- C/+- Researchers Report (Sept. 24, 2008) [hereinafter ORNL Press Release Sept. .*./4-7 &+ C5*3/4- C)/+,- (2008), available at http://www.cfr.org/publi- 2008]. cation/14765/. President-elect Barack Obama supports implementation of an 5. IPCC 2007, supra note 3, at 36. economywide carbon cap-and-trade system to reduce carbon emissions by 80% 6. Data available through the ORNL’s Carbon Dioxide Information Analysis Cen- over 1990 levels by 2050. All permits are to be auctioned, and a portion of the ter, see supra note 2. proceeds used to develop clean energy projects. See Barack Obama & Joe Biden, 7. ORNL Press Release Sept. 2008, supra note 4. New Energy for America, http://my.barackobama.com/page/content/newenergy 8. Id. (last visited Nov. 16, 2008) (on #le with author). 9. IPCC 2007, supra note 3, at 37. 16. Al Gore, former Vice President, Speech to the Daughters of the American Revo- 10. Id. lution: A Generational Challenge to Repower America (July 17, 2008), available 11. C-+4-% 2&% G5&0/5 D-;., C)*+/ P/77-7 U.S., L-/.7 W&%5. *+ P&<-% S-(- at http://blog.algore.com/2008/07/a_generational_challenge_to_re.html. 4&% C/%0&+ E3*77*&+7 (2008), available at http://www.cgdev.org/content/ 17. See Naomi Oreskes, !e Scienti"c Consensus on Climate Change, S(*-+(-, Dec. article/detail/16578/. 3, 2004, at 1686 (“In recent years, all major scienti#c bodies in the United 12. See Sen. Frank H. Murkowski, !e Kyoto Protocol Is Not the Answer to Climate States whose members expertise bears directly on the matter have . . . all issued Change, 37 H/%;. J. &+ L-,*7. 345, 345-46 (2000) (arguing that growing emis- statements concluding that the evidence for human modi#cation of climate is sions from developing nations would quickly overshadow any achievements in compelling.”); J&*+4 S(*-+(- A(/.-3*-7 S4/4-3-+4, G5&0/5 R-79&+7- 4& emissions reductions by the United States and other Annex I countries). C5*3/4- C)/+,- (2005), available at http://www.eesi.org (statement signed by 13. Congressional leaders recognize that the United States must be a leader in cli- representatives of scienti#c academies in Brazil, Canada, China, France, Ger- mate change action. "e report to America’s Climate Security Act of 2007 states many, India, Italy, Japan, Russia, the United Kingdom, and the United States, the following: noting that “[t]he scienti#c understanding of climate change is now su:ciently "e rest of the world is waiting to see whether the U.S. will act meaning- clear to justify nations taking prompt action”). fully. . . . It is because the U.S. has by far emitted the greatest cumulative 18. Dan Balz & Juliet Eilperin, Gore and U.N. Panel Share Peace Prize, W/7). P&74, amount of greenhouse gas emissions—and will remain the largest cumulative Oct. 13, 2007, at A1. Former Vice President Gore’s documentary, An Inconve- GHG emitter for some time—that U.S. leadership on this issue is crucial. . . nient Truth, also won an Academy Award. . By acting decisively, the U.S. will remove a primary rationalization for inac- 19. Id. tion by developing countries. 20. See Larry Parker & Brent D. Yacobucci, Climate Change: Greenhouse Gas Re- S. R-9. N&. 110-337, at 12 (2008). duction Bills in the 110th Congress (Cong. Research Serv. Rep. No. RL33846, See also Erik Eckhold, China Said to Sharply Reduce Emissions of Carbon Apr. 24, 2007) (listing six bills introduced in 2007 that involve a cap-and-trade Dioxide, N.Y. T*3-7, June 15, 2001, at A1 (stating that Chinese o:cials want a system). Since the report was updated, two carbon tax bills have been intro- developed country to show them that reduced carbon emissions do not prevent duced: (1) H.R. 2069 (Save Our Climate Act of 2007); and (2) H.R. 3416 a high standard of living for its citizens). (America’s Energy Security Trust Fund Act of 2007). 14. See Liana G.T. Wolf, Countervailing a Hidden Subsidy: !e U.S. Failure to Require 21. Christine Todd Whitman, former EPA Administrator, predicted that there will Greenhouse Gas Emission Reductions, 19 G-&. I+4’5 E+;45. L. R-;. 83 (2006). be federal legislation after the 2008 election cycle. See Zachary Coile, Enacting

2!2009 NEWS & ANALYSIS 39 ELR 10119 Copyright © 2009 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. 39 ELR 10120 ENVIRONMENTAL LAW REPORTER 2!2009 tions underlie any cap-and-trade system: (1) that emissions can be #xed or come with a variety of adjustable features.28 below a certain quantity do not cause undue harm to the While the quantity of emissions is determined under the environment (the cap); and (2) that a market in pollution cap, the price of allowances will $uctuate with the market. allowances is the most cost-e!ective means of reducing pol- However, the initial setting of the cap will also in$uence the lution to the predetermined level (the trade).22 Both cap- price of the allowances. If the cap is set too low, then the and-trade systems and pollution taxes are market-based cost of meeting the emissions reduction will rise rapidly, as instruments. A carbon tax is a pollution tax. Cap-and-trade it will make carbon allowances more valuable on the market. systems impose quantity restrictions; pollution taxes impose High prices will cause economic pain, and will endanger the cost restrictions.23 system. In 1994, California launched an emissions trading program called RECLAIM (Regional Clean Air Initiatives

A. Designing a Cap-and-Trade System Market), which targeted SO2 and nitrogen oxides (NOx), the precursors to smog.29 Due to California’s energy crisis Economists generally consider pollution taxes to be the gold in 2000, there was extreme price volatility in allowances, standard of market-based instruments.24 Cap-and-trade sys- which ranged from a low of $1,000 per ton in 1994 to a high tems are not as e!ective as pollution taxes, particularly in of over $100,000 per ton in 2000.30 In the face of this unsus- the context of GHG emissions.25 Cap and trade is in#nitely tainable economic turmoil, the program was abandoned.31 more complex to implement. By contrast, to implement pol- Volatile markets in allowances can result in uncertainty lution taxes, one must decide on the level of the tax, the about the cost of the GHG abatement. Existing pollution pollutant to be taxed, and measurement standards for emis- permit markets have experienced extreme volatility. "e U.S. sions. "ere already exists a large and e!ective government SO2 trading prices have varied from a low of $70 per ton in structure for the collection of taxes. For a cap-and-trade sys- 1996 to $1,500 in late 2005, with an average annual volatility tem, one must (at a minimum) decide also on the size of the of 43%.32 "e European Union’s (EU’s) Emissions Trading cap, the number of initial allowances, and how they will be Scheme (ETS) has also experienced signi#cant volatility.33 allocated, and then design a regulatory scheme to create and Setting the cap too high also causes problems. If the emis- monitor markets. sions cap is set too high, it will not accomplish emissions A cap-and-trade system, while not optimal from an eco- reductions. In the view of some researchers, the EU issued nomic e:ciency standpoint, is politically popular for several too many permits at the start of its ETS.34 "ey noted “[b] reasons. First, it is not called a tax. Second, there is some his- ecause emissions permits were over-allocated, the price of torical experience with cap-and-trade systems. In this coun- emissions permits plummeted, and little—if any—emis- 35 try, we have had a sulfur dioxide (SO2) allowance trading sions reductions have taken place because of the ETS.” system since 1990.26 "ird, from an environmentalist point Who receives the allowances and how they get the allow- of view, an absolute quantity restriction on carbon emis- ances also in$uences the outcome of the cap-and-trade pro- sions, only available with a cap, may be preferable.27 Finally, gram. In an “upstream” program, importers or producers of the initial allocation of emissions permits allows government fossil fuels would acquire the allowances.36 An upstream cap o:cials to pick winners. is more e:cient, as there are fewer producers than there are "e #rst step in designing a cap-and-trade system is set- emitters.37 A downstream cap would allocate allowances to ting the level of emissions permitted under the cap. "e emitters.38 Emitters such as electric utilities can be large, but cap represents the maximum allowable emissions. "e cap end users of energy, like automobile drivers, are also emitters. Whether the cap is placed upstream or downstream, the cost impact would be felt throughout the carbon supply chain.39 Allowances can be given away, initially sold at a #xed Federal Climate Legislation Ends Up Being Long, Hard Slog, S.F. C)%&+., Sept. price, or auctioned o! at market prices. After the initial allo- 24, 2007, http://www.sfgate.com/cgi-bin/article.cgi?#le=/c/a/2007/09/24/MN- cation, any trading pro#ts would accrue to the allowance JBSB0HA.DTL. 22. Parker & Yacobucci, supra note 20, at 15. holders rather than to the government. Free allowances ease 23. Roberta F. Mann, Waiting to Exhale: Global Warming and Tax Policy, 51 A3. U. the transition for existing emitters, but could raise the cost L. R-;. 1135, 1209 (2002). 24. Jonathan Baert Wiener, Global Environmental Regulations, 108 Y/5- L.J. 677, 682 (1999) (noting that “the standard analysis crowns taxes as the presumptive #rst choice for optimal environmental regulation”). See also Louis Kaplow & 28. Cong. Budget O:ce, Issues in the Design of a Cap-and-Trade Program for Carbon Steven Shavell, On the Superiority of Corrective Taxes to Quantity Regulation, 4 Emissions, E(&+. = B'.,-4 I77'- B%*-2, Nov. 25, 2003, at 4. A3. L. = E(&+. R-;. 1-17 (2002). 29. Kenneth P. Green et al., Climate Change: Caps Versus Taxes, E+;45. P&5’6 O'4- 25. R*()/%. D. M&%,-+74-%+, R-.'(*+, C/%0&+ E3*77*&+7 /+. L*3*4*+, 5&&8, June 2007, at 3, available at http://www.aei.org/publication26286. C&747 3-4 (Resources for the Future (RFF) 2002), available at http://www.r!. 30. Id. at 4. org (explaining how price instruments such as carbon taxes are superior to quan- 31. Id. tity targets for the abatement of GHG emissions). 32. Id. at 3. 26. 42 U.S.C. §7651 et seq., Pub. L. No. 101-549, 104 Stat. 2584 (1990). 33. Id. 27. See M&%,-+74-%+, supra note 25: 34. Id. In the United States, environmentalists’ desire for #xed emissions targets have 35. Id. combined with a broad political aversion to energy taxes to give the rhetorical 36. Cong. Budget O:ce, supra note 28, at 2. edge to pure quantity-based instruments are the leading method for imple- 37. Id. at 4. menting climate policies. 38. Id. Id. at 3. 39. Id. Copyright © 2009 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. 2!2009 NEWS & ANALYSIS 39 ELR 10121 of reducing carbon emissions.40 "ey also have the anom- In designing its climate change policy, the federal govern- alous result of rewarding existing emitters with valuable ment will not be writing on a blank slate. In the absence of allowances. "is allocation forms the main “winner-pick- federal guidance, the states have taken the lead in imple- ing” mechanism in cap-and-trade. Finally, once the cap- menting GHG reduction strategies. Twenty-three states and-trade system has been created, it must be monitored to have entered into regional climate change partnerships. "e deter cheating. "is duty must either be placed on existing Western Climate Initiative sets a regional GHG reduction agencies such as the U.S. Environmental Protection Agency target and plans to implement a trading program for Ari- (EPA) or the U.S. Department of Energy (DOE), or a new zona, California, Montana, New Mexico, Oregon, Utah, agency created for this purpose. In any case, the enforce- and Washington.45 "e Midwestern Regional Greenhouse ment function must be funded. Gas Reduction Accord will establish a similar program for Concerned about excessive costs, some industries argue that Illinois, Iowa, Kansas, Michigan, Minnesota, and Wiscon- a cap-and-trade system should include a safety valve—when sin.46 "e #rst regional program, the Regional Greenhouse costs of carbon allowances exceed a certain amount, the gov- Gas Initiative (RGGI), formed in 2003, held its #rst auction ernment will release additional allowances at a speci#ed safety of 12.5 million carbon allowances on September 25, 2008, valve price.41 A safety valve sets a ceiling on carbon emission raising nearly $40 million.47 "e proceeds will be used for prices, just like a carbon tax. A safety valve also allows addi- energy e:ciency programs.48 RGGI caps emissions for 233 tional carbon emissions over the cap, just like a carbon tax. power generating plants.49 Connecticut, Maine, Maryland, Opponents to safety valves argue that they would provide an Massachusetts, Rhode Island, and Vermont participated in “easy out” from the pressure to innovate and reduce the incen- the auction.50 "e other members of the initiative–Dela- tive to rapidly reduce emissions.42 "e safety valve approach, ware, New Hampshire, New Jersey, and New York—did not “born from the collision between the theoretical desirability participate but plan to join in future auctions.51 In 2004, of using price instruments . . . and political reality,”43 has all energy experts set the #rst RGGI cap at 188 million tons the complexity disadvantages of a cap-and-trade system with- of carbon emissions, anticipating that by 2008, emissions out the advantages of a quantity cap. would exceed that amount.52 However, a slowing economy "e availability of banking, borrowing, o!sets, and inter- and milder weather caused carbon emissions to decrease national credits can further complicate a cap-and-trade from 184.5 million tons in 2005 to an estimated 172.4 mil- system. Banking provides timing $exibility by allowing an lion tons in 2007.53 Critics note that setting the cap too high allowance holder to save its allowances to use in future years. will limit the e!ectiveness of the program—emissions will Borrowing entails emitting now and “paying back” later, at not decrease.54 On the other hand, if a cap is set too low, a speci#ed “interest rate.” Borrowing acts like a safety valve, industry will complain that costs are excessive. except that at some point the emitter is supposed to pay In June 2008, the #rst major federal carbon cap-and-trade back the extra emissions. O!sets can be investments in proj- bill to make it out of committee was defeated by a U.S. Sen- ects that absorb GHGs, such as forest conservation. O!sets ate #libuster.55 While this bill would have allowed the states represent projects that absorb carbon, so for cap-and-trade to continue regulating GHG emissions, concerns may grow purposes, the o!set acts as a negative emission. It can be that state or regional cap-and-trade programs may interfere challenging to accurately measure the amount of carbon with the e:cient functioning of the federal cap-and-trade absorbed by an o!set project, and the projects must be program and increase demands on both governmental and monitored. For example, if a tropical forest in Brazil quali- nongovernmental resources. Industries may complain about #ed as an o!set, what would be the result if it was burned being required to comply with multiple cap-and-trade pro- down? International credits extend the cap-and-trade system grams. For example, a utility might have to buy both state beyond the sovereign boundaries of the United States. In and federal allowances to cover the same ton of GHG emis- particular, o!sets and international credits pose signi#cant sions. As the U.S. House of Representatives’ Committee on compliance issues.44 Energy and Commerce noted in its white paper on climate change design, “di!erent points of regulation or allocation methodologies between State and Federal programs would

40. Id. 41. Issues in Designing a Cap-and-Trade Program for Carbon Dioxide Emissions: Testi- 45. See Western Climate Initiative, Homepage, http://www.westernclimateinitiative. mony Before the H. Comm. on Ways and Means, 110th Cong. 11 (Sept. 18, 2008) org (last visited Dec. 26, 2008). (statement of Peter R. Orszag, Congressional Budget Dir.) 46. See http://www.wisgov.state.wi.us/docview.asp?docid=12497. 42. Henry D. Jacoby & A. Denny Ellerman, !e “Safety Valve” and Climate Policy 47. Robin Shulman, Carbon Sale Raises $40 Million, W/7). P&74., Sept. 30, 2008, 9 (MIT Joint Program on Science and Policy of Global Change Rep. No. 83, at A4. 2002). 48. Felicity Barringer & Kate Galbraith, States Aim to Cut Gases by Making Polluters 43. Id. at 5. Pay, N.Y. T*3-7, Sept. 16, 2008, at A17. 44. See Dan Mitchell, How Clean Is Your Carbon Credit, N.Y. T*3-7, May 5, 2007; 49. Id. Fiona Harvey, Beware the Carbon O#setting Cowboys, F*+/+(*/5 T*3-7, Apr. 27, 50. Shulman, supra note 47. 2007. See also F%*-+.7 &2 4)- E/%4), I+(., S'09%*3- C/%0&+: O227-47 /+. 51. Id. L-77&+7 F%&3 4)- C%-.*4 C%*7*7 (2008) (drawing parallels between the sub- 52. Barringer & Galbraith, supra note 48. prime mortgage market and the market in carbon o!sets, stating that “analyzing 53. Id. the quality of underlying carbon o!set projects [traded on secondary carbon 54. Id. markets] will be as di:cult, if not more so, than analyzing mortgages, and may 55. David M. Herszenhorn, After Verbal Fire, Senate E#ectively Kills Climate Change be even less suited to modeling”). Bill, N.Y. T*3-7, June 7, 2008. Copyright © 2009 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. 39 ELR 10122 ENVIRONMENTAL LAW REPORTER 2!2009 also cause complications and increase resources necessary to 60% by 2050.63 "e arguments against taking action can for compliance.”56 Jonas Monast, co-director of the Cli- be summarized simply: it will cost too much. “"e fear that mate Change Policy Partnership, believes that allowing state carbon mitigation policies will be costly has become a deter- and federal carbon markets to co-exist will have signi#cant rent to action.”64 If the cost of limiting emissions and the (negative) economic impact and would result in little or bene#ts of reduced emissions are known with certainty, a no cumulative environmental bene#t.57 Monast advocates carbon cap-and-trade system is economically equivalent to a integration of the regional markets into the federal scheme, carbon tax.65 "e type of uncertainty that exists with a par- while acknowledging the considerable di:culty in accom- ticular type of emission predicts the best economic instru- plishing that goal.58 ment.66 When environmental damages are not very sensitive Economists have not addressed the issue of e:ciently inte- to short-term emission levels or where concerns about exces- grating a federal carbon tax with existing state or regional sive costs exist, a cost restriction works better than a quan- carbon trading schemes. It may be easier to integrate a tity restriction.67 "e environmental damage from GHG federal carbon tax with state and regional cap-and-trade emissions is cumulative—short-term emission levels are not programs than it would be to integrate a federal cap-and- critical as long as overall reductions occur.68 “"e real goal trade program with the state and regional programs. State of [pollution] taxes is to gradually correct market forces even and regional carbon allowance holders could use purchased when the negative externalities cannot be properly valued. allowances as credits against the federal carbon tax—based From this perspective, it is better to install modest envi- on the carbon allowed to be emitted, not on the purchase ronmental taxes now than to wait several decades before price. Allowing free allowances to be used against the federal the optimal tax level can be determined with certainty.”69 carbon tax would create a windfall for the holder of the free Carbon taxes are better for consumers and businesses alike, allowances. If a federal carbon tax works to reduce emissions assuming a level playing #eld. Consumers get predictable below the state and regional targets, the state and regional prices, and businesses get a stable environment for planning authorities may be encouraged to dismantle their systems. In and investment. Unfortunately, in the U.S. political system, the meantime, the states can keep the pressure on the federal we cannot assume a level playing #eld. government to create a strong carbon tax that will lead to As the saying goes, the devil is in the details. A cap-and- signi#cant emissions reductions, and industry will have an trade system has a lot more details than a carbon tax. "e incentive to accept a strong federal carbon tax so as to avoid recently failed Lieberman-Warner Climate Security Act the patchwork of state and regional initiatives.59 of 2007 ran to 548 pages.70 In a cap-and-trade system, the design battles are fought on two fronts: (1) whether carbon B. Why a Carbon Tax Is Better Than a Cap- allowances should be auctioned or given away, and who gets and-Trade System them; and (2) whether the cost of carbon mitigation should be limited, as with a safety valve provision.71 "e issue of carbon allowances is remote to ordinary citizens—we will We are running an uncontrolled experiment on the only not be privy to the negotiations between the industries and home we have.60 our government.72 Ordinary citizens may be pleased to sup- A carbon tax is better than a cap-and-trade system because of port non-auctioned allowances, under a mistaken impression its simplicity, transparency, e:ciency, and certainty (of cost). Reducing the amount of GHG emissions is critical for our continued survival on earth. "e 2007 IPCC assess- 63. Id. at 67. ment notes that “unmitigated climate change would, in the 64. Morgenstern, supra note 25 at 3. 65. Id. long term, be likely to exceed the capacity of natural, man- 66. Id. 61 aged, and human systems to adapt.” With current climate 67. Id. 68. Id. change mitigation policies, CO2 emissions from energy use 62 69. Johan Albrecht, !e Use of Consumption Taxes to Re-Launch Green Tax Reforms, are projected to grow 40-110% between 2000 and 2030. 26 I+4’5 R-;. L. = E(&+. 88, 93 (2006). To stabilize atmospheric GHG concentrations at close to 70. S. 2191, 110th Cong. (2008). Admittedly, the #rst 215 pages were crossed out current levels, we must reduce global CO emissions by up because the bill was an amendment in the nature of a substitute o!ered by Sen. 2 Barbara Boxer (D-Cal.), the Chairman of the Senate Committee on Environ- ment and Public Works. See 154 C&+,. R-(. S5344 (daily ed. June 6, 2008). 71. See Jad Mouawad, Industries Allied to Cap Carbon Di#er on the Details, N.Y. 56. Comm. on Energy & Commerce, U.S. House of Representatives, Climate T*3-7, June 2, 2008. Change Legislation Design White Paper: Appropriate Roles for Di!erent Levels 72. At least, we cannot be assured of having that information. In 2001, Vice Presi- of Government 18-19 (Feb. 2008) [hereinafter White Paper]. See James Kanter, dent Dick Cheney produced an energy policy report with the assistance of an en- Banks Urging U.S. to Adopt the Trading of Emissions, N.Y. T*3-7, Sept. 26, 2007. ergy task force. N/4’5 E+-%,6 P&5*(6 D-;. G%&'9, N/4*&+/5 E+-%,6 P&5*(6: 57. Jonas Monast, Integrating State, Regional, and Federal Greenhouse Gas Markets: R-9&%4 &2 4)- N/4*&+/5 E+-%,6 P&5*(6 G%&'9 (2001) (on #le with author). Options and Tradeo#s, 18 D'8- E+;45. L. = P&5’6 F. 329, 334 (2008). When requested by Congress to disclose the identity of the task force members, 58. Id. at 343. Vice President Cheney refused and a lawsuit ensued. See Dana Milbank, Cheney 59. White Paper, supra note 56, at 23. Refuses Records’ Release: Energy Showdown with GAO Looms, W/7). P&74, Jan. 28, 60. Quoted in T)&3/7 L. F%*-.3/+, H&4, F5/4, /+. C%&<.-.: W)6 W- N--. / 2002, at A1, A12 and Dana Milbank, GAO Sues Administration Over Task Force G%--+ R-;&5'4*&+—/+. H&< I4 C/+ R-+-< A3-%*(/ 49 (2008) (the quote Records, W/7). P&74, Feb. 23, 2002, at A7. Ultimately, the U.S. Department of is by Bill Collins of the Lawrence Berkeley National Laboratory). Energy released over 11,000 heavily redacted pages after receiving a court order. 61. IPCC 2007, supra note 3, at 73 (emphasis in the original). See Dana Milbank & Mike Allen, Energy Contacts Disclosed: Consumer Groups 62. Id. at 44. Left Out, Data Show, W/7). P&74, Mar. 26, 2002, at A1, A8. Copyright © 2009 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120. 2!2009 NEWS & ANALYSIS 39 ELR 10123 that it will reduce energy costs. Center on Budget and Policy consumers.79 "e odds are just overwhelmingly against that Priorities Director Robert Greenstein explains the following: result. A federal carbon tax, with its simplicity, transparency, e:ciency and cost containment, gives us the best chance of "at belief [that energy prices will not rise if the allowances fairly allocating the cost of carbon reduction. are given away] is not correct; it $ies in the face of the basic In 1927, U.S. Supreme Court Justice Oliver Wendell Hol- law of supply and demand. A cap on emissions will limit the mes said: “Taxes are what we pay for civilized society.”80 In amount of energy produced from fossil fuels. Regardless of the years since, paying taxes has not enjoyed such respect.81 whether the government gives away or sells the allowances, But not paying taxes has its disadvantages as well. Tom market forces will raise the price of fossil-fuel energy to the Friedman writes that “the motto of the petrolist authori- point where the amount demanded will fall to the amount tarian state is “no taxation, so no representation either.”82 supplied. Either way, energy companies will be able to sell Freedom thrives when citizens pay taxes, and is repressed their products at the higher price. "e increase in prices is where citizens receive payment from the government, as in the source of windfall pro#ts for the companies that receive the petrodollar regimes.83 Consumers who pay a transpar- allowances for free but are able to charge the higher price.73 ent carbon tax will be in a position to demand less carbon- Industries, on the other hand, understand precisely how intensive goods and services. In paying a carbon tax, we will allocation of allowances will a!ect their bottom line. A carbon be paying for our continued existence on earth. tax minimizes rent-seeking behavior by industries. “With- out the pro#t potential of amassing tradable carbon permits, III. Barriers to Implementing Carbon industry groups would have less incentive to try to get credits 74 Taxes: Lessons From the British Thermal for their favored but non-competitive energy sources.” 84 "e complexity of a cap-and-trade system makes it dif- Unit Tax #cult for taxpayers and consumers to determine who will be paying the costs, and how much those costs will be. "e If you drive a car I’ll tax the street. complexity allows a!ected industries to jockey for advantage If you try to sit I’ll tax your seat. and exemptions without the general public understanding If you get too cold I’ll tax the heat. what is going on. From an end-user cost perspective, a car- 85 bon cap-and-trade system is opaque, not transparent. "is If you take a walk I’ll tax your feet. may be viewed as a political advantage—if consumers don’t Last year I wrote an article about the tax treatment of coal.86 understand that some industries are getting o! without pay- I presented this paper at an American Bar Association Tax ing their fair share, it is unlikely that consumers will raise Section Conference before the Energy and Environmental objections. Political compromises can then be made among Tax Committee. In my conclusion, I noted that a carbon the industries without fear of public uproar. In short, a cap- tax would create an incentive for cleaner fuels.87 An audi- and-trade system provides cover for the government’s deci- ence member asked how a carbon tax was di!erent from the sion as to who “wins” and who “loses.” Friends of the Earth, British thermal unit (BTU) tax that failed so dismally dur- Inc. analyzed the Lieberman-Warner Climate Security Act, ing the Clinton Administration. Now I have an answer. A and identi#ed its “winners”: the fossil fuels industry.75 "e BTU88 tax taxes goods. A carbon tax taxes bads. Nobel Prize- report notes that “the way in which the federal government winning economist Joseph Stiglitz says that it makes much hands out these valuable permits will determine whether companies receive a windfall or if the money bene#ts the public at large.”76 "e bill would have given away (for free) 79. Peter Dorman, professor of economics at Evergreen College, sets forth four re- 38% of the allocated permits to the fossil fuels industry over quirements for a fair carbon cap-and-trade system: (1) upstream coverage incor- 77 the lifetime of the program, from 2012 to 2050. "ese per- porating the entire economy; (2) 100% auction of carbon permits; (3) no o!sets mits would be worth $436 billion at EPA’s estimated cost of allowed; and (4) equal distribution of auction revenues on a per capita basis. 78 Peter Dorman, !e Coming Economic Showdown Over Climate Change (unpub- carbon. Of course, a federal cap-and-trade program could lished manuscript) (on #le with author). be structured to provide public bene#ts, a level playing #eld, 80. Compania General de Tabacos de Filipinas v. Collector of Internal Revenue, 275 and fairness and cost containment for all industries and U.S. 87, 100 (1927) (Holmes, J. dissenting). 81. See Roberta F. Mann, Beyond Enforcement: Top 10 Strategies for Encouraging Tax Compliance, 111 T/1 N&4-7 919, 922 (2006). 82. F%*-.3/+, supra note 60, at 101. 83. Id. 73. Fiscal Impacts of Controlling Carbon Emissions: Hearing Before the H. Comm. on 84. U.S. D-9/%43-+4 &2 4)- T%-/7'%6, S'33/%6 &2 4)- A.3*+*74%/4*&+’7 R-;- Budget, 110th Cong. 4 (Nov. 1, 2007) (statement of Robert Greenstein, Exec. -+'- P%&9&7/57 64 (1993). Dir., Center on Budget and Policy Priorities), available at http://www.cpbb.org. 85. T)- B-/45-7, Taxman, on R-;&5;-% (Capitol Records 1966). Prof. Paul Caron 74. Green et al., supra note 29, at 6. notes that "e Beatles were unusually prescient in anticipating the Clinton Ad- 75. K/4- M(M/)&+ = E%*() P*(/, W*+.2/557 *+ L*-0-%3/+-W/%+-% G5&0/5 ministration’s proposed BTU tax. Paul Caron, Tax Myopia, or Mamas Don’t Let W/%3*+, B*55: Q'/+4*26*+, 4)- F&77*5 F'-5 I+.'74%6 G*;-/ (RFF Discussion Paper No. 08-28, 2008). Mondale, who famously said: “Mr. Reagan will raise taxes; 105. See Richard Westin, What to Do With Proceeds of a Carbon Tax, T/1 N&4-7, July and so will I. He won’t tell you. I just did.”118 Former Senator 16, 2007, at 191 (“A carbon tax that is not returned will never be enacted.”). Mondale lost to Ronald Reagan in a landslide, and no other 106. Gilbert E. Metcalf, A Green Employment Tax Swap: Using a Carbon Tax to Fi- nance Payroll Tax Relief, B%&&8*+,7-WRI P&5*(6 B%*-2, June 2007, at 6 (a re- U.S. politician has ever dared to admit that he or she would bate of the employer and employee payroll tax contribution on the #rst $3,660 raise taxes.119 His words are still the truth: a carbon cap-and- of earnings per worker would make a $15 per ton carbon tax distributionally neutral). 107. Martin Sullivan imagined the future support of the business community for a 111. See J-22%-6 H. B*%+0/'3 = A5/+ S. M'%%/6, S)&<.&<+ /4 G'((* G'5(): carbon tax in his article drafted in the form of a “con#dential memorandum” to L/<3/8-%7, L&006*747, /+. 4)- U+5*8-56 T%*'39) &2 T/1 R-2&%3 285 “member companies” from “Association for Corporate America.” See Martin A. (1987). Sullivan, Will Business Learn to Love the Carbon Tax?, T/1 N&4-7 T&./6, May 112. Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. No. 107- 27, 2008, at 102-11. He notes that “for business there are two major advantages 16, 107th Cong. (2001). Section 901 of the Act provides of a carbon tax over a cap-and-trade system: 1) reduction in uncertainty and 2) (a) In general—All provisions of, and amendments made by, this Act shall trade advantages.” Id. Paul Anderson, Chairman and Chief Executive O:cer not apply— (CEO) of Duke Energy, stated that “an economy-wide carbon tax is the least (1) to taxable years . . . beginning after December 31, 2010. prescriptive policy approach as it does not mandate reductions in any one sec- 113. George P. Shultz, How to Gain a Climate Consensus, W/7). P&74, Sept. 5, 2007, tor.” P/'5 A+.-%7&+, G%/00*+, 4)- C/%0&+ E5-9)/+4, E+-%,6 M/%8-47 at A21. (2006). More recently, James E. Rogers, President and CEO of Duke Energy, 114. Id. supported a federal cap-and-trade system with a safety valve in his testimony 115. Id. before the House Subcommittee on Energy and Air Quality (Mar. 2007). 116. John Wiseman, Top Conservative in Favour of Carbon Tax, A'74%/5*/+, Mar. 13,

108. Green et al., supra note 29, at 9 (noting that a $15 per ton CO2 tax raises enough 2008, at 6. revenue to reduce the corporate income tax by over 25%). 117. Id. 109. It must be conceded that revenue recycling does not always remove the political 118. Former Senator Mondale’s acceptance speech at Democratic Convention in San taint of “new taxes.” Canada’s recent election is a case in point. Liberal leader Francisco (July 19, 1983), http://www.cnn.com/ALLPOLITICS/1996/conven- Stephane Dion proposed a national carbon tax with revenue recycling. "e Lib- tions/chicago/facts/famous.speeches/mondale.84.shtml; see also George H.W. erals su!ered a severe defeat in the election, resulting in Mr. Dion’s resignation Bush, 1988 Republican Convention “read my lips—no new taxes.” as leader. His opponents argued that a carbon tax would harm the economy in 119. Rep. John Dingell (D-Mich.) favored a carbon tax (John D. Dingell, !e Power a time of global crisis. See Ian Austen, Canada’s Liberal Party Leader Says He Will in the Carbon Tax, W/7). P&74, Aug. 2, 2007, at A21), and now has issued a Step Down, N.Y. T*3-7, Oct. 21, 2008, at A12. discussion draft of a carbon cap-and-trade program. See Executive Summary of 110. Tax Reform Act of 1986, Pub. L. No. 99-514, 99th Cong. (1986). Discussion Draft (on #le with author). Copyright © 2009 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120.

trade system would increase energy costs—like a tax—the advocates just won’t tell you so.120 A carbon tax doesn’t need to increase overall taxes, because it can be recycled. Choosing a carbon tax will level the playing #eld and send a clear price signal throughout the economy without picking winners. It limits the opportunities for rent-seeking and fraud that lurk in the complexity of a cap-and-trade system. A carbon tax taxes bads, not goods. It creates incentives to try various means of GHG reductions: conservation; e:ciency; and renewable energy. It creates incentives to buy sustainably produced local goods. It discourages the global market from using cheap labor (by making transport of goods more expensive), and encour- ages a global market in ideas. In a recent column, Friedman wrote the following: Many people will tell [President-elect] Obama that taxing carbon . . . now is a “non-starter.” Wrong. It is the only starter. It is the game-changer.121 A carbon tax can best help us achieve our green destiny. We should do it, now.

120. See R&0-%4 S)/9*%& -4 /5., T)- U.S. C5*3/4- C)/+,- T/78 F&%(-, A..%-77- *+, C5*3/4- C)/+,- W*4)&'4 I39/*%*+, 4)- U.S. E(&+&36 3 (2008), available at http://www.climatetaskforce.org (noting that every approach to climate change ultimately involves higher energy prices for households and businesses.) 121. "omas L. Friedman, !e Real Generation X, NY T*3-7 (Dec. 7, 2008).

39 ELR 10126 ENVIRONMENTAL LAW REPORTER 2!2009