CBO: CO2 tax the best move on climate change

Bob Tippee

The Congressional Budget Office is right to favor a tax on carbon dioxide over other possible US responses to climate change. But it omits an important reason.

In a February report, CBO compares a CO2 tax with an inflexible cap and two cap-and-trade systems.

It uses three criteria: efficiency, implementation considerations, and consistency with mitigation efforts elsewhere in the world.

CBO considers a CO2 tax the best option. Net benefits of a tax could be five times those of an inflexible cap, the worst option, CBO says.

Second-best, according to the agency, would be a cap-and-trade system with a price ceiling plus either a price floor or banking provisions. Cap-and-trade schemes set limits on total CO2 emissions and assign emission allowances to regulated companies. The companies can sell allowances they don't use and buy extra allowances they need.

A price ceiling would limit unexpected cost surges and help coordinate a US system with those in use elsewhere. Under banking provisions, companies could hold allowances for use in the future.

Third-best in CBO's ranking is a cap varying with the price of allowances along with banking plus either of two other features: a limit on how much the cap could tighten if allowances exceeded a certain price or the ability, adjustable by government, to borrow future allowances for earlier use.

Obviously, the cap-and-trade schemes require government intervention. CBO doesn't say so, but so large an official hand in potentially so large a market would create opportunities for corruption. Small details about system design, implementation, and operation could be worth big money to people willing to pay for advantage.

But that's not the missing reason to favor a straight-up tax as a tool for discouraging CO2 emissions.

However they came about, meaningful cuts in CO2 emissions would be painfully expensive. People, not businesses, would bear the burden. Inflexible caps and cap-and-trade schemes are just camouflage.

Governments determined to require CO2 cuts despite questions that the effort can affect global temperature must warn people about the cost. Proposing a tax is the clearest way to do it.

It is, in fact, the only honest option.

(Online Feb. 22, 2008; author's e-mail: bobt@ogjonline.com)

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