Within one week of taking office, President Obama has dispelled any doubts on whether heâ€™s serious about tackling climate change. His stimulus plan will direct more tax and spending subsidies to climate-friendly technologies and fuels over the next 18 months than the Bush administration did over the last eight years, and the federal government will offer itself as a model by bringing federal facilities up to the â€œGold Leedsâ€ energy-efficiency standard. Moreover, his EPA will let states that as yet are politically more climate-sensitive than Washington, including California and a dozen others, set more stringent CO2 emissions standards than the federal versions. And other climate-friendly laws and regulations are on their way, including higher federal fuel-efficiency standards for automobiles and trucks.
Sound as these steps generally are, they leave undone the hard work that climate scientists agree must be done â€” namely, put in place a policy to embed the cost of carbon in the price of everything our businesses and households use, especially that electrical power which mostly still depends on the most carbon-intensive fuel we have, coal. And thereâ€™s a good reason why President Obama isnâ€™t starting with this step, even though itâ€™s the most important one: Making people pay more for carbon-intensive energy and the products and services produced with it means that, well, people have to pay more â€” and people donâ€™t like that, especially in very hard economic times.
And, the inconvenient truth is, those are only the beginning of the costs to contain climate change, since retrofitting our factories, offices, homes and our power systems for less carbon-intensive and energy-intensive technologies and materials will cost everyone, well, a lot more than the stimulus package. To his credit, President Obama corrected one of his rivals for the nomination who tried to claim that we could beat climate change at little cost. And there is some other good news here: The costs to redo our lives around more climate-friendly fuels and technologies can be spread over two generations â€” and paying those costs will save much of planet for our grandchildren.
The current, hard economic times hopefully will focus more of the climate change debate on how to contain those costs, both the direct costs to people and businesses and the indirect ones through the larger effects of these policies on the economy. And if we donâ€™t figure that out, any systemic reform that doesnâ€™t contain those costs may not survive long enough to make a difference. Here is where a real divide opens between the two main options for embedding the price of carbon, a cap-and-trade system and carbon-based taxes. On the direct costs, a tax-based system has the advantage: You can tax energy based on its carbon content, and then turn around and return the revenues to everybody through payroll tax cuts or simple disbursement to every household. Cap-and-trade could do something of the same thing by auctioning off its permits to generate greenhouse gases and then using those proceeds for tax cuts. But so far, every cap-and-trade plan either gives away its permits (businesses wouldnâ€™t have it any other way) or uses the auction revenues to pay for other climate-friendly initiatives. In either case, cap-and-trade leaves everyoneâ€™s incomes lower, a pretty nasty outcome for most of us.
Another inconvenient truth here is that carbon-based taxes also have the advantage on indirect costs. The great asset of cap and trade is that it applies an actual cap to CO2 emissions. But whenever demand for the energy that produces those emissions is greater than had been expected when the cap was set â€” for example, because the summer is hotter than expected, the winter is colder, or the economy grows faster than anticipated â€” demand will hit the cap, and prices will spike for both the permits and the energy that underlies them. Adding a new layer of national price volatility in energy prices, on top of what we already have to bear from international forces, would be another nasty outcome.
Carbon-based taxes have their own problems. They donâ€™t involve a set, annual cap on greenhouse gases, so keeping us on a safe emissions path would probably entail adjusting the level of the tax on a pretty regular basis. And the prospect of enacting a large, new tax and then choosing which offsetting taxes to cut could itself easily turn into a nasty piece of political business. Itâ€™s no wonder that President Obama isnâ€™t eager to referee this fight. Of course, the publicâ€™s faith that of all of our national leaders, he alone is best equipped to drive and guide our responses to daunting challenges is also the main reason heâ€™s the president today.