Home' Technology Review : January February 2009 Contents Q&A
Many economists argue that
painful though it might be to
consumers, the best way to
address climate change is to put a "price"
on carbon dioxide and other carbon-
based emissions, thereby making fossil
fuels more expensive and alternative
energy sources more competitive.
The European Union established a
trading program for carbon emissions
in 2005. In the United States, a proposal
for a similar system is at the center of
the new administration's energy policy.
Under such programs, a regulatory
authority sets a cap on total carbon emis-
sions, and tradable emissions allowances
are issued or auctioned o to industries.
But many economists advocate a far
simpler approach: a carbon tax levied
directly on the production of fossil fuels.
Over the last several years, Gilbert
Metcalf, an economist at Tufts Univer-
sity, has calculated the costs and conse-
quences of such a policy. He explains to
Technology Review editor David Rotman
why a carbon tax is a good idea.
TR: How much revenue would a carbon
tax raise in the U.S.? Who would get the
Metcalf: For an initial tax of $15 per ton
of carbon dioxide, I estimate that the tax
would raise about $85 billion annually.
The U.S. Treasury would get the money.
But your real question is, What does the
Treasury do with the money? I have pro-
posed creating a tax credit in the personal
income tax. That ensures that we don't
raise the overall tax burden during this
recession and that we don't dispropor-
tionately burden low-income households.
Why a carbon tax, rather than a cap-and-
As businesses are planning long-lived
investments, power plants that last 50,
60 years or longer, they need to know
what price they are going to face to make
these plants competitive. With a tax, we
know what that price is. It's the tax rate.
With cap-and-trade, we have much less
certainty about what the price will be.
For example, we're seeing carbon prices
falling [in the E.U.] because the demand
for energy is falling as the economy
Beyond allowing for a more predictable
price, why is a carbon tax better than a
It's much simpler. From both an e -
ciency and an administrative perspec-
tive, a carbon tax is a better approach. I
think there is a clear consensus on that
Would I have to pay a carbon tax on my
electric bill or at the gas pump?
No. The best way to do a carbon tax
would be to tax coal as it comes out of the
ground. You can levy the tax where it is
most convenient: the coal mine. For oil,
at the refineries. It's pretty easy to catch
all the fossil fuels with a small number of
taxpayers. Administratively, it is very easy.
Nevertheless, the impact of the tax will, of
course, reach the consumer.
Given the woeful state of the economy,
how politically feasible is such a new tax?
The political momentum clearly favors
cap-and-trade. The game in Washington
has been to design a cap-and-trade sys-
tem that acts as much as possible like a
carbon tax without being a tax.
Is the cap-and-trade scheme really
working in the E.U.?
We're starting to get some sense. I
think it will not be e ective at achiev-
ing the targets. It is a partial system. It is
only including the electric-utility sector
and some energy-intensive industry. The
transport sector is not in the system at
all. There are certainly many lessons that
we can learn from the E.U. approach, but
the most important lesson may be how
not to design a carbon-trading system.
With the price of oil so low, does a carbon
tax s effect on innovation get lost?
It does. Most of the proposals putting
an initial price on carbon emissions only
add about 25 to 40 cents to the price of a
gallon of gas. The real action will be in
the coal sector. It has a huge impact
there. The transport sector is very
important---something like 40 percent of
our carbon emissions come from the
transport sector---but that is not the
cheapest place to get our initial emission
reductions. The cheapest will be the
electric-utility sector and industry.
How much will a carbon tax add to the
cost of electricity?
A $20 tax per ton of carbon dioxide
adds about 15 percent to the cost of elec-
tricity. For coal-fired electricity it will be
a lot more. It will more than double the
price of coal---about a 40 percent increase
in the price of coal-generated electricity.
Is the current economic recession
affecting this debate?
The interesting fallout from the eco-
nomic crisis is that there has been this
love a air with the cap-and-trade ap-
proach: we create these markets, we cre-
ate these assets and let trading happen.
Well, I think some of the bloom is o the
rose in creating these kinds of [financial]
instruments. I don't know what it will
mean for the relative attractiveness of
a carbon tax versus a permit approach,
but I think that it could make the tax that
much more politically attractive.
The case for a carbon tax
Photograph by CHRISTOPHER CHURCHILL
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