Tuesday, January 6, 2009

Tax carbon, but not Hanson's way

In a letter to Michelle and Barack Obama, NASA’s Jim Hanson makes some valid critique of the “cap and trade” approach to the reduction of CO2 emissions that we also embraced in Europe:

Policies being discussed in national and international circles now, which focus on ‘goals’ for emission reduction and ‘cap and trade,’ have the same basic approach as the Kyoto Protocol. This approach is ineffectual and not commensurate with the climate threat. It could waste another decade, locking in disastrous consequences for our planet and humanity.

“Cap and trade” generates special interests, lobbyists, and trading schemes, yielding non productive millionaires, all at public expense. The public is fed up with such business.

The physics of the matter, together with empirical data, also define the need for a carbon tax. Alternatives such as emission reduction targets, cap and trade, cap and dividend, do not work, as proven by honest efforts of the ‘greenest’ countries to comply with the Kyoto Protocol

But the way a carbon tax is proposed is IMHO flawed:

The most effective way to achieve (decarbonisation of the economy) is a carbon tax (on oil, gas, and coal) at the well-head or port of entry. The tax will then appropriately affect all products and activities that use fossil fuels. The public’s near-term, mid-term, and long-term lifestyle choices will be affected by knowledge that the carbon tax rate will be rising. The public will support the tax if it is returned to them, equal shares on a per capita basis (half shares for children up to a maximum of two child-shares per family), deposited monthly in bank accounts.

What is nevertheless positive about this is, that it is neutral. The money collected as a tax is not spent by the government. It is given away to the people on a per capita basis (a nice touch of social demagogy). But the proposed system of taxing energy at the “port of entry” effectively increases the price of energy in a country thus making all its products and services less competitive vis-a-vis countries without such tax. So imported goods become even more competitive and carbon leakege and even greater problem.

Instead I proposed a gradual phasing out of the VAT and replacement with a tax on CO2 embedded in the products and services. Regardless whether domestic or imported. This would make carbon intensive products more expensive and others cheaper.

Countries need to tax something. Now they tax labour. They could just as well tax CO2. And if it turns out that the relation between man made CO2 and climate is not quite as strong as claims the current “scientific consensus”, not much harm to the local industry and jobs would be made.