I have a couple of thoughts on last night's double-header debate—Senator Clinton appeared tired and worn yet won on foreign policy, Governor Romney looked bad, Congressman Paul needs to stop talking about the "hidden tax" of U.S. monetary policy—but one exchange in particular sticks out for its contrast.
Charlie Gibson asked:
None of you have favored a carbon tax. Is it a bad idea, or is it just so politically unpalatable that you guys don't want to propose it?
Governor Richardson, former Secretary of Energy, went first:
You know, I was energy secretary. It's a bad idea. Because, when you have a carbon tax, first of all, it's not a mandate. What you want is a mandate on polluters, on coal companies, on those that pollute, to reduce greenhouse gas emissions by a certain target.
Under my plan: 30 percent by the year 2020; 80 percent by the year 2040. It takes international leadership. The better way to do it is through a cap-and-trade system which is a mandate.
Furthermore, a carbon tax, that's passed on to consumers, that's passed on to the average person, that's money you take out of the economy.
So it's a bad idea.
Cap-and-trade is a mandate, but it's also going to take presidential leadership. It's going to take all of us here, every American, you know, to think more efficiently about how we transport ourself, what vehicles we purchase, appliances in our homes.
Governor Richardson is assuredly well-versed in the topic; suggesting that cap-and-trade's cost is not passed on to consumers is either profound perfidiousness or incredible ignorance.
Senator Obama, on the other hand, took the noble yet politically risky path of labeling both price raisers:
Well, I agree with Bill that I think a cap-and-trade system makes more sense. That's why I proposed it: because you can be very specific in terms of how we're going to reduce the greenhouse gases by a particular level.
Now, what you have to do is you have to combine it with a 100 percent auction. In other words, every little bit of pollution that is sent up into the atmosphere, that polluter is getting charged for it.
Not only does that ensure that they don't game the system, but you're also generating billions of dollars that can be invested in solar and wind and biodiesel.
I do disagree with one thing, though, that Bill said, and that is that on a carbon tax, the cost will be passed on to consumers, and that won't happen with a cap-and-trade.
Under a cap-and-trade, there will be a cost. Plants are going to have to retrofit their equipment. And that's going to cost money, and they will pass it onto consumers.
The senator goes for cap-and-trade over a carbon tax—it does, after all, have the politically-untenable word tax in it—but, channeling President Kennedy, Obama deserves points for admitting the costs and declaring that Americans need to make the sacrifice regardless.
The economics behind either scheme is unambiguous: Both put a price on carbon emissions, which raises the costs of carbon-involved products and services. The increased costs put downward pressure on demand. Both have the benefit of using market forces to regulate pollution, which is important: We do not know where the marginal benefit of cutting emissions equals the marginal cost. Both plans essentially devolve into the same thing, at an economic level. I favor a carbon tax due to its simplicity: less bureaucracy, less gaming potential, more transparency.
In either a cap-and-trade system or a carbon tax, the costs of carbon are passed on to the consumer—there is no debating this, both ultimately function in the same way. (Some of the carbon costs eat profits, particularly where prices are sticky, but over the long-term most of the rising costs will result in higher consumer prices.) Some or even all of the rising costs, however, can be rebated back to consumers through the lowering of other, productivity-deterring taxes, such as those on income and payroll.
