Lawmakers Favor Carbon Caps,
Trading; Economists Prefer a Tax

(See Corrections & Amplifications item below.)

The biggest political battle in Washington over climate change may not pit Democrats against Republicans. Instead, it could be economists versus politicians.

Many academics, even conservatives, favor a tax on carbon emissions. Many lawmakers, including some liberals, fear a political backlash against new fees. They lean toward a cap-and-trade system, which would set a limit on carbon-dioxide emissions and require companies to obtain permits to release carbon dioxide into the air.

QUESTION OF THE DAY

There may not be much practical difference between the two approaches. Caps would likely function much like a tax, levying new costs on business that would ultimately be passed on to consumers.

Still, both sides say important principles are at stake. A cap-and-trade system, say its critics, could reward big polluters if it bases its allotment of permits on how much industries emit now. It also could spark a lobbying frenzy as industries fight to turn the system to their advantage. Defenders of cap and trade say it will provide a better incentive to cut emissions because companies can sell excess permits. They call a tax heavy-handed.

"The concern about taxes is understandable because people think you're going to raise their electricity bill by putting a tax on coal," says Kenneth Green, a resident scholar at the conservative American Enterprise Institute who advocates a carbon tax. "But with cap and trade you're still going to raise the cost of their electricity."

The tax-increase crowd includes prominent Democratic economists -- such as former Treasury Secretary Lawrence Summers and Nobel laureate Joseph Stiglitz -- and Republican economists such as N. Gregory Mankiw, a former Bush adviser and defender of President Bush's 2001 and 2003 income-tax cuts.

Business and environmental groups as well as organized labor generally back cap and trade. They are joined by Democratic presidential candidates Hillary Clinton, Barack Obama and John Edwards, as well as Republican John McCain. At least five carbon-emission bills have been introduced on Capitol Hill, and the issue is expected to be taken up this fall.

Both cap and trade and a carbon tax attempt to use market incentives to get businesses and consumers to reduce emissions of carbon dioxide, which is a gas produced by burning fossil fuels and, according to scientists, is a contributor to global warming.

Imposing a tax or fee on each ton of carbon emitted would encourage technologies that produce less carbon, advocates say. It would raise the price to consumers of activities that burn carbon, such as driving. "If there's an iron law in economics, it's that if you raise the price, you lower demand. And so if you raise the price of burning fuels, you'll lower demand for them," says Mr. Green.

An American Enterprise Institute paper estimates that a tax of $15 per ton of carbon dioxide emitted would increase the cost of a gallon of gasoline by about 14 cents and the price of coal-fired electricity by $1.63 per kilowatt-hour.

Critics observe that higher prices would have a particularly harsh impact on the poor; proponents say carbon-tax revenues could be used to lower income or payroll taxes to offset that.

A cap-and-trade system would place a limit on the total amount of carbon dioxide that could be emitted nationwide, with that cap gradually tightening over a certain period of time. Companies would be allocated and -- under most scenarios -- eventually be sold permits allowing them to spew a certain amount of carbon dioxide into the air each year. Most proposals envision permits being tradable. Companies could buy or sell them on a market if they were emitting more or less than they expected.

One advantage of this system: It sets a clear limit for emissions. Also, it gives companies the lure of potentially making money if they can sharply curb pollution.

"By imposing a value on pollution reduction, it creates a race for the pot of gold that rewards the people who figure out how to bring down global-warming emissions," says Fred Krupp, president of the advocacy group Environmental Defense.

Many of the cap-and-trade programs being touted on Capitol Hill would mimic a tax by making companies pay to buy emissions permits, a cost they would pass along to consumers in much the same way as a tax. The Congressional Budget Office estimates a 15% cut in emissions would cost the poorest households an additional $677 a year in current dollars.

Some cap-and-trade proposals include what is known as a safety valve, which is often likened to a tax because it allows companies to pay a fixed fee to emit more carbon dioxide than permits allow. Under a proposal by Republican Sen. Jeff Bingaman (D., N.M.), companies could pay $12 per metric ton of carbon "in the event that it is too difficult to reduce emissions." That fee would increase five percentage points above the inflation rate every year.

The government could use the money from selling permits to lower taxes or, under many proposals, fund research into low-emission technologies.

Most political momentum appears to be behind cap and trade. Later this month, Connecticut Sen. Joseph Lieberman, an Independent who caucuses with Democrats, and Republican Sen. John Warner (R., Va.) are expected to unveil a cap-and-trade bill. Labor groups, including the United Steelworkers, support the bill from Sen. Bingaman.

Still, some carbon-tax proposals are kicking around. Rep. John Dingell (D., Mich.) is expected to introduce one this fall, though he has said the bill is an attempt to show how unpopular such a tax would be. "I sincerely doubt that the American people are willing to pay what this is really going to cost them," he said in a cable-television interview.

Write to Deborah Solomon at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

Corrections & Amplifications:

A tax of $15 on each ton of carbon dioxide emitted would add an estimated 81 cents to a thousand cubic feet of natural gas and 1.63 cents to a kilowatt hour of electricity. An earlier version of a chart accompanying this article incorrectly said a $15 tax would add 81 cents to a cubic foot of natural gas and $1.63 to a kilowatt hour of electricity.

http://online.wsj.com/article/SB118955082446224332.html?mod=googlenews_wsj