In 2009, the House of Representatives narrowly passed the
American Clean Energy and Security Act (ACES) (H.R.2454) by a vote of 219-212.
The bill proposed a carbon cap-and-trade system and was seen as US’s answer on
its commitment towards climate change to the then upcoming Copenhagen Climate
Summit. However, the bill failed to pass the Senate. This paper seeks to review
how policy design favored cap-and-trade over carbon tax, and suggests reasons
for it failing to be passed.
Carbon Tax: A Penalty to All
Economically, a carbon tax is the most direct and efficient approach to
curbing carbon emissions. It directly accounts for the social costs associated
with greenhouse gas emissions. A published tax rate provides certainty on the tax
amount payable. However, it is uncertainty if the pricing mechanism would effectively
reduce emissions.
What is clear with a carbon tax is that it presents a clear message of “You
use, you pay”, and a perception of “No Way Out”. Consumers will most likely be
at the receiving end as businesses passes the additional costs to them. The
carbon tax is also seen as a regressive tax that affects the poor in particular
especially when applied to goods such as energy and food which are price
inelastic. Businesses could also suffer as they lose the competition in the
global economy.
Many overseas countries are facing similar problems when imposing a
carbon tax. An example was Australia, where former Prime Minister Julia Gillard’s
carbon tax cost resulted in her Labor-Greens coalition government being voted
out, and the current government plans to reverse the unpopular ruling. These
various factors presents a lose-lose-lose situation, which could explain the lean
towards a cap-and-trade approach.
Carbon Trading: Market Driven Approach
The market driven cap-and-trade system provides a “Way Out” for businesses
and industries, as companies that are energy efficient could sell their
allowances to net emitters. This mimics the Acid Rain program to limit SO2
levels. Market forces manage the pricing, whilst the invisible hand of the government
controls by setting the emission limit. Such a cap also provides certainty on achieving
the original intent – to mitigate greenhouse emission levels.
A key issue
lies with the amount of greenhouse gases to limit. An overly-high limit poses
little effect and drives down the carbon costs, which might disincentive
industries to adopt greater energy efficiency, as they choose to acquire
additional allowances. Such was the case when the EU introduced its emissions
trading program, where a higher emissions limit was set. Conversely, an exceptionally-low
limit could artificially inflate costs, affecting costing of goods and global
competitiveness. The government would not benefit from a cap-and-trade program if
the initial allocation of allowances was free, or “grandfathering”, compared to
the carbon tax, which would provide tax revenue that could be channeled to
other social and environmental initiatives.
An Elites’ Debate
Through my research, it is apparent that elites and organized interests
groups dominated the debates. There were questions on the approach to manage
emissions, the social costs to impose, and whether climate change is actually
happening. In contrast, the public, whilst generally believing in climate
change, have not mobilized towards the cause. The cost-benefit simply does not
make sense. The cost associated with the legislation would be too high, with no
clear benefit especially when greenhouse emission is a global issue. Why should
Americans pay a penalty for their carbon emissions when other countries could
freely pollute. Without global consensus, any governmental actions on emission
levels would at best be a symbolic gesture, much like the ACES act. That could
explain why the focus has shifted towards encouraging greater energy efficiency
and renewable energy generation.
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