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February 13, 2008

CBO FINDS CARBON TAX 'MOST EFFICIENT' FOR CURBING EMISSIONS

By Darren Samuelsohn, E&ENews PM senior reporter

A carbon tax is the "most efficient" method to address global warming,
both in limiting economic costs and for achieving environmental
benefits, the Congressional Budget Office said today.

In a 42-page report, CBO found that a tax on the carbon dioxide
content of coal, oil and other fossil fuels would give businesses
year-to-year certainty on how much they must spend to deal with
climate change.

At the same time, CBO cited research that it said shows a carbon tax
could lead to net climate benefits five times greater than what would
come from a global warming policy where there were no provisions aimed
at limiting economic costs.

A tax, CBO said, "would provide firms with an incentive to undertake
more emission reductions when the cost of doing so was relatively low
and allow them to reduce emissions less when the cost of doing so was
particularly high."

The CBO study -- requested by Senate Energy and Natural Resources
Chairman Jeff Bingaman (D-N.M.) -- compared a carbon tax with three
alternative policies that use a market-based, cap-and-trade system.

Carbon taxes are no doubt the most politically unpopular option in
Congress for addressing global warming. Instead, lawmakers have shown
far greater interest in legislation establishing a cap-and-trade plan.

Bingaman and Sen. Arlen Specter (R-Pa.) last summer cosponsored one of
many cap-and-trade proposals circulating on Capitol Hill, S. 1766. The
Bingaman-Specter bill's most unique feature involves a "safety valve"
that limits the overall price for industry on how much companies would
need to spend to comply with the program.

The CBO study said that Bingaman's approach would be the next-best
option for reducing emissions if Congress opted against a carbon tax.

"The safety valve would prevent price spikes and could keep the costs
of emission reductions from exceeding their expected benefits," CBO
said.

Other cost options

CBO also looked at several other price-control options that it said
could help maintain a balance between the costs and benefits of a new
cap-and-trade program.

One involved "banking" provisions that could help prevent carbon
prices from dropping too low. Under banking, a company can hold onto
its emission reduction credits for future compliance year if it meets
its annual targets.

Another approach suggested that lawmakers could establish a "price
floor" that ensures CO2 credits never dip below a certain price.

CBO also weighed in on the "circuit breaker" option where the
government would intervene and halt the need for emission reductions
if the price of CO2 credits goes over a specified level.

A drawback, CBO warned, would be when to trigger this provision: "Such
interventions could aggravate price fluctuations if those judgments
were incorrect."

CBO also cautioned against setting up a cap-and-trade program with no
price-control mechanisms. "Allowance prices could be volatile," CBO
reported. "An inflexible cap could require too many emission
reductions (relative to their benefits) if the cost of achieving them
was higher than anticipated and could require too few reductions if
the cost of meeting the cap was lower than policymakers had
anticipated."

The CBO report did not examine a cost control approach from Sens. Joe
Lieberman (I-Conn.) and John Warner's (R-Va.) climate legislation, S.
2191, which is the leading candidate for Senate floor debate this
year.

Under the Lieberman-Warner plan, a Federal Reserve-like board would
track prices for carbon dioxide in the emerging U.S. market and allow
industry a flexible option if compliance prices stay too high for too
long. The Lieberman-Warner proposal tries to achieve a compromise
balancing the need to address costs of a climate policy and the
opposition of environmental groups and others opposed to a safety
valve option.

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