E&E News PM, 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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