Take my carbon. Please...

When last we visited the subject of global climate change, several readers had shared their points of view on the seriousness of the problem and whether it indeed exists. You can read all the posts and comments by clicking on "global warming" in the Labels section below.

Suffice it to say at this point I accept the argument that greenhouse gases (GHG) are contributing significantly to climate change. The question now becomes: What if anything can or should we do about it?

The answer has been reduced to two primary options: emissions trading and carbon taxes.

Policymakers and businesses are now trying to figure out the best way to limit the emissions of greenhouse gases, especially carbon dioxide, which is produced by burning fossil fuels such as coal, oil, and natural gas. Why impose limits? Because accumulating scientific evidence indicates that the increased concentration of greenhouse gases in the atmosphere is causing average temperatures to rise globally. This increase could trigger significant disruption of the world’s climate by the end of this century. Although there remain serious uncertainties about the magnitude of the human role in climate change, there is a growing consensus that emissions need to be reduced. [If you only read one link - read this one]

At first glance, most would likely opt for the one that does not include the word "taxes". But another way of looking at carbon taxes is pricing energy with all the externalities included. Rather than a government revenue scheme, carbon emitters (energy users) would no longer be subsidized by future generations who will experience the downstream costs of our energy consumption.

How? With a carbon tax that assesses fuels according to how much they pollute. Coal, having the highest carbon content, would be taxed the most, followed by oil and natural gas. The higher prices for the most damaging fuels would encourage people and companies to use them less and more of other types of energy, including nuclear, solar, wind and biofuels. This approach also would affect all sources -- not just cars, which account for only one-fifth of all U.S. carbon dioxide emissions. [More]

Such a tax is termed a Pigovian tax after economist Arthur Pigou. One of the strongest proponents of the carbon tax has been economist Greg Mankiw. One powerful reason he cites is the importance of switching to consumption taxes.

Economic growth. Public finance experts have long preached that consumption taxes are better than income taxes for long-run economic growth, because income taxes discourage saving and investment. Gas is a component of consumption. An increased reliance on gas taxes over income taxes would make the tax code more favorable to growth. It would also encourage firms to devote more R&D spending to the search for gasoline substitutes. [More]

Emissions markets seem to solve the problem without making us actually, well, do anything. And for the most part, the European experiment in emissions trading was handled just that way - the governments simply handed out emissions allowances until they were worthless. Nonetheless, for many farmers sporadic articles describing how we could suddenly get a payment for sequestering carbon by simply doing what we do is tempting compared to paying $5 for diesel.

On the whole, going at GHG reduction via trading schemes strikes me as incredibly complicated and inefficient, since vast bureaucracies for measuring, allocating, and administering caps and credits would be required. Of course, this is one reason such plans are popular with legislators and government planners.

One big challenge is how we will get corn residues to breakdown and release nitrogen without releasing carbon - another complicating factor for all-corn cropping strategies.

Tillage will decompose the residue faster by mixing oxygen into the soil system, but the carbon and nitrogen release from the residue will be rapid, far before the crop needs the nutrients. A legume cover crop could reduce some of this nitrogen penalty by providing some biological diversity. [More]

I favor the carbon tax. By making it revenue neutral via lower income taxes and capital gains taxes (which would go a long way to ending 1031 problems and estate hassles), we could shift our taxing structure and discourage fossil fuel consumption. Since the wealthy consume more energy, they would pay most of the taxes, and progressive rebating via lower income taxes would mitigate the burden on low earners while still encouraging consumption changes.

But the even bigger reason is this: ethanol/biofuels would likely not be subject to a carbon tax - it is not a fossil fuel, and hence, carbon-neutral. Taxes would have been paid for the coal or natural gas needed to power the plant, but the result would still be a wider spread between ethanol and gasoline than without the tax. This pricing advantage would lower the need for other legislative protections for biofuels. A carbon tax would solidify the future of biofuels more securely than mandates, credits, and tariffs.

A gradually increasing carbon tax would make energy expensive, and perhaps finally make lower consumption via changing our lifestyles more imaginable to more Americans. To be sure, our world will change, but perhaps in a better way.