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New House Bill Sparks Carbon Tax vs. Cap-and-Trade Debate

Representative John Larson (D-Conn.) introduced America's Energy Security Trust Fund Act of 2009, which would tax carbon dioxide at $15 per ton at the source, including refineries, coal mines and shipping terminals for imported fuel, and increase by $10 per year or higher, depending on how fast emissions decline.

The debate over the best way to reduce greenhouse gas emissions heated up last week with the introduction of a House bill proposing a carbon tax, rather than the cap-and-trade approach.

Representative John Larson
(D-Conn.) introduced America's Energy Security Trust Fund Act of 2009, which would tax carbon dioxide emissions at $15 per ton at the source, including refineries, coal mines and shipping terminals for imported fuel, and increase by $10 per year or higher, depending on how fast emissions decline.

The bill proposes that 3 percent of the revenue -- about $100 billion over 10 years -- be spent on clean energy tax breaks, and another 1 percent used for transitional assistance for displaced workers. The remaining 96 percent of revenue would go toward cutting payroll taxes, helping citizens pay for higher energy bills and fostering job growth.

When compared to a cap-and-trade system, a carbon tax is simpler, harder to manipulate, easier to immediately implement, and offers price certainty for more informed business decisions, according to Charles Komanoff, co-director of the Carbon Tax Center.

In general, a carbon tax locks in the price on greenhouse gas emissions while a cap-and-trade framework fixes the amount of emissions reductions. A cap-and-trade is favored by President Barack Obama and many environmental groups.

"I'm going to suggest -- and maybe it's a little unconventional -- that price certainty trumps quantity certainty," Komanoff said. "If our objective is maximizing reductions in carbon emissions, it's much more helpful to have a future price for carbon emissions than it is simply to be able to say the quantity is going to come down at some rate."

Under the carbon tax bill, the price on the emissions, which will increase annually, will shift industry toward reductions, while also keeping families financially whole by shielding them from the expense of higher energy costs, Komanoff said.

But a carbon tax is difficult to pass politically, especially at a rate that is high enough to effect real change or generate enough revenue to invest in alternatives, said Terry Tamminen, a policy advisor to Gov. Arnold Schwarzenegger and operating advisor of Pegasus Capitol Advisors.

"Moreover, it's too late to fiddle around waiting to see if taxes reduce greenhouse gases -- a cap assures how/when/what cost greenhouse gases will be lowered," Tamminen said via email. "Taxes don't allow us to create incentives for developing nations to reduce greenhouse gases, but a cap-and-trade allows the creation of offsets in those countries, for at least a portion of a U.S. polluter's obligation. Without that, China, India and other developing nations will never agree to make the reductions necessary to avoid the global tipping point."

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