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Cap & Trade's Failure Means It's Time for a Carbon Tax

"I was a huge supporter of cap-and-trade," said Wayne Leonard, the CEO of Entergy, a $11 billion utility company.

"We developed enormously elegant solutions, but they couldn't get done."

Taxing carbon emissions is the next best way to deal with the threat of global climate disruptions, he said, in part because it would give the energy industry a degree of certainty about how to deploy its capital.

"A simple tax on every one is a starting point," Leonard said. Proceeds could be used to reduce the federal deficit or rebated to consumers.

Leonard spoke today (Nov. 9) at a launch event for the Center for Climate and Energy Solutions, a new organization that is succeeding the Pew Center on Global Climate Change.

Eileen Claussen, who has directed the Pew Center for 13 years, will lead the new group, which has raised money from three so-called strategic partners -- Entergy, HP and Shell -- as well as Alcoa Foundation, Bank of America, GE, The Energy Foundation, Duke Energy, and the Rockefeller Brothers Fund. Pew is no longer a backer.

The arrival of yet another Washington group to deal with climate and energy issue doesn't mean much, especially when it's a makeover of an existing group. C2ES says: "We believe that ensuring safe, reliable, affordable energy for all -- while protecting the global climate -- is a paramount challenge of the 21st century."

Well, sure, but that's what Washington environmental groups have said for years, with few signs of political progress to show for it. Global GHG emissions, meanwhile, reached record levels in 2010.

So what's to be done? If a new idea was voiced at C2ES's launch event, I missed it. Most interesting, to me at least, was the conversation about an old idea -- a carbon tax or fee -- which was set off by Leonard's comments.

Claussen said that C2ES will take a close look at global carbon pricing. "The most effective and efficient way to deal with this issue is through some form of carbon pricing, whether it's a tax or something else," she said. Europe's approach has been based on cap-and-trade, which sets a cap on emissions, allocates or auctions permits to emit, which can then be traded among emitters. (By the time you explain cap-and-trade, most people tune out.) Australia, by contrast, has just enacted a carbon tax.

Ted Roosevelt IV, chair of the C2ES board, said: "We don't have a good price signal on carbon, and we need it." Cap-and-trade is dead, if only because of public distrust of Wall Street, he said. He should know: he works at Barclay's Capital. (See my June blogpost, Ted Roosevelt is lonely.) The debt crisis facing the federal government could create an opening for a carbon tax, he suggested: "We have very severe fiscal problems. Maybe a price signal and addressing the fiscal problems can be combined."

Leonard, whose company is based in New Orleans, said that as much as he would like to move Entergy towards lower carbon energy sources, he's constrained by his fiduciary duty to shareholders. That requires him, in essence, to deliver power at the lowest possible cost. "We can do things at the margins," he said, "but beyond that we are violating our fiduciary obligations."

The time may be near to revive discussion of a carbon tax. Increasingly, there's recognition on the left and the right that today's mishmash of subsidies and mandates is not only ineffective but wasteful. With no clear end in mind, the government provides tax breaks (for wind, solar, corn ethanol and electric cars), loan guarantees (for nuclear power, renewable energy and electric car manufacturing) state-level renewable portfolio standards (mostly for wind and solar) and EPA fuel-economy standards (which regulate cars, but do nothing to discourage driving).

The results are often perverse. To pick just one example, investment tax credits for solar panels are awarded to anyone who puts solar on a roof, including well-to-do people who live in places where there's so little sunlight that the GHG-reduction benefits are slim. Meanwhile, a utility company that might be willing to switch from dirty coal to cleaner natural gas -- which could make a real difference to the climate -- has no incentive to do so under a binary regulatory scheme (dirty/clean) that doesn't differentiate between fossil fuels. That's nuts.

Of course, the politics of a carbon tax or fee are difficult. Republicans on Capitol Hill are all but unanimous in their stated opposition to taxes. A carbon tax with a rebate to consumers was at the heart of legislation introduced back in 2009 by Sens. Cantwell and Collins that ran into stiff opposition.

Then again, as Phil Sharp, a former Indiana congressman who now leads Resources for the Future, said at the C2ES event, political winds can shift. "Rhetoric is one thing, and what people do when they get down to concrete decision-making is often something else," he said.

The other reason why environmental groups have been reluctant to support a carbon tax is that, unlike cap-and-trade schemes, it doesn't even set a hard cap on GHG emissions, which scientists say we need. If the tax is too low, it won't reduce emissions far enough or fast enough to deal with the climate threat.

Then again, anything that would put a brake on emissions would be better than what we have now, which is just about zilch.

Carbon tax photo via Shutterstock.

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