Published: July 02, 2009 08:59 pm      

A small, imperfect, right step

EDMOND — Last week the U.S. House of Representatives passed landmark environmental legislation that for the first time will put a price on carbon emissions. The measure, which passed on a mostly party-line vote, now faces an uncertain fate in the Senate. But to many mainstream economists, the problem with this legislation is not that it goes too far, but that it does not go far enough.

The measure promises to reduce greenhouse gas emissions — the same pollution that most climate scientists believe contributes to climate change — 17 percent below 2005 levels by the year 2020. To accomplish this, the bill would set a cap on emissions and distribute pollution credits to polluting firms. In order to exceed the pollution limits placed on their firms, the polluters would need to purchase pollution credits from firms that found ways to reduce their emissions. Thus, for the first time firms would have a financial incentive to reduce their carbon emissions.

To economists, though, the ideal way to accomplish this would be to auction off the pollution permits. Only the polluting firms would be willing to pay for them — essentially forcing the polluting firms to pay for their pollution. The Congressional Budget Office estimates that this would raise nearly $1 trillion during the next 10 years.

If you are thinking that this amounts to a tax then you are absolutely correct. Generally, the economists’ pollution solution is to make the polluters pay a tax. Unfortunately, the climate bill being pushed through Congress does not auction off the pollution permits, but instead gives 85 percent of them away, providing an immense windfall to polluters at the expense of taxpayers.

Even still, some Republicans are complaining that the proposed bill would still raise $159 billion in revenues during the next 10 years — far too high of a cost, they say. It is true that the bill will raise the production costs of polluters, but that outcome does not mean this is a bad idea. In fact, we do this all the time. For example, we do not allow firms to dump pollution into the Oklahoma River because we want to preserve its beauty. Notice, though, that this restriction increases business costs. Without such a restriction, businesses more easily could dispose of their waste, bringing down their costs. Few people, though, would argue that allowing firms to pollute the Oklahoma River is good for society, even if it is bad for profits.

The same can be said about the climate bill. If, as most climate scientists believe, carbon emissions are contributing to climate change and generating significant long-term costs on society, then taxing (even indirectly) that pollution is sound policy. In other words, not all taxes are bad. In fact, such a carbon tax has been endorsed by some of the most conservative economists in the nation as the appropriate governmental response to fight climate change.

Granted, while a carbon tax wins support of economists, the imposition of any tax is unpopular with the general public. But this could have been overcome by using the $1 trillion of revenues to reduce the corporate income tax (one of the most harmful taxes in existence) and the payroll tax (one of the most regressive taxes in existence). In other words, we could raise taxes on polluters, while cutting the worst taxes for the rest of us. To paraphrase New York Times columnist Thomas Friedman, “we punish you for your pollution sins and reward you for your payroll wins.”

The cap-and-trade bill is clearly not a perfect bill. But judging from the closeness of the vote in the U.S. House, it is likely as close to perfect as one can get right now. Hopefully, as the bill progresses through the legislative process it will be improved further by including payroll or corporate income tax cuts. But even in its current form, by forcing those firms who contribute to climate change to pay something for their pollution, it is progress. Sometimes the small, imperfect steps in the right direction are the only steps we can take.



MICKEY HEPNER is an associate professor of economics at the University of Central Oklahoma.