Jim Hansen vs. Cap and Trade

NASA climate scientist starts the circular firing squad.

NASA climate scientist Jim Hansen has a new book out about climate policy, with excerpts in this month’s issue of The Nation.  And in my view, he’s got a pretty good policy idea:  tax carbon, and use the revenue to give out rebates in equal, per capita shares to every US citizen.  It’s a twofer—the carbon tax helps drive down emissions, and the rebate makes sure that it’s fair to middle- and lower-income folks who’d otherwise bear the brunt of the tax.

If I were the globe’s climate czar, Hansen’s tax-and-dividend plan is one of the top 5 to 10 ideas I’d give serious consideration.

That’s the good news.  The bad news is that Hansen has opted for the tone of a zealot:  he doesn’t merely extol the virtues of his favored policy, he actually lashes out at anyone who prefers a slightly different alternative to his policy.  Die-hard environmental champions in Congress who support cap-and-trade instead of Hansen’s carbon tax are, in Hansen’s view, nothing more than representatives of a government that’s lying to the people. Environmental advocates who’ve fought for decades to protect the climate “have been in Washington a little too long.”

You get the drift. Rather than turn his fire at the REAL enemies of a sound climate policy—the fossil fuel industries that have stymied progress for decades — Hansen trains his fire at his potential allies. The result: a circular firing squad that reminds me of the scene in Monty Python’s The Life of Brian, where the People’s Front of Judea declares its undying enmity for the scoundrels in the Judean People’s Front I’m sure the coal industry is watching the spat that Hansen’s set in motion, and yucking it up big time.

But what’s especially nettlesome here is that Hansen’s opposition to cap and trade is based on two fundamental misunderstandings.  First, Hansen implies that cap and trade and carbon taxes are completely different systems.  But (yes, I’ll say it for the thousandth time)—they’re not!!!  Economically, they’re really two peas in a pod.  Second, Hansen talks as if his carbon tax idea were completely bulletproof—capable of passing both houses of Congress without getting watered down.  But that’s bunk!!  For every potential weakness in a cap and trade system, there’s a way to mirror that weakness in a carbon tax regime.  The problems that Hansen finds in the cap-and-trade bills being considered in Congress are almost all about politics, not any “inherent” flaws in cap and trade.

Let’s look at Hansen’s two misunderstandings in greater depth.

First, economists are pretty unanimous in their belief that cap and trade and carbon taxes have very similar effects.  In their ideal forms, they both put a price on carbon, which gives incentives for every actor throughout the economy to reduce carbon emissions.  Economically, a carbon tax of $20 per ton has the exact same effect as a cap-and-trade system in which carbon permits sell for $20 per ton. More generally, at any given carbon price, there’s essentially no difference in the effect the two systems have on emissions. (To put us on record:  we like both cap and trade and carbon taxes, in large part because the systems are so similar—and can even complement one another.)

The real difference between carbon taxes and cap and trade—again, in their ideal forms—is in where they concentrate uncertainty.  With carbon taxes, the government locks in the price of carbon, and the market decides how much carbon to emit. If fossil fuel prices fall, or the economy surges, or inflation runs hot, emissions can rise despite the tax.  With cap and trade, on the other hand, the government locks in the carbon emissions, and the market decides what price carbon needs to be; ideally, emissions fall, slowly and steadily, no matter what happens to the rest of the economy.  I tend to think of cap and trade as a variable tax:  one that fine-tunes the price to guarantee a certain level of emissions.

Of course, there are ways of implementing cap and trade that make emissions uncertain.  Price caps, poorly regulated “offsets,” and other loopholes can poke holes in the cap, weakening the guarantee of steady emissions reductions.

But that brings us to the Hansen’s other core misunderstanding:  his apparent belief that his tax-and-dividend policy is immune from political compromise or troublesome loopholes; that somehow, both houses of Congress would agree to Hansen’s “perfect” policy, without any of the compromises that Hansen believes render current cap-and-trade legislation too weak to be worthwhile.

I have three responses to that:  Bull-pucky, the IRS, and France.

Bull-pucky first.  Virtually every problem that Hansen critiques in cap-and-trade could be injected into a carbon tax system.  Worried that favored industries will get special treatment under cap and trade?  Well, Congress could exempt big swaths of the economy from a carbon tax, or use tax revenues to create subsidies for favored industries.  Worried about risky carbon “offsets”—like reforestation or sequestration projects that might not live up to their promise?  Well, a carbon tax system could include refundable tax credits for risky carbon storage projects too.  Worried that the cap is going to be set too high?  Well, Congress could always set the carbon tax too low, or increase it too slowly, or not increase it at all.  I could go on, but there’s no point:  carbon taxes and cap and trade are such similar systems that even their loopholes match up.

IRS second.  In their ideal form, carbon taxes are a bit simpler than cap and trade.  By the same token, the ideal income tax form takes 3 minutes to fill out.  But as anyone who’s tried to navigate an IRS instruction booklet knows, the tax code has a tendency to grow in complexity—sometimes for good reasons, but mostly because of the political impulse to provide special tax treatment to favored constituencies.  I see no reason to believe that carbon taxes are magically immune from that impulse.

France third.  It may not have made much news here, but the French supreme court just rejected France’s proposed carbon tax.  The reason:  according to Bloomberg News, “93 percent of all industrial carbon emissions in France would have avoided paying the full tax.”  The French carbon tax was so riddled with loopholes that it ran counter to the principle of tax equality—and the French supreme court felt they had no alternative but to sink it.  And if that sort of thing can happen in France, then it certainly can happen in the US.  France’s experience suggests that carbon taxes are no more immune from politics than any other climate-protection system. Internationally, British Columbia’s carbon tax comes pretty close to being a model of transparency and comprehensiveness.  But as Alan argues, most of the globe’s carbon taxes—as important as they are—are actually quirky, and full of loopholes and favoritism.  (Sigh.)  That doesn’t make those taxes bad ideas, but does point out that carbon taxes are hardly immune from politics.

I have no idea if Hansen’s tantrum will have any effect on the prospects for climate legislation in the next year.  But I’m going to try to set a good example here, and put an end to the circular firing squad:  Carbon taxes are a good idea!!  Hansen’s version of a carbon tax is a great one!!  Congress should consider it!!  If they were to pass it, the world would be a better place!!

But let’s not kid ourselves that scrapping cap and trade legislation now will automatically open up the field to Hansen’s pristine, un-game-able tax system anytime soon.  The same federal legislators will still be there, with the same interests, and the same propensity to poke holes in any good idea that comes along—whether it’s cap and trade, a carbon tax, or any other awesome concept that a scientist-turned-policy-dabbler could come up with.  In my view, the more energy we put into trashing our allies and their integrity, the more likely we are to end up in 2011 where we are today:  with no federal climate pricing system whatsoever, and a fossil fuel industry that’s laughing all the way to the bank.

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  1. Paul Birkeland says:

    Clark – As I commented on Eric’s post on 12/8, you are right in your critique of Hansen’s position. But I think we do ourselves a disservice if we don’t examine the roots of his thinking.At its heart, Hansen’s vision is a Populist one. Populism is neither Republican nor Democrat. This viewpoint is based on the belief (or feeling) that “we,” the producers and wage-earners, are taxed by the Government to provide handouts to “Big Business” and to the “underclass” of non-workers, whoever they are seen as being at the time (the poor, the immigrants, minorities, etc.). There’s a lot of Populist resentment right now with big business bailouts and record payouts in unemployment.Cap-and-trade plays into this Populist paranoia. It sets up a situation where, to the Populist, it appears that I, the wage-earner, will be on the hook for higher energy prices to heat my house, drive my car, and mow my lawn. But the game-players on Wall Street get a new business and revenue stream! (On top of their very non-populist bailouts.) And it seems that the “underclass” of non-workers will get a tax credit of some sort, or will simply pay less because they don’t have to drive to work.The Populist viewpoint, which is where I think Hansen is coming from, is that we should be able to incentivize us as individuals so that I, the wage-earner, gets the breaks and keeps the money. A few months ago, Sightline had a piece discussing a carbon tax that was levied per gallon, but was then distributed per capita. (I think you wrote it, Clark.) Hansen recommends such a program now. It is the perfect Populist answer. Individuals who drive less, actually make money. Those who can’t ‘discipline’ themselves to drive less have a net financial loss. But it’s up to the individual, and there are no ‘parasites’ in the system sucking away money they don’t deserve.So, to the real subject: politics. Yes, Hansen is a bit ideological here, and a carbon tax would just as surely be politicized as a cap-and-trade. Everything you say is true. But I think we could move the carbon cap legislation forward more easily if we were able to find a way to position it as a Populist program, or put some Populist features into it. Maybe a hybrid cap-and-trade-and-tax-and-dividend system. Sounds complicated, but it gets both Wall Street and Main Street on board.

  2. Clark Williams-Derry says:

    Good points, Paul!To me, the key features of a populist carbon policy include:* Everyone pays the same for carbon. No exceptions!* Revenues are returned to the people.* Carbon fees go high enough to guarantee results!* Tight rules that limit the potential for a few folks to get rich.We’ve heaped praise on systems that have those characteristics: tax and dividend, cap and dividend, and various other kinds of carbon tax shifts and carbon caps. To me, both cap & trade and carbon taxes have roughly equal potential to meet populist goals—or to fall short, depending on how they’re structured. The choice isn’t “cap vs. tax.” It’s loopholes vs. no loopholes, favoritism vs. no favoritism. That’s where the real political battle lies, not in cap vs. tax.

  3. CTF says:

    I could not disagree more. We cannot continue to put political expediency above good public policy and that is absolutely what Congress is doing as they move forward on cap and trade. The fact is that the overwhelming majority of the world’s leading scientists and economists favor a revenue-neutral carbon tax. It’s about time we payed attention.

  4. Rod Smelser says:

    “The fact is that the overwhelming majority of the world’s leading scientists and economists favor a revenue-neutral carbon tax. It’s about time we payed attention.”CTF, … to quote you a second time,”I could not disagree more!”I have never seen a poll of economists on this subject but from what I can gather it would be more accurate to say they fall into three camps, those prefering a cap and trade system, those prefering a carbon tax, and those prefering both. Prof Andrew Weaver of UVic makes the same kind of assertion, that everyone in the economics profession is in favour of a single position, and I just don’t think that’s the case.

  5. Clark Williams-Derry says:

    I agree with Rod—there seems to me to be plenty of divergence among economists over the “ideal” form of carbon pricing. Many economists clearly prefer taxes—they prize the stability in carbon prices, on the grounds (among others) that price stability makes for more efficient estimates. Greg Mankiw, the head of the CEA under Bush II, is clearly in this camp, but there are plenty of others.Other economists clearly prefer cap and trade. Sometimes this is on economic grounds, others for emissions certainty, other times for political science reasons. In the latter camp, count Robert Stavins, among others.Some don’t see much of a difference between caps and taxes, and prefer whichever one can get passed (with some caveats, I’m sure). Nobel prizewinner Paul Krugman probably counts in this camp—and he’s clearly peeved with Hansen’s botching of the economics of cap-and-trade.Unfortunately, whenever I see Hansen speak about climate policy at this point, I wince. I bet I feel the same way about Hansen that Hansen feels about some climate skeptic butchering basic climate science. Not about everything—sometimes I agree with Hansen wholeheartedly. But on many important issues he’s just plain wrong, in bizarre and obvious ways. Sadly, those sorts of basic errors undermine my trust in Hansen more generally. Sigh.

  6. John Gear says:

    As for Bull-pucky, IRS & France1) A carbon tax applied at the point of extraction or importation (with equivalent tariffs for the fossil-fuel content of manufactured imports) is not necessarily subject to more political compromise than anything else, and since this would in fact be presented as a tax on oil and coal companies, probably has much better salability than most other systems.2) IRS—see #1—tax would be invisible to nearly all in the US and would only appear in the price of goods and services, not as a tax anyone would need to bother with. The only thing most people would see is a check.3) France—See #1 and #2—the whole point of Pigot taxes is that they are avoidable (through the desired behavior). In the US, one of the strongest pillars of the law is that the constitution gives the feds the authority to tax and spend—and unless you can show that there is NO intent to raise revenue whatsoever, most taxes are upheld.You may not like Hansen’s campaign against your pet plan, but I have already seen that, the more time people study the issues, the more questions they have about cap-n-trade and the more they like the simplicity and predictability of tax-n-rebate.

  7. Alan Durning says:

    Thanks for your comments, John. It’s a good debate.With Clark and Eric, I think Hansen is pointing his fire in the wrong direction—attacking the policy vehicle (cap and trade) rather than those who are weakening the actual proposal. If the dominant policy vehicle were a carbon tax, the exact same political pressures would be resulting in the exact same kinds of compromises in the House and Senate. There’s nothing about a tax (as opposed to cap and trade) that insulates the proposal from those pressures.So Hansen—and some others—are attacking cap and trade rather than attacking those who are weakening climate policy by, for example, allowing too many offsets, setting too generous an early cap, distributing too many free permits to the coal industry for dubious sequestration plans, etc.And I’ll reiterate something we’ve been saying for a long time. Cap and trade PLUS tax is better than either. And the form of cap and trade that emerged from the House in Waxman-Markey is, yes, compromised and hybridized. Still, it actually incorporates a form of a carbon tax, by setting an auction reserve price. So do both Kerry-Boxer and Cantwell’s new bill. That puts a floor under the price of carbon.To us, it seems like we should all be struggling to improve climate policy in the Senate—and fast. Also, it seems to us that killing Waxman-Markey/Kerry-Boxer-Graham will most likely NOT lead to a tax-and-dividend alternative. It will most likely lead to another ten years of inaction. President Obama will not get another chance.The obstacle in the Senate is NOT cap and trade. Cap and trade has a massively better chance of passing than a carbon tax. The problem is passing any climate policy that will be comprehensive and put a price on carbon and kick-start the clean-energy revolution.

  8. Clark Williams-Derry says:

    John Gear-You say: “A carbon tax…is not necessarily subject to more political compromise than anything else”Yes!! That’s exactly my point!!! Taxes will be subject to political compromise to roughly the same extent as cap-and-trade.And there’s the rub. Leaving out the “trade” part, enviros who don’t like cap and trade tend to point to…* bad offset policy* holes in the cap* an emissions reduction schedule that’s not ambitious enough* giveaways to industryBut the political pressures that create those problems in cap-and-trade legislation will, in my view, create equivalent problems if you tried to get a carbon tax through both houses of Congress.Now, to be clear: if a carbon tax proposal with roughly the same mix of good and bad points as Waxman-Markey and Kerry-Boxer were making its way through Congress, I’d stand shoulder to shoulder with anyone to support it. ABSOLUTELY!! The climate’s way too important to let a political opportunity to pass by. And that’s true, even though my “pet” policy is probably a form of cap-and-dividend.

  9. John Franklin says:

    “But I’m going to try to set a good example here, and put an end to the circular firing squad..”It would appear the best way to do this would be to not accuse Jim Hansen of starting a “circular firing squad” in the first place. i.e. don’t use incendiary terminology to get someone to read an article and then say that someone else is guilty of hyperbole in their assessments.Also, you provide no reason to believe your assessment of individuals vs. that of Hansen. People you characterize as “die-hard environmental champions”, Hansen believes are representatives of a government that’s lying to the people. Do you know many people in Washington (or Olympia) who are not representatives of a government lying to the people?

  10. Barry says:

    The best solution I think would be “Tax-Until-Cap”. The lesson learned in BC is that a carbon tax can be put into effect very quickly. BC announced a carbon tax and a cap & trade effort at the same time. The tax kicked in quickly—two years ago. The cap & trade is still far from even being defined.We need a carbon price quickly. We need it for both economic and climate reasons. The Economist magazine just said $40/tonne is needed now to let society transition with the least economic impact overall.We should be pushing governments to implement a carbon tax that would sunset when a cap comes into force. Putting a temporary carbon pollution tax shift in place would also spur the cap and trade discussions along for sure.It feels like the Sightline folks are overly focused on USA legislation in this debate. As BC has shown a carbon tax can be implemented state by state, province by province to prepare those folks better than just waiting. Also Canada itself needs something quickly. It is falling ever farther behind USA in the carbon race to a shared 2020 finish line. A carbon tax at that federal level is a real alternative to get Canada moving in the right direction. A cap up here is years away.Finally it is true that everyday folks understand a carbon tax much better than a cap & trade system. You have to have public buy in…and the more complex they public views it the harder it will be to keep public support up as it starts to bite folks.tax-until-cap

  11. Clark Williams-Derry says:

    Barry -Agreed, tax-then-cap would be awesome!! Yet despite BC’s awesome example, there doesn’t seem to be much movement in that direction in the US or the NW states. But I don’t actually think you need to phase out the tax; or, rather, you could convert the tax into a reserve price on permit, as we argue here; economically it’s the same.And agreed, we’re pretty focused on the USA right now. Sorry! But we’re sorta going where the action is. When the Western Climate Initiative was the big thing on the west coast, we spent our time on that. When the carbon tax was heating up in the last BC election, we spent a bunch of time on that. But right now, the action’s in DC. The WCI—the regional program that’d affect BC, WA, and Oregon—is sort of stalled, since it’s waiting for the US Congress to figure out what it’s doing.

  12. John Gear says:

    Just finished Hansen’s new (late 2009) book—“Storms of My Grandchildren: The truth about the coming climate catastrophe and our last chance to save humanity” and, though it’s hard work in spots (and he’s kinda a plodding writer), I have to say that the result is that I’m even more in agreement with him that cap-and-trade schemes are futile because their entire purpose, in a nutshell, is to permit US coal plants to continue operation while other things are done to (perhaps) reduce emissions from oil and natural gas. In other words, it’s to provide cover for continuing coal while making false promises about reductions that will not remain in place because all the reachable oil and natural gas _will_ be burned and then we’ll have a world entirely dependent on the existing coal infrastructure (including some fairly young plants that were allowed under cap-and-trade rules but would economically prevented under tax-and-rebate).

  13. Andrea Faste says:

    Why has Sightline given up on tax and rebate? I think that Cantwell’s bill is a step in the right direction, and because she was such achampion during the Enron mess, I think a case could be made that she will fight hard to point out the biggest problem with cap and trade. The big corporations and money folks will game this to the hilt, so that emissions are NOT reduced (as has been the case following Kyoto) but the corporate coffers will continue to be filled. As Paul B. points out, the public is pretty sick of this (aka health insurance, bank bailouts followed by record profits, etc.), but if they are told over and over that “cap and trade” is the answer on climate, most will roll over and we will be snookered once again. Give the Cantwell bill more air time.

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