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Saturday, April 24, 2010

Cap and Trade versus Carbon Tax - CBO Letter

on April 20, the CBO issued a letter to Congressman Christopher Smith on the costs to households of H.R. 2454, the American Clean Energy and Security Act of 2009 (+ see CBO Director's blog post). H.R. 2454 passed in the House in June 2009. This is a complicated bill that creates a cap and trade for carbon emissions, allows for use of carbon offsets and has a few tax provisions in it. I wrote an short article on this in August 2009 in the AICPA Tax Insider (Tax Aspects of Greenhouse Gas Legislation).

CBO estimates: "Measured in terms of the 2010 economy, the average loss per household would be $90 for 2012, $550 for 2030, and $930 for 2050; it would average about $460 per year over the 2012–2050 period."

I'm guessing these costs will be viewed as a bad thing which is somewhat unfortunate. Reducing greenhouse gas emissions and global warming is going to cost us. But that is a good thing as opposed to suffering the costs to the economy and life of climate change. We created an economy dependent on many things that produce GHG emissions and to change course now will entail costs. These costs are also there to help encourage people to change behavior. After all, if gasoline continues to cost the same, where is the incentive to use less of it?

I hope any discussion of the information in the CBO letter will also lead to evaluation cap and trade versus a carbon tax. A carbon tax should be far more transparent as to the cost. For example, you'd see if listed on your utility bill. Gas stations could post the details of the price you pay at the pump that notes the carbon tax. It will be more difficult and less accurate to try to estimate the cost of cap and trade embedded in the cost of any goods or services.

But we definitely have to get to the point of accepting that it is going to cost us. The sooner we make changes, the lower the cost will likely be. Also, shifting from fossil fuels to renewable energy sources should also create jobs as we develop and improve upon the necessary technology.

A carbon tax - a polluter pays tax, makes sense. While it is regressive, relief can be provided via the income tax, but everyone needs to pay something to be better incentivized to change our behavior to help save the planet.

What do you think?

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