Mr. Obama, Now is the Time for a Carbon Tax

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Some will disagree. But this is the right time to combine policies for economic recovery with policies to control greenhouse gas emissions and prevent an even greater economic disaster from climate change in the future.

But to do this, we need a new tax at the very time that many economists are talking about a tax cut. I am talking about a carbon tax.

The reason is simple, and urgent. It is set out in a letter to Barack and Michelle Obama from James Hansen, the award-winning American scientist who heads the NASA Goddard Institute for Space Studies. He is credited with playing a key role, dating back to 1981, in identifying the threat to life on the planet from the build-up of carbon dioxide in the atmosphere from human activity.

He has continued to speak out, with growing concern, about the threat from climate change and the urgency of acting before the planet reaches a point of no return.

Hansen warns that the atmospheric level of carbon dioxide has risen from 280 million parts per million before the industrial revolution to 385 ppm today, with the world headed to 500 ppm. He argues that for a sustainable future this level must be reduced to 350 million ppm. Moving to 500 ppm, he warns, “would be disastrous.”

In his letter, Hansen appeals to the incoming president to drop his plan for a cap-and-trade system to limit emissions and to adopt instead a carbon tax that would rise over time. In his proposal, all of the money collected by the carbon tax would be paid back to American taxpayers in the form of a dividend on an equal per capita basis. The tax would be imposed at the coal-producing mine or the oil or gas wellhead, and in the case of imports, imposed as a tariff.

As Hansen points out, “a rising price on carbon emissions is the essential underlying support needed to make all other climate policies work.” It would reinforce stronger building codes and many other measures to promote energy efficiency and conservation.

How does this benefit the economy? “The tax will spur innovation as entrepreneurs compete to develop and market low-carbon and no-carbon energies and products,” he argues. This will create new jobs. Indeed, if the automakers are to shift to “green” vehicles as part of the industry bail-out, they have to be assured that the public will buy them. By using a carbon tax to ensure that gas at the pump is at a high and rising level, consumers will have a strong incentive to buy them.

Fearful of selling a carbon tax, Obama has talked of a cap-and-trade system that would set a limit on emissions from major polluters and allow low-polluting enterprises to sell their unused credits to enterprises that fail to meet their emission targets. This is the approach favoured by Stephen Harper’s government and also by the proposed Liberal-NDP coalition.

But as Hansen points out, a cap-and-trade system is a bonanza for lobbyists, special interests and the financial community. Because emission permits would have to be traded, Wall Street—and Bay Street—would generate potentially hundreds of millions of dollars in trading fees and create more millionaires in the financial world. A carbon tax is much more efficient and cleaner.

This concern seems to be shared by Rick Hyndman, the senior climate change adviser to the Canadian Association of Petroleum Producers, the oil and gas industry lobby.

Writing in Alternatives Journal, he also appears to favour some form of carbon tax. He argues government should set the price for carbon, not let traders do it through a cap-and-trade system which, he contends, would be costly and lead to constant volatility in the price of carbon.

The financial community, he warns, is pushing the government to adopt a cap-and-trade system because of the big profits they will make. But a cap-and-trade system will not send a clear signal on carbon prices. Only a carbon tax can do that. And for investments to be made and entrepreneurs to develop new innovations, a sustained and rising carbon price is essential.

Making the changes necessary to move to a low- or post-carbon world will take time and a strong inducement to curb the burning of coal, oil and natural gas. As Pietro Nivola writes in a new study from the Brookings Institution in Washington, “that inducement is called a carbon tax.” Interestingly, the chairs of both Exxon-Mobil and General Motors have now called for some form of carbon tax. It is the wrong time for the Liberals to abandon the carbon tax.

David Crane is former economics editor at the Toronto Star. He has just returned from a 15-month stint at the OEcD in Paris. He can be reached at [email protected]