Is the carbon tax v. cap-and-trade debate really over?

Most observers of U.S. policy and politics would say yes. The usual insight given is that Americans are so tax-phobic that anything that remotely smells of a ‘tax’ won’t pass. Even though cap-and-trade will be a tax on energy for all intents and purposes, it is considered more politically palatable simply because of the name. This is really a framing question, though. Stakeholders who play in transportation policy alternately call the 18.4¢/gal federal fuel tariff a “gas tax” or a “user fee.” Use “gas tax” if you think gas shouldn’t be taxed no matter what the reason. Say “user fee” if you think it good policy that the federal fuel tax pays for the entire federal interstate highway system and a good deal of state and local roads, bridges, railroad crossings, bike paths, buses and bus lanes, and other goodies. If carbon tax proponents (and there are legions) had any sense, they’d be devoting most of their time and energy to figuring out how to address this framing issue.

The debate might be over simply because every state that has started to move toward GHG regulation has moved in the cap-and-trade direction (RGGI, WCI, etc.), and the only bill in Congress to see movement so far is the Lieberman-Warner cap-and-trade bill (S.2191). But not so fast. Despite being a member of the Western Climate Initiative, the government of British Columbia just passed a comprehensive carbon tax. And the heavyweights in U.S. policy that favor a carbon tax is long. Carbon tax and cap-and-trade are not mutually exclusive, and in fact best policy would institute both for different sectors.

Perhaps the most compelling reason we will have a cap-and-trade system instead of a carbon tax is a combination to two factors: money and inertia. Once one regime is in place, adding the other to address other sectors is unlikely. So which regime comes first? That’s where money comes in. Wall Street stands to make big, big money pushing electrons through wires. How much? Well, New Carbon Finance just released an estimate that if Lieberman-Warner passes as is, the carbon trading market will be $1 trillion by 2020. That’s trillion. With a T. Now does anybody want to bet which regulatory regime we will be seeing?