A Novel Approach to Climate Change Policy: A Tax Shift

With voters on board, a simple policy change could be the best weapon against carbon emissions.

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Bill Shireman, president and CEO of the Future 500, has successfully advocated environmental causes for 30 years, and now brings business and activists together to develop collaborative solutions to economic, social, and environmental challenges. Bill O'Keefe, CEO of the George C. Marshall Institute, is president of Solutions Consulting Inc.

Both major political parties have received major wake-up calls: the GOP last November and Democrats last month. Sound bite politics, it's clear, do not make for sound policy. And voters are catching on. Now, lawmakers on both sides of the aisle must stop stonewalling and start solving problems.

One problem we can solve together is the climate change risk. Participants in the emissions debate must simply shift their focus from scoring rhetorical points to finding common ground. America has prospered when governed from the center, and we're long past due to return to that philosophy.

Despite its fractious appearance, the divide on this issue is not too wide to bridge. Just consider the two of us. We come from very different backgrounds. One is a lifelong environmental activist, and the other served as a top energy industry executive. Though we differ on some details regarding the risk of human induced climate change (exactly how it's caused, the degree of its severity, how fast we can change, etc.) we agree on this: the risk is real. We must act, but act intelligently.

Moreover, we can agree on the core solution: putting a price on carbon.

Setting the most contentious issues aside will free lawmakers to engage in a healthy dialogue, figuring out the best way to address basic, uncontested issues: humans have and do influence climate; pumping unlimited quantities of CO2 into the atmosphere is probably unwise; our global economy needs new technology and more efficient energy systems, etc. As James Carville reminded Americans during the 1992 presidential campaign ("It's the economy, stupid"), there's much to be gained by keeping it simple. And that goes double for climate.

Out of the three possible ways to impose a price on carbon emissions (command and control, cap-and-trade, and carbon tax shift), the simplest method is also the most promising.

First option: Allow the EPA to impose broad regulations on greenhouse gas emissions. Though command and control is the most expensive, least effective path, it's a favorite of nervous politicians who don't want to bear responsibility for any unintended consequences.

Second, Washington could establish a cap-and-trade system: put a legal cap on emissions and allow emitters to trade credits. This is the approach at the center of the current House and Senate legislation. It's good in theory; however, real-world implementation shows the system is easy to game and vulnerable to risky trade of complex financial tools. Consequently, emissions are still rising under the E.U.'s trading system, which continues to falter. And, not surprisingly, support for the policy is dwindling among U.S. lawmakers.

That brings us to the third option--what the right calls a "tax swap" and the left calls a "tax shift." Basically, Congress could cut taxes on things we want more of (employment and income, for example) and then make up the difference by levying a fee on carbon emissions. This plan is revenue neutral, so consumers will enjoy as much money as they did before. Plus, it has the added feature of making clear that carbon--and the energy sources that emit it--will become scarcer over time. That delivers a strong incentive to invest. Given the simplicity, transparency, solid economic benefits, and investment incentives associated with a carbon tax, it's easy to see why it should transcend run-of-the-mill climate rhetoric.

Of course, a solution that simple can't be politically feasible, right? Pundits love to look sophisticated by repeating the decades-old conventional wisdom that anything called a "tax" just can't pass. Just like Massachusetts can't elect a GOP senator, and the United States can't choose a president named Obama. Candor and trust in American citizens might go a long way toward restoring trust in our political system.