Scarcely a day passes without some Republican legislator labeling the cap-and-trade plan to lower greenhouse gas (GHG) emissions a carbon tax. Alas, they are wrong: a carbon tax would cost less to achieve a given reduction in GHG emissions than would the Waxman-Markey plan, which was passed by the House and endorsed by the Obama administration.

With the current plan, government would require most sources of man-made GHG emissions to have a valid permit for each ton that they discharge into the atmosphere. Government would issue the permits and, by limiting the number it issued, would establish a cap on total U.S. emissions. The price of permits would rise to whatever level would balance the demand for permits with the supply that government has issued.

Under this system, hard-to-predict forces such as technology trends, economic growth rates, fuel prices, and even weather will determine GHG permit prices. As a result, a GHG cap can easily cost more than the price of the harm that it avoids. Former Vice President Al Gore, for example, has proposed a cap that has been calculated to cost $17 trillion more than the expected future damages from unchecked climate change. The current plan is also very likely to overshoot that mark. Further, with cap-and-trade, permit prices will fluctuate widely, and businesses will have to incur unnecessary costs to hedge against these price swings.

Most Republican congressmen and conservative pundits, instead of pointing out that a tax would be a far better option, are hard at work trying wrongly to convince voters that the current plan is a tax.

The carbon tax is free from these defects. With it, businesses know the current and future price for emitting a ton of GHG—at least until Congress changes the tax rate. Since the tax rate is set in advance, there will be no punishing cost spikes just because technology changed too slowly or the economy grew too fast. And since the tax rate will change slowly and predictably, hedging costs will be minimized.

This comparison casts our national discourse on climate in a somewhat ironic light. President Obama and his allies are promoting a tool for GHG control that is distinctly more costly than a simple carbon tax. Yet most Republican congressmen and conservative pundits, instead of pointing out that a tax would be a far better option, are hard at work trying wrongly to convince voters that the current plan is a tax.

A few members of Congress have managed to stand outside this political comedy. Their efforts certainly merit praise, perhaps all the more because most commentators grant them so little prospect of success. Why, though, should a policy tool that will clearly be better than the current plan face such long odds?

The organization of the Congress is the source of part of the explanation. The congressional committees with jurisdiction over pollution control are not the ones that write taxes. And these committees have little interest in transferring jurisdiction to the tax-writing committees.

With cap-and-trade, permit prices will fluctuate widely, and businesses will have to incur unnecessary costs to hedge against these price swings.

After all, by dint of their committee assignments, members increase their ability to influence the kinds of choices that fall within that panel’s purview. Committee jurisdictions are, in effect, franchises. With a share of the franchise a member receives an opportunity for making electoral “profit” within that committee’s “territory.” For any given member, part of the art of getting reelected is to match his committee assignments with his main constituent interests.  

It is likely, therefore, that most members already hold places on committees to which their interests are at least fairly well-suited. In that case, switching a major issue from one committee’s purview to that of another is likely, on net, to worsen the fit between all members’ electoral strategies and their committee assignments.  

Also, the implied shift in relative power between committees is certain to trigger fierce intra-party conflicts. In the case of GHG control, tens of billions of dollars a year are at stake. The intra-party power struggles that would erupt from making such a large change would surely detract from efforts to realize programmatic goals on both sides of the aisle. As a result, prudent policy becomes difficult to orchestrate.

This simple reality suggests that, for carbon tax advocates, the least bad available option may be to try to structure a cap-and-trade to mimic the desirable features of a carbon tax. But how?

Hard-to-predict forces such as technology trends, economic growth rates, fuel prices, and even weather will determine GHG permit prices.

One idea is to add what is called a “permit price safety valve.” With a safety valve, government would offer to sell unlimited numbers of GHG emission permits at a specified set price. This offer effectively makes this price a ceiling on the marginal cost of GHG abatement. By doing so, it reduces the risk of runaway control costs, and it limits the range within which permit prices can fluctuate. The safety valve, therefore, can allow a cap-and-trade system to mimic a tax in these two vitally important regards.  

Efforts to enact a pure carbon tax are likely to founder (and any carbon tax that Congress would enact would, itself, fall far short of the economists’ ideal of such a measure). Some version of GHG control is, nonetheless, on the way. Damage control is the order of the day. Trying to mend cap-and-trade’s worst defects is clearly better than accepting the cap-and-trade plan in its present form, and it is also more helpful than obscuring that plan’s greatest weaknesses by attempting to mislabel it as a tax.   

Lee Lane is a resident fellow at the American Enterprise Institute. He is also codirector of AEI’s Geoengineering Project.

FURTHER READING: Lane recently testified before Congress on energy independence and climate change.

Image by Dianna Ingram/Bergman Group.