How carbon taxes can mesh with cap and trade.
In what would be easily the world's biggest carbon tax shift, French President Sarkozy has begun advocating for robust carbon tax coupled with rebates or tax reductions:
The tax would be initially based on the market price for carbon dioxide emissions permits, which is now euro17 ($24.74) per ton of carbon dioxide, Sarkozy said. At that level, the government expects to raise euro3 billion, which will be entirely returned to households and businesses through a reduction in other taxes or repaid via a so-called "Green Check," Sarkozy said.
The result would be a shift of the tax burden from other revenue sources to energy derived from fossil fuels in an effort to discourage their use.
Gasoline, diesel fuel, coal and natural gas will be subject to the tax, but not electricity, Sarkozy said.
C'est bon. Not only is this an exceptionally good tax shift, but it's also a good demonstration that carbon taxes and cap-and-trade systems can go hand in hand.
France is a charter member of the world's largest carbon cap and trade program, the EU ETS. And while the ETS has done a fine job (despite what you may have heard), its biggest flaw is that it is limited in scope to major emitters of carbon such as power plants and industrial facilities. By applying a carbon tax to home heating fuels and transportation fuels, France can do what virtually no one else has done: price carbon comprehensively across the economy.
Wonky tangent: I'm giving extra points for setting the carbon tax rate at roughly the same price as emissions permits in the cap-and-trade program. That helps ensure that carbon pricing doesn't simply engender a shift between sources of carbon but rather engenders a shift away from carbon altogether.
The main lesson here, however, is this: carbon taxes and cap-and-trade can work together. No really, they can. You can use the different pricing systems for the same sources of carbon -- as both British Columbia and Quebec will presumably do if the Western Climate Initiative becomes operational -- or you can use the different pricing systems for different portions of the economy, as France may do. Let this be a lesson to all you one-true-way carbon pricing zealots out there.
It sounds geeky, I know, but single-system carbon pricing advocates can make religious fanatics look downright moderate. Of course, there are advantages and disadvantages to carbon taxes just as there are for cap and trade. We can and should debate the merits of these systems. But I wish everyone would acknowledge that they can be complementary and they are not mutually exclusive.
This piece originally appeared on Sightline Daily