President Xi: Maybe a Carbon Tax Would be Better

Who would have thought that the first-ever Papal address of a joint session of Congress, calling for Congress to take action on climate change, would be the second most important news item of the day on climate change? That was the case for Thursday, September 14, when Chinese President Xi Jinping announced that China will commit to establishing a cap-and-trade program to reduce greenhouse gas emissions. The details of the program are still apparently under development, but the Chinese plan is hardly an impulse; regional pilot trading programs have been operative for years. The announcement was still considered a surprise; the New York Times reported just Monday that "There is little expectation that Mr. Xi will promise anything as drastic as he did last year."

The plan is meant to be an operationalization of a commitment by China back in November to peak its emissions in 2030, but it may have to wind up being a good bit better. The way that the Chinese Central Committee moves on policy, incrementally and cautiously (except maybe when rescuing stock markets), suggests that the Chinese are not nearly done with climate policy. The greater significance of the announcement is that it renders incredible the claims of climate skeptics inveighing against President Obama's cooperation with China on the grounds that China is simply sitting on its hands and waiting for the world to end.

The nature of climate commitments would seem to call for an emissions limit, and therefore a quantity instrument – like cap-and-trade, with an emissions cap – rather than a price instrument, like a carbon tax. But cap-and-trade brings problems with administration. The U.S., with its experience with sulfur dioxide trading, could probably set it up and run it competently, for about a billion dollars as a start-up cost. But other countries might not start up so smoothly. It has been pointed out that China has even more experience with corruption than Chicago. If emissions permit fraud can happen in the European Union Emissions Trading System, it seems pretty likely that we will see some permitting fraud and corruption cropping up with a Chinese cap-and-trade system.

A better alternative would be a Chinese carbon tax. Who would complain if China had announced a plan to introduce a carbon tax, instead of a cap-and-trade program? There could be Sino-skeptical climate skeptics out there that would argue that a carbon tax would not necessarily constrain the quantity of emissions, but those people are not open to persuasion anyway. There could be environmentalists out there that worry that emissions reporting fraud could be a problem, but such an enforcement problem would be no worse, and significantly better, than they would be under a cap-and-trade program. Under cap-and-trade, it would be easy for a permit buyer to avoid asking questions about the validity of permits bought, especially if she could simply flip the permit to someone else in a robust-traded market. Under a carbon tax, there could be an angry Central Committee to face if emissions under-reporting were found. It is true that under both systems there is a danger of local government and emitter fraud. But if guaranteeing the absence of fraud in China is the condition for an international agreement on climate change, then we might as well just give up.

A Chinese carbon tax would also be a better base model on which to negotiate a climate treaty. The failure of the Kyoto Protocol itself is testament to the fraught politics created by divvying up emissions among signatory nations. What do international treaties look like? Unfortunately, American and European negotiators were overly taken with the Montreal Protocol, the cap-and-trade-like agreement to phase out the use of ozone-depleting substances. In the wake of the success of the Montreal Protocol to dramatically reduce the use of ozone-depleting substances worldwide, every international environmental problem started to look like a pollution problem nail that needed to be addressed with a cap-and-trade hammer. Result: Kyoto.

What do treaties really look like? Most are agreements in which every signatory party agrees to do something affirmative, and the signatories get to bicker over whether certain behaviors are or are not consistent with the treaty. They do not generally look like Kyoto or Montreal. Not only that, tax treaties are really quite common. The harmonization of tax collection throughout the world is imperfect, but a familiar task for trade and tax people. And with a carbon tax, there is at least there is the fact that carbon tax proceeds can be retained by each signatory taxing country.

If Tea Party extremists can force out a House Speaker, then a carbon tax treaty may not seem very plausible. But if opposition from the Tea Party is a really a deal-breaker for international climate negotiations, then we might as well give up.

Actually, What the Pope Thinks Matters

The Papal Encyclical Laudato Si of this past summer, and the address to Congress by Pope Francis yesterday (the first Pope to ever address a joint meeting of the U.S. Congress), prominently featured calls for action on immigration reform (calling himself a "son of immigrants"), poverty, and also climate change. Climate change is often talked about as problem to be solved by policy and economics, but a growing number of people have raised it as a moral imperative. Niskanen Center's Jerry Taylor wrote cogently about it yesterday. I think the world of Jerry, and am privileged to call him my friend, but when it comes to moral authority, the Pope has a higher perch.

The question has remained, however, whether the Pope will move people. On the Niskanen Center blog, David Bailey has argued persuasively that he will not. I disagree. I agree that the Pope inveighs quite heavily against what we have to believe is capitalism, and loses some of his moral authority in doing so. Note that at this point in history, with lingering public anger over the role of the finance industry over the Financial Crisis, wagging a finger at exuberant capitalists seems more credible than it has been in decades (see Republican Senator David Vitter's opposition to the deregulation of derivatives in the last spending bill). I do agree that with a few exceptions in Congress – John Boehner, who wept during his address, one of them – it does indeed seem as if the Pope will fail to move the needle, at least directly and immediately. Former Senator and Presidential candidate Rick Santorum remarked on the Papal Encyclical, "The Church has gotten it wrong a few times on science, and I think we're probably better off leaving science to the scientists…" We might elide the fact that Santorum has waded into climate science himself as a lawyer ("the idea that man, through the production of CO2 … is somehow responsible for climate change is, I think, just patently absurd."), lacking the training that Pope Francis had as a chemist, but the point is that politicians seem to believe they have their own moral authority.

But in the longer term, the Pope's calls will have a political effect. Politicians' beliefs are ultimately derived from, in addition to the beliefs of the Koch Brothers, the beliefs of their constituents. I believe that for the 1.2 billion Catholic voters in the world, the Pope's call for action on climate change will have substantial weight. Humans are evolved to take all kinds of action and belief cues from prestigious, high-ranking people within their most important social groups, and the Catholic Church remains an extremely important source of identification for many of the 1.2 billion. Climate change is an economic issue, a policy issue, but it also is a compelling moral issue. Harm imposed on others is both an externality and a moral wrong. Ultimately, the divergence between the Pope and the economists of the world rolling their eyes at his moral call may just be a matter of degree. No credible economist believes that the appropriate price of greenhouse gas emissions is zero. That is inefficient and immoral.

The Pope is not actually the first to invoke faith in support of action on climate change. The Evangelical Environmental Network has long advocated for action on climate change. That organization has recognized the need to pass on a clean environment to future generations. There is no reason for economic and moral compulsions to be rival motivators for action on climate change. On climate change, there really is no tension between economic efficiency and moral imperative.

Pope 1, Economics 1.