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.