05/29/2007 03:49 pm ET | Updated May 25, 2011

Big Business, cap-and-trade, and carbon taxes

In Washington Monthly, Chris Hayes draws attention to the "revolt of the CEOs." Big Business is parting ways with the Republican Party, actively seeking greater government involvement in the realms of health care and climate change.

Why? Two reasons.

One, CEOs recognize that rising health care costs and global warming are real problems that will affect their bottom lines.

Two, they see the way the wind is blowing. They realize that public pressure is building for gov't action, Democrats are likely to win the White House in 2008, and, well:

The Chamber of Commerce's [Bruce] Josten summed up his members' views this way: "You want a seat at the table, because if you're not at the table you may be on the menu."

This is largely good news -- the symbiotic relationship between the GOP and Big Business has been toxic -- but there's reason for caution, mainly because reason two is a lot more significant than reason one. CEOs are getting involved in crafting climate legislation because they seek to minimize its cost and maximize their opportunities -- goals not necessarily in line with substantial emission reductions.

It is no coincidence, then, that the business community overwhelmingly favors a cap-and-trade system over a carbon tax.

The government agencies that allocate credits within a cap-and-trade system will be involved in an enormously complex and inherently political process with billions of dollars at stake. It's going to take a long time to get a program up and running, and when it does, you can be sure business lobbyists will be there to help their clients make out like bandits.

This is one reason so many economists and policy analysts prefer a carbon tax. Two recent articles do a great job making the case: this unsigned editorial in the left-leaning L.A. Times and this piece by Ronald Bailey in the right-leaning American magazine.

I highly recommend Bailey's piece. It's comprehensive and fair, and makes the point about cap-and-trade's complexity and vulnerability to manipulation with great detail. But the L.A. Times editorial also makes an additional and crucial point about price volatility:

Cap-and-trade would also have a nasty effect on consumers' power bills. Say there's a very hot summer week in California. Utilities would have to shovel more coal to produce more juice, causing their emissions to rise sharply. To offset the carbon, they would have to buy more credits, and the heavy demand would cause credit prices to skyrocket. The utilities would then pass those costs on to their customers, meaning that power bills might vary sharply from one month to the next.

That kind of price volatility, which has been endemic to both the American and European cap-and-trade systems, doesn't just hurt consumers. It actually discourages innovation, because in times when power demand is low, power costs are low, and there is little incentive to come up with cleaner technologies. Entrepreneurs and venture capitalists prefer stable prices so they can calculate whether they can make enough money by building a solar-powered mousetrap to make up for the cost of producing it.

Contrast this to a carbon tax, where the costs are predictable and revenue goes to the government, which could use it to offset other regressive or economy-distorting taxes. In other words, a carbon tax would likely be better for consumers -- more predictable and less costly over the long run. (It would also, in the long run, be better for business in general, though not for those particular businesses that received massive windfalls in a carbon trading scheme.)

The problem, of course, is the word "tax," which has been demonized almost beyond repair. That's the main -- and as far as I can tell, only valid -- criticism of the carbon tax: it can't pass.

But I think that's been overblown. A recent New York Times poll showed that 68% of people believe that "[p]rotecting the environment is so important that requirements and standards cannot be too high and continuing environmental improvements must be made regardless of cost." If a politician, or better yet a coalition of politicians, made a concerted case that a carbon tax is more consumer-friendly than a cap-and-trade system, the public could be convinced.

Of course the Republican base would fight them every step of the way, but as Hayes says:

Today's conservatives, desperately embracing the small-government ideology that once supported their movement, are almost completely unprepared for this tsunami of federal growth. Unless they can get business back on their side, or win back power, they'll be in a position neither to stop this development nor to shape it. Indeed, right now they seem blithely unaware of what's about to hit them.

Blithe indeed, and increasingly irrelevant. Let them bleat about "tax and spend" blah blah. The American people aren't as dumb as all that, and they're sick as hell of the crowd that's been running the place.

The time is right for a carbon tax. Tell your friends and neighbors.