03/20/2013 05:39 pm ET | Updated May 20, 2013

The Canadian Tar Sands Dilemma: We Still Need a Carbon Tax, Pipeline or Not

Climate change is largely the result of one very powerful special interest, the fossil-fuel industry (coal, oil, gas and power companies), getting a special pollution break -- essentially a subsidy -- that enables them to dump their carbon pollution into the atmosphere for free. With the massive financial clout they derive from these subsidized profits, they have been able to capture the very public officials who are supposed to be regulating them but who are instead in their thralls.

It is easy to understand why the fossil-fuel industry spends so much money on lobbying and campaign donations. Any truly effective strategy to combat climate change would require two fundamental elements: first, putting a price on carbon so that polluting the atmosphere is no longer free; and second, keeping a significant portion of remaining fossil-fuel reserves in the ground rather than burning them. In each instance, fossil-fuel industry profits would be greatly reduced. This is the great dilemma of climate change.

That dilemma is about to be magnified as we approach a decision on the Keystone XL pipeline. Although the environmental community is urging President Obama to cancel the pipeline, the president still talks about an "all of the above" energy strategy, which probably means approving the pipeline. This outcome is even more likely following a recent State Department report finding that, if the pipeline isn't built, the fossil-fuel industry will simply find other ways to move the dirty Canadian tar sands crude to market. If this is true, then pipeline or no pipeline, perhaps we should be exploring other ways to create incentives for the fossil fuel companies to leave the crude in the ground rather than monetizing it.

This is where a carbon tax comes in. A carbon tax is the only step that truly enlists markets in the fight against climate change. As fossil-fuel companies are forced to pay for the damage their carbon is doing to the planet, the price of their products would rise. As fuel prices rise, consumers would be incentivized to use less, conserve more and switch to zero-carbon alternatives. Non-polluting, renewable energy sources would become more competitive as the playing field is leveled.

But how would we overcome the implacable opposition of the fossil-fuel industry and its minions in Congress, including a Republican House that is now seemingly opposed to all forms of taxation under any circumstances?

Logically, there are only two options:

(a) the fossil fuel industry and its allies would have to be defeated on the political and policy front; or

(b) they would have to be persuaded to join the effort rather than resisting it.

Despite the best efforts of environmentalists, scientists and other reformers who have worked on this issue for so long, prevailing in a head-to-head contest against the fossil-fuel lobby in sufficient time to prevent irreversible climate damage is highly unlikely. Given our current political divide, our campaign finance system, our evolutionary bias in favor of focusing on immediate rather than long-term threats and what would be required to marshal public opinion -- let alone create a movement -- in sufficient time to make a difference, it is unrealistic to think that climate change can be successfully tackled with the fossil-fuel interests aligned in steadfast opposition.

Which brings us to the second option -- persuading the fossil fuel industry to switch sides. Believe it or not, this is actually the more realistic alternative. Exxon Mobil has already tepidly endorsed a carbon tax. I believe other energy companies could be persuaded as well, and that this is where we should be focusing our efforts.

Needless to say, the fossil-fuel industry won't be turned simply by reasoned argument. Their business model is inextricably linked to converting every asset they own into bottom-line profit. Leaving carbon in the ground is leaving money on the table as far as the fossil-fuel industry is concerned. They are not going to just walk away from monetizing those assets.

No, what I mean by persuading the fossil-fuel industry to join the cause is to bribe them. That may sound facetious, but what I mean is that we will need to pay them to leave the carbon in the ground and invest in clean energy instead. We will need to make it more profitable for them to produce clean energy than to produce dirty energy.

This won't be a cakewalk, but it may be easier than we think. Once again, a well-crafted carbon tax is the key. Not only will it put a price on carbon, but it will also generate significant revenues, a portion of which can be assigned or recycled right back to the energy companies in the form of transition subsidies that help them convert over to sustainable energy. These transition subsidies could include expanded investment tax credits, low-interest loans, price supports, and so forth. But the amount transferred would have to be meaningful and would have to approach the profits the energy companies forego by leaving the fossil fuels in the ground.

We will need to abandon the notion that a carbon tax should be revenue neutral. It shouldn't be. Similarly, we should resist efforts to enlist carbon tax revenues to address a wish list of other social objectives. While assigning some portion to deficit reduction is undoubtedly warranted, the revenues from carbon levies should be primarily directed at hastening the transition from carbon-based energy to clean energy, pure and simple.

The Canadian tar sands are the perfect laboratory for this experiment. We know roughly how much oil is buried beneath the tar sands and the fossil-fuel companies know what it would cost to extract, ship, refine and sell it. Estimating its market value shouldn't be overly difficult. Moreover, Canada is a friend and ally - and has much more to gain by being part of the solution rather than the problem when it comes to climate change. Although neither Canada nor the fossil-fuel companies can be expected to walk away from the wealth represented by the tar sands, we have before us the perfect opportunity to devise another way for them to achieve their financial goals without jeopardizing the climate.

What we desperately need is a strategy to transform the energy companies of today into the energy companies of tomorrow. To do this, we need carrots as well as sticks; there have to be appropriate price signals and market incentives. This will require a carbon tax - but one where the revenue generated by the tax is intelligently deployed.

The Canadian tar sands represent a do-or-die moment. Regardless of what decision is made on the Keystone XL pipeline, President Obama and other policy makers should be engaging with the energy companies and the Canadian government to build support for a well-crafted carbon tax - in both countries -- that creates incentives to keep the oil buried beneath the ground while expediting the transition from an industrial-age economy powered by fossil fuels to a sustainable economy powered by clean, renewable energy.