2011 – The Year of the CAT for Carbon Regulation?

The Chinese Year of the Tiger will soon cede to the Year of the Rabbit and, from a climate perspective, some might view the transition as apt. Since last December, after all, the heroic agenda of Copenhagen has morphed into the timid menu of Cancun. But appearances can be deceiving in the climate game, and a tiger remains crouched in the wings. Nick Stern recently invoked it:

"If you are charging properly for carbon and other people are not, you will take that into account. Many of the more forward-looking people in the US are thinking about this. The US will increasingly see the risks of being left behind, and 10 years from now they would have to start worrying about being shut out of markets because their production is dirty,"

To amplify Nick’s point, the carbon-regulation paradigm has to shift because the ever-rising line of atmospheric CO2 accumulation has now collided with the flatlined attempt to reduce global carbon emissions by taxing them at their sources. Basically, we can reduce carbon-intensive activity by subsidizing clean activities or taxing dirty ones. In the wake of the debacles in Copenhagen and the US Congress, the global discussion is refocusing exclusively on the subsidy option. But this is a mistake: Subsidy funds are limited in these fiscally-stressed times, so direct clean-technology promotion, while necessary, is not likely to save us in time.Enter the tiger or, more prosaically, the CAT (Carbon Added Tax), which turns the regulatory paradigm on its head. Rather than taxing carbon emissions at their points of production, the CAT taxes the carbon embodied in products at their points of consumption. Nick is far from alone in calling attention to this alternative. Paul Krugman and Joe Stiglitz have also invoked the CAT during the past year.The CAT draws on carbon lifecycle analysis, which accounts for the carbon emitted during the production and distribution of goods and services. For example, an automobile purchased in Maryland may have been assembled in Kentucky, from components produced in the UK, Poland and China. Carbon has been emitted, either directly or indirectly, during the production of each component, its transportation to Kentucky, assembly there, and transportation to final sale in Maryland. Carbon lifecycle analysis computes the total carbon emissions embodied in the automobile at its point of sale in Maryland. A CAT would tax these embodied emissions at a rate considered appropriate by the people of Maryland.Maryland’s CAT option is available to any fiscally-sovereign polity (I’ll use “state” as shorthand for any interested city, state, province, country, or international alliance). And the advantages of a CAT are considerable. First, it can be implemented unilaterally, without any need for the multi-state negotiations that have crippled national and international carbon regulation. In the US context, for example, a CAT is basically a sales tax similar to the federally-permissible tax on the alcohol content of beverages that is already levied by some states. Second, a CAT in one state will encourage clean production everywhere, by taxing carbon from all sources equally and creating a market advantage for clean products. A national or international alliance of relatively-wealthy CAT states that support green policies can have enormous impact, since these states dominate global consumption. Third, a CAT can attract support from in-state producers because its taxation of embodied transport emissions will automatically favor local production. This will be particularly true in states where producers have been disadvantaged by local taxation of emissions at the source (Nick Stern’s basic point).Sounds great, so why hasn’t the CAT been widely adopted? In the past, most economists gave it short shrift because an ideal CAT would be nearly impossible to compute. This thinking prevailed as long as there was even faint hope for direct taxation of carbon emissions at the source. But that hope has flatlined for the foreseeable future, we’ve collided with the rising line of carbon emissions and, in the realm of methodology, the perfect is now clearly the enemy of the good. So an approximate CAT is easily good enough, and recent work at the World Bank has shown how it can be calculated using input-output analysis.We’re out of time and out of excuses. Clean production subsidies must be in the mix, but they probably can’t save us in time. So let’s join Nick Stern, declare 2011 the Year of the CAT, and get on with it.