It says a lot about the changing climate in business circles and in Washington that Exxon Mobil chief executive Rex Tillerson yesterday came out in favor of a carbon tax in a speech at the Woodrow Wilson Center. When I asked him afterward how high a price he thought would be needed, he said the tax should probably start out "somewhere north of" $20 a ton.
That's enough to qualify as a serious suggestion. It's about what carbon has cost in the European Union for much of the time the continent has been using a cap-and-trade approach to pricing carbon emissions. And it's almost half as much as the price many people suggest would be needed to help spur carbon capture and storage at coal plants. It's also about the level that Sen. Jeff Bingaman (D-N.M.), chairman of the Senate Energy and Natural Resources Committee, once suggested as an initial upper limit on a price for carbon.
Yes, this Tillerson is from the same Exxon Mobil that for years gave funds to groups that denied the existence of climate change or mankind's role in speeding it along. It's the same Exxon Mobil that puts the carbon-breathing tiger in your tank.
Moreover, it just isn't every day that a major business executive comes out in favor of a new tax. Tillerson said that he wrestled with this issue for the past three years, thinking that there had to be a third alternative to cap-and-trade, which he dislikes, and to the carbon tax. He said there wasn't one. (It seems to me, however, that there is another route: regulatory fiat of the sort we use when we order carmakers to manufacture more fuel efficient cars. The government could set limits on other emitters, too. But that's another story.)
Tillerson's tax is still a modest amount when converted into the price of gasoline at the pump. It would amount to barely 6 cents a gallon. William Nordhaus, a Yale economist, estimated in 2007 that a carbon tax should start at no less than $30 a ton and rise to $85 a ton by 2050 in order to change people's greenhouse gas emissions. British economist Nicholas Stern estimated in his 2006 report that the price should be about $300 a ton.
Many people will wonder whether the Exxon Mobil chief is simply trying to throw a monkey wrench into the debate just when the incoming Obama administration and Democratic leaders in Congress appear to be coalescing around the idea of a cap-and-trade system to limit greenhouse gases.
I think there's more to it than an effort to bring about gridlock. As Tillerson said, there will be a climate change proposal perhaps as early as this year and now is the time to try to shape it.
There is still a legitimate debate to be had on the relative merits of cap-and-trade versus a carbon tax. Supporters of cap-and-trade say that there's no telling what level of emissions a tax will achieve because it isn't clear how much people will change behavior at a given price level. The gap between Tillerson, Nordhaus and Stern is a good illustration of the challenge of setting an appropriate tax level.
The cap-and-trade approach sets an emission level and lets the market set a price. But as Tillerson noted, that market price tends to bounce around almost as wildly as the price of oil, making it difficult for companies to plan for the future. He clearly laid out some other legitimate questions about the cap-and-trade system that his company must abide by in Europe. Here's what he said:
"Such a system was put in place in the European Union. Unfortunately, the European scheme is struggling to achieve the overall reductions that its supporters had hoped for.
"One of the reasons for this is that cap-and-trade systems inevitably introduce unnecessary cost and complexity that undercut their effectiveness.
"It is important to remember that a cap-and-trade system requires a new market infrastructure for traders to trade emissions allowances. This new "Wall Street" of emissions brokers will take the emphasis away from the goal of reducing carbon emissions and focus its attention on trading on price volatility. For businesses and consumers, these market gatekeepers and resultant price swings add cost and they create uncertainty.
"Also, cap-and-trade systems, because of their complexity, have inherent problems with verification and accountability. They require a vast expansion of administrative and regulatory officials to ensure emissions allowances are not exceeded. This is another cost for businesses and consumers to bear."
Tillerson said that a tax doesn't carry those burdens.
"As a businessman it is hard to speak favorably about any new tax. But a carbon tax strikes me as a more direct, a more transparent and a more effective approach. It avoids the costs and complexity of having to build a new market for securities traders or the necessity of adding a new layer of regulators and administrators to police companies and consumers. And a carbon tax can be more easily implemented. It could be levied under the current tax code without requiring significant new infrastructure or enforcement bureaucracies.
"A carbon tax is also the most efficient means of reflecting the cost of carbon in all economic decisions -- from investments made by companies to fuel their requirements to the product choices made by consumers."
Unlike many policy makers and would-be policy makers, Tillerson would support making a carbon tax revenue neutral by cutting other taxes.
Tillerson isn't alone in supporting a carbon tax. Rob Shapiro, a former Clinton administration official, supports it. So does Greg Mankiw, former chairman of Bush's Council of Economic Advisers. And so does Elaine Kamarck, now at Harvard's Kennedy School but formerly in the Clinton White
House and in 2000 a policy adviser to Al Gore.
Still, Tillerson may be swimming against the tide. If there's one area where Obama has sent a clear message with his appointments, it's the area of climate change, where Energy Secretary nominee Steve Chu, White House energy and environment czarina Carol Browner and White House science adviser John Holdren are all adamant about the need to clamp down on greenhouse gas emissions. And they all seem to be heading toward a cap-and-trade proposal.
Tillerson said yesterday that cap-and-trade simply disguises the size of a carbon tax. He may be right. And that may be reason enough to do it regardless of the baggage that comes with it.