Washington (Platts)--12Jan2009

The US Congress is more likely to ultimately reject cap-and-trade schemes
in favor of taxes aimed at curbing carbon emissions in the wake of the Wall
Street meltdown, according to the Carbon Tax Center's Charles Komanoff.

"Cap-and-trade will fall flat on its face. It's going to be ultimately
rejected. In the end, [Congress] will turn to a tax in order to impose a price
on carbon," he said.

"The last thing the public will want to see is a new trillion dollar
market in some esoteric financial instruments that is going to be conducted
behind closed doors with no transparency," he said.

Komanoff is hardly a disinterested observer. In January 2007, he
co-founded the Carbon Tax Center "to give voice to Americans who believe that
taxing emissions of carbon dioxide -- the primary greenhouse gas -- is
imperative to reduce global warming."

The Center's characterization of an opaque carbon market subject to
"manipulation and exploitation by special interests and perverse incentives,"
casts cap-and-trade in the most negative light.

However, David Doniger, policy director with the Natural Resources
Defense Council, said a tax regime could be distorted in much the same way.

"When has Congress passed a simple, pure tax bill?" he asked. "They have
exceptions, they have exemptions, and they have loopholes. Every single
interest that would be looking for special consideration under cap-and-trade
would be looking for the same special consideration under a tax bill. We
disapprove of giveaways that lead to windfalls and exemptions and we're trying
to avoid those defects in the design of cap and trade."

MARKET-BASED

Cap-and-trade and carbon taxes are market-based options to reduce
emissions that contribute to climate change. A tax sets a fixed price on
carbon emissions but does not directly limit emissions; cap-and-trade programs
impose emission reduction targets but do not establish a fixed price.

"A tax gives you economic certainty, but not environmental certainty,"
said Jennifer Layke of the World Resources Institute.

A carbon tax would be based on the carbon content of the fuel--the higher
the carbon content, the steeper the tax. The tax could be levied at any point
of the supply chain, from the coal mines and oil wellhead to consumers.

Entities and consumers using the fuel -- presumably acting in their own
economic interests -- would shift to less expensive, cleaner burning fuel and
to energy efficient technologies. The assumed result: lower consumption of
high carbon fuels and reduced emissions. The tax revenues can be refunded to
individuals and/or used to develop alternative energy sources and
technologies.

"The tax would motivate entities to cut back on their emissions if the
cost of doing so was less than the cost of paying the tax," according to a
Congressional Budget Office study. "But the total amount of carbon dioxide
that would be emitted in any given year would be uncertain."

--Gerald Karey, gerry_karey@platts.com