How to fight global warming: Smart taxes

NEW YORK (CNNMoney.com) -- With Copenhagen climate talks looking stalled and the Senate mired in complicated eco-wrangling, is there a simpler way to get the U.S. to reduce the carbon emissions that most scientists blame for global warming?

Some say yes, a refundable carbon tax.

The current cap and trade plan in congress to cut greenhouse gases involves a complex web of allotments and giveaways that some fear are too compromised to work.

A carbon tax could cut greenhouse gases without having to make major concessions to any one interest group, supporters say.

The tax works like this: A fee is levied at the refinery, coal mine, or natural gas well for each ton of carbon produced when the fuel is burned. That fee is passed on to the consumer, thus discouraging the use of the costliest, and most carbon-intensive fuels.

The fees start out small and increase gradually. In 10 years they'll add about $1 a gallon to the price of gas and $50-$70 extra a month in household electricity bills.

Those fees are then returned to the consumer. They could be returned in the form of a direct monthly payment deposited into people's bank accounts, or as a reduction in another tax, like the payroll tax.

The main advantages are it requires very little new bureaucracy to run, and it establishes a set price on carbon that households and business can then plan around.

"It's simple, it's understandable, and it's not going to be done in back rooms," said Charles Komanoff, co-director of the Carbon Tax Center, a research and advocacy group pushing the plan.

The "back rooms" comment refers to the somewhat messy process that's resulted in the current cap-and-trade plan to limit greenhouse gases.

Under cap-and-trade the government would issue permits each year to polluters. The permits decline each year, and companies can either buy them from each other in a secondary market or invest in carbon dioxide reducing technology.

Many nations use cap-and-trade laws to meet their obligations under the Kyoto treaty or any successor hashed out in Copenhagen. A version of cap-and-trade has passed the House and the Senate is expected to take up the matter sometime next year.

Supporters like the idea because it could actually pass and is supposed to guarantee a drop in emissions.

But in order to make the bill politically palatable, it has giveaways for just about everyone:

- It steers lots of money to green energy projects.

- Utilities, especially coal-burning ones in the Midwest, get most of the permits for free.

- Farmers, foresters and others get to make money by selling offsets - credits for trees and plants that suck up carbon.

- Wall Street, eager to profit from the new market, is allowed in on the permit trading game.

Critics say the whole system is too costly and might not do anything to lower emissions.

"We need to dispense with the blind loyalty to cap and trade, or at least begin to question if it is warranted," Sen. Lisa Murkowski, R-Alaska, said during a Senate hearing on a carbon tax earlier this month.

To that end, a bi-partisan bill from Sen. Susan Collins, R-Maine, and Sen. Maria Cantwell, D-Wash., last week proposed a "cap-and dividend" program. Under that plan, the government would still sell permits to pollute, but there would be no trading and few free giveaways.

Three-quarters of the revenues would be returned to taxpayers in the form of a dividend check, with one quarter going to renewable energy and efficiency projects.

"What you are seeing is senators more willing to consider other types of ideas," said Whitney Stanco, an energy analyst at the brokerage Concept Capital.

Although Stanco said a straight-up carbon tax will "have a hard time gaining traction." She doesn't even expect cap-and-trade legislation to pass the Senate next year.

Some, unconvinced of the science behind global warming, will say a carbon tax, or any plan that raises energy prices, is unnecessary.

Others say that while a carbon tax sounds good in theory, once implemented those same special interests that lobbied for the giveaways in cap-and-trade will line up for their exemptions from the IRS.

"In the abstract, it's a very fair way to do it," said Lisa Margonelli, director of the energy initiative at the New American Foundation, a research organization. "But in reality it could be as complicated as cap-and-trade."