TR: Given the woeful state of the economy, how politically feasible is such a new tax?
GM: The political momentum clearly favors cap-and-trade. The game in Washington has been to design a cap-and-trade system that acts as much as possible like a carbon tax without being a tax.
TR: Is the cap-and-trade scheme really working in the E.U.?
GM: We’re starting to get some sense. I think it will not be effective at achieving the targets. It is a partial system. It is only including the electric-utility sector and some energy-intensive industry. The transport sector is not in the system at all. There are certainly many lessons that we can learn from the E.U. approach, but the most important lesson may be how not to design a carbon-trading system.
TR: With the price of oil so low, does a carbon tax’s effect on innovation get lost?
GM: It does. Most of the proposals putting an initial price on carbon emissions only add about 25 to 40 cents to the price of a gallon of gas. The real action will be in the coal sector. It has a huge impact there. The transport sector is very important–something like 40 percent of our carbon emissions come from the transport sector–but that is not the cheapest place to get our initial emission reductions. The cheapest will be the electric-utility sector and industry.
TR: How much will a carbon tax add to the cost of electricity?
GM: A $20 tax per ton of carbon dioxide adds about 15 percent to the cost of electricity. For coal-fired electricity it will be a lot more. It will more than double the price of coal–about a 40 percent increase in the price of coal-generated electricity.
TR: Is the current economic recession affecting this debate?
GM: The interesting fallout from the economic crisis is that there has been this love affair with the cap-and-trade approach: we create these markets, we create these assets and let trading happen. Well, I think some of the bloom is off the rose in creating these kinds of [financial] instruments. I don’t know what it will mean for the relative attractiveness of a carbon tax versus a permit approach, but I think that it could make the tax that much more politically attractive.