Download Why a Revenue Neutral Fee on Carbon Fuels Can Be Enacted in

WHY A REVENUE-NEUTRAL UPSTREAM FEE ON CARBON FUELS
CAN BE ENACTED BY CONGRESS IN 2017-2018:
FIVE PROPOSITIONS
George T. Frampton, Jr.
Partnership for Responsible Growth
May 2016
We begin with the proposition that current, planned, and even anticipated U.S. climate change
policies will not enable us to reach the greenhouse gas (GHG) emissions reduction pledge
President Obama made in Paris: a 28 percent reduction by 2025, from a 2005 baseline. Globally,
even if all the pledges made in Paris by 185 countries are fulfilled, they will provide less than
half the reductions needed by 2030.
This is true even if the Clean Power Plan (CPP) survives and flourishes. If fully implemented, the
CPP would reduce power plant emissions only slightly more than “business as usual.” Of course,
the rule would lead to no reductions in other sectors. Some utility and non-profit modeling
indicates that if the CPP successfully fosters a trading system within (and between) most of the
states, the market trading price for permits is likely to range from zero to $10 per metric ton
(MTCO2) by 2030. That would be far too low to lead to transformational change or the required
clean technology investment in the rest of the economy.
A second proposition is that pricing carbon is the only way to meet our goals. Experts agree:
The fastest, least expensive, and most predictable way to reduce GHG emissions is to “price”
the health and economic costs that these emissions impose on society. Only significant price
incentives using the power of the market can generate enough low-carbon investment at scale
to move the world away from carbon and thus meet the climate challenge.
There is an emerging worldwide consensus among governments, policy-makers and industry
that we must price carbon. Even before the Paris conference, the major European oil company
CEOs called on governments to take that step. Last month, an international Carbon Pricing
Leadership Coalition organized by the World Bank and others brought together the SecretaryGeneral of the UN and the heads of the IMF and World Bank, with countries and businesses, to
urge adoption of a global carbon price.
But U.S. leadership is essential--not just to meet our own targets, but to drive other nations to
achieve their goals. Retaining our leadership role will be difficult if we slip behind in hitting even
our own relatively modest targets.
1
Third, any form of economy-wide pricing will require legislation by Congress, and thus require
bipartisan support. Indeed, no significant climate-related legislation of any kind can move
through Congress without bipartisan support, including support from the House leadership and
a significant number of Republican senators and House members.
Although a perfect ‘cap-and-trade’ system could theoretically put a price on emissions, the this
approach appears to have little chance of success on Capitol Hill for at least three reasons: 1)
congressional and corporate hostility to cap-and-trade resulting from the failure of WaxmanMarkey; 2) the inevitability of price volatility based on history in both Europe and the Northeast
states; and 3) the susceptibility of any cap-and-trade system to market manipulation and
siphoning off of economic rents by the financial sector. In any event, in our more than 200 Hill
visits this past year, as discussed below, the majority of them to Republican offices, we found
zero interest among Republicans in resuscitating cap-and-trade legislation, and by contrast
surprisingly robust interest in generating carbon revenues,
A revenue-neutral fee on carbon fuels would be the simplest, most efficient and transparent
way to price carbon. The fee would be imposed at the mine mouth, refinery gate (for oil) or
gathering station (for gas), based on the number of metric tons (MT) of CO2e that amount of
fuel would be anticipated to emit when burned. A fee starting at $35 per MT and ramping up
over a decade would generate between $1.5-2.0 trillion over ten years. (The fee would
continue to increase as targets were established for 2040 and 2050.)
The fourth proposition: There is a way to make such a fee attractive to a broad range of
political interests. In trying to assess what might be a political sweet spot for such a fee,
imagine that half of the revenue were used to reduce the corporate income tax to 25 percent
from its currently uncompetitive level of 35 percent. The balance of the revenue could
compensate low- and low-middle income families for slightly higher energy costs. (For example,
modeling indicates that 15 percent of the revenue would make all the families in the lower 20
percent of the income spectrum whole with respect to their energy costs.)
Revenue neutrality appeals to most Republicans and conservatives, to some business leaders,
and certainly to the “no-new-taxes-ever” wing of the Republican Party. (It is sometimes called a
“tax swap” since the revenue from a new tax is used to reduce other taxes rather than to fund
additional government discretionary spending.)
To test our legislative idea, the Partnership for Responsible Growth met with more than 200
senators and members of the House, or their staff, over the past year, the majority
Republicans. We found surprising (private) recognition of the merits of a revenue neutral
carbon tax, and potential support provided that the business community and other important
constituents in their states and districts expressed openness to the idea.
On revenue neutrality, we found a range of views. For example, use of a portion of the revenue
for other pro-growth national priorities such as infrastructure spending, research and
development, and assistance to coal communities had great appeal to a surprising number of
Republicans. And while Democrats tended to favor using the revenue to fund infrastructure and
2
invest in low-carbon technologies, in general they indicated a willingness to accept revenue
neutrality if it were the political price for a grand bargain to make significant progress in
combating climate change.
This market-based, creative compromise would provide many benefits. It would: 1) increase
GDP, 2) advance tax reform, 3) make US companies more competitive, 4) discourage inversions,
5) compensate low- and low-middle-income families for increases in energy costs, 6) create
jobs, 7) make some current and future EPA regulations unnecessary, 8) enable companies to
make rational long-term investment decisions, and 9) reduce emissions faster and at less cost
than any other method.
Appropriate border tax adjustments could guard against the loss of competitiveness for energyintensive, trade-exposed (EITI) industries, prevent carbon leakage, and encourage our trading
partners through a market incentive to adopt a similar price on carbon. Forceful diplomacy
could help globalize the price, beginning with Canada, Mexico, and the EU.
A final proposition: With a new president and Congress, there will be a serious debate
beginning in January 2017 about using carbon revenue to achieve comprehensive tax reform
that both parties support. That will bring into play the possibility of a grand bargain featuring a
carbon fee, reduced EPA climate regulation, infrastructure spending, coal community relief, and
perhaps even some income redistribution to those below and just above the poverty level.
There are at least two compelling forces that will drive this debate. First, tax reform is unlikely
to be accomplished any other way, as demonstrated by its failure in two consecutive
Congresses. The Camp-Baucus process in the last Congress and subsequent efforts in the
current Congress have proved that eliminating dozens of loopholes and subsidies is extremely
difficult; each tax break has political support that is stronger than the general support for
reducing overall rates. Even if most of those provisions could be repealed, there would not be
enough revenue to get the corporate tax rate down even close to 25 percent. Only carbon
revenues are likely to accomplish that. Neither a one-time tax on repatriated income nor a
higher future tax on overseas income has much change of enactment - - and neither would
produce enough revenue.
Second, as it becomes increasingly evident that we are falling short of achieving our climate
targets, there will be implacable pressure for either a congressional solution or for vastly
increased EPA regulation. For example, Section 111(d) of the Clean Air Act (CAA) could in due
course be extended to additional industrial sectors: first refineries, then cement, steel,
aluminum, and chemicals, with 50 state plans for each. Environmentalists will want to tightly
regulate methane in the existing oil and gas system, limit or end new oil and gas leases on
federal land and off-shore, and use new regulatory levers like section 115 of the Clean Air Act.
Any scenario involving increased future regulation under existing laws never designed for GHG
regulation involves heightened political polarization, business opposition, litigation, increased
uncertainty, regional fragmentation, decreasing marginal abatement of emissions at each new
step, and significantly increased costs—with no new revenue to compensate anyone for those
costs.
3
Other forces that could drive adoption of a carbon fee include: 1) increasing frustration with the
inability to forge a bipartisan approach to repairing our aging infrastructure; 2) the possibility of
a tax reform mechanism that channels additional resources to very poor and low-income
families; and 3) increased focus by the environmental community on expansive new regulation,
divestment, and an aggressive “leave it in the ground” approach to all carbon fuels. Some of the
above strategies for revenue use, of course, would compete with the principle of revenue
neutrality.
The Partnership’s Hill visits and intensive discussions in the last few months with key staff of the
Senate Finance Committee and House Ways and Means Committee, policy experts, business
leaders, and conservative, Libertarian and Republican organizations interested in carbon pricing
suggest that the concept of a revenue-neutral carbon fee is timely and politically viable.
Virtually all Democrats find it attractive. A surprisingly large number of Republicans now
privately concede that climate change is real, we have to do something about it, and a revenueneutral fee is far preferable to the course we are on. But, they repeatedly told us, there must
be some support from important “influencers” in their states and districts, and particularly from
local businesses and national business leaders.
If, in fact, we face a choice between a carbon fee or four (or eight) more years of expensive,
unpredictable, contentious and not very productive additional climate regulation, and if the
business community prefers a fee, that raises an important question: Can the community
influence this debate if it waits until January? A new administration will start forging its agenda
in the fall during the October-December transition period. We anticipate that quiet discussions
among senior Republicans and Democrats will begin this summer. The bipartisan Climate
Caucus will likely grow. The drivers for a debate in 2017 will become stronger. Global pressure
on the United States to enhance its climate policy will increase.
The business community could take an important leadership role in advocating publicly for
bipartisan legislation that promotes economic growth and reduces GHG emissions efficiently.
Many corporate leaders and companies in Europe (and some in the United States) have
embraced ‘shadow pricing’ of carbon and have pledged to reduce their own emissions and
purchase cleaner energy. However, these actions have little impact on policy or on emissions
reductions. If we are to move forward and maintain U.S. leadership on the global climate
change agenda, corporate leaders in this country will have to become advocates for carbon
pricing legislation and urge their peers and elected officials to engage in a robust public and
legislative debate on the subject.
4
FREQUENTLY ASKED QUESTIONS
Is it essential that the carbon fee be revenue-neutral?
Not necessarily. In the scenario that we use as an example, all new revenue would be returned
to corporate taxpayers and families. There would be no new government discretionary
spending.
However, if the principle of revenue neutrality were to be slightly adjusted, significant funds
theoretically would be available for infrastructure investment or for other pro-growth priorities,
such as research and development.
Moreover, on the current path, the coal industry and coal utilities will be hit hard by an
unpredictable and expensive regulatory program (CPP). A carbon fee could provide funds to
help transition the coal industry and invest in new technologies, while providing a more
predictable economic path for the coal companies that remain.
How do you protect low-income families from increased energy costs?
Fuel and electricity prices would increase slightly. For example, a $35 fee would increase gas at
the pump roughly 33 cents a gallon. If a portion of the fee revenue (35-40%) were used to
compensate low and low-middle income families for higher costs, approximately the lower 35
to 40 percent of families could be made whole. A number of studies have shown how revenue
could be returned to these families through some combination of lowering individual tax rates
at the bottom end, cutting Social Security taxes, increasing Earned Income Tax Credits, and
other methods.
How can the U.S. maintain international competitiveness?
Energy-intensive, trade-exposed (EITE) industrial sectors comprise less than 2 percent of U.S.
GDP and less than half of 1 percent of non-farm labor. But these industries and jobs (basically,
steel, aluminum, cement, glass, some paper and chemicals) are important and could be
competitively disadvantaged versus competitors in no-tax countries. The World Trade
Organization (WTO) would allow a border adjustment tariff to be levied on goods from
countries that do not have a carbon fee, though both design and compliance issues are
complicated. The use (or even threat) of such a border adjustment tariff would guard against
carbon leakage, encourage our trading partners to adopt a similar price, and help our EITE
industries achieve a level playing field. Moreover, the WTO’s “environmental exceptions”
provisions contemplate prior international negotiations before imposing such tariffs, allowing
and empowering the exercise of U.S. diplomatic leadership.
5
Isn’t it risky to trade certainty about emission reductions from EPA limits in the CPP for an
uncertain amount of emissions reductions under a carbon fee?
No. It appears that a $35 carbon fee increasing to $50 by 2030 would produce more than twice
as many emissions reductions in the power sector by 2030 as the CPP, and would essentially
make the CPP obsolete. But there are ample ways to make sure that a fee would achieve
greater reductions than EPA regulation. One approach would be to set incremental targets for
the power sector well in excess of those achievable by the CPP for an interim period. If
emissions did not meet or exceed that target, then EPA regulation would again be triggered; or
the fee could be increased at a steeper rate. A pricing approach could increase certainty,
eliminate litigation risk, and cover the entire industrial economy, not just power plant
emissions, which amount to only one-third of all our emissions.
When emissions begin to fall significantly, doesn’t that jeopardize the tax cuts and refunds?
If the fee were to increase each year for 10 to 20 years, modeling shows that enough revenue
would be available to support lower corporate and individual rates for at least 30 years.
Because the “bargain” would be three-pronged (tax decreases for business and individuals,
decreased regulation, and greater GHG reductions), broad interests would be at stake, and it
seems unlikely that the bargain could easily be revisited.
The Partnership for Responsible Growth is a 501(c)(3) organization formed to build bi-partisan
support for a new general concept: a revenue-neutral carbon pollution fee tied to tax reform
can promote sustained growth, create jobs, make companies more competitive, and address
climate change in the most effective and least costly way possible. Rather than advocate any
specific legislation or detailed plan, we seek to build intellectual capital in and promote serious
discussion of this idea. For more information, please contact us at
[email protected].
6