Federal Carbon Tax Bill Introduced Into Senate

Jerry Elmer

Earlier this month, Rhode Island’s U.S. Senator Sheldon Whitehouse, who has made climate change his signature issue, introduced into the Senate the American Opportunity Carbon Fee Act (S-2940). The bill imposes a direct, simply-applied, economy-wide tax on carbon emissions. While the bill is not perfect, it is quite excellent (and has a number of very interesting features).

The centerpiece of the bill is that it immediately imposes an economy-wide tax on carbon at the rate of $42 a ton. This figure ratchets up at a rate of 2% annually plus inflation (as measured by the Consumer Price Index).  At that annual rate of increase, carbon would be priced at $85.68 a ton in 2050, a bit more than the $82/ton rate widely recommended by scientists for properly pricing carbon so as to avert a climate disaster.

That is, there are three very salient differences between the Whitehouse bill and the Regional Greenhouse Gas Initiative (RGGI), the current carbon-pricing scheme that has been adopted by nine northeastern states (including all six New England states):

  • RGGI covers only the electricity sector; the Whitehouse bill covers virtually the entire economy.
  • The most recent RGGI clearing price for carbon (Auction 26, December 3, 2014) was only $5.21 per ton; the Whitehouse bill imposes a much more appropriate price, because it starts at over 800% of that amount and then ratchets up.
  • RGGI prices carbon by means of cap-and-trade; the Whitehouse bill is a straight tax.

A key part of the Whitehouse bill is that it requires governmental agencies, notably EPA and the Department of Energy, to collect data on all methane emissions resulting from extraction (including coal mining and oil drilling!) and distribution (including all gas pipeline losses and fugitive emissions) – and to impose the same carbon tax (starting at $42/ton) on methane based on the methane’s CO2 equivalent! This is important because, depending on the time horizon used, methane is 21 times or more as powerful a greenhouse gas as CO2. Thus quantifying and pricing methane emissions must be an important component of any overall plan to address climate change – but methane is also one that is frequently overlooked (especially by people who push increased use of natural gas as a means of lowering greenhouse gas emissions).

Interestingly, the bill directs 100% of the carbon-tax proceeds to a new “American Opportunities Fund,” and specifies what the fund may be used for. This includes things like economic assistance to low-income households hurt by the newly-imposed tax, and providing transition assistance to workers and businesses in fossil fuel industries. However, the bill is not, and is not intended to be, revenue-neutral. Money in the Opportunity Fund can also go to the general fund to offset tax cuts, invest in domestic infrastructure, and go for climate mitigation and adaptation measures.

I discussed this last point with one of Senator Whitehouse’s staff aides. Obviously, one potential selling point with Tea Party and other fiscal conservatives would be if the bill were truly revenue neutral, with zero dollars going to enlarge the federal government, and 100% of the proceeds being returned to the American people. Senator Whitehouse’s staff aide acknowledged this point. However, Senator Whitehouse seems to be viewing the varied ways of using the money as a way of drawing in other sponsors for the bill: sponsor the bill and help us allocate this large new source of money. (Readers can consider whether or not they agree with this decision, but this is the decision that Senator Whitehouse made.)

The one major flaw I see in the bill is a provision on “Border Adjustments.” This provides that any mined or manufactured goods that are exported from the U.S. get a full refund on the carbon tax paid. The hypothetical I put to Whitehouse’s staffer was this: The bill creates a perverse incentive to mine zillions of tons of coal for export to China; and drill zillions of new oil and gas wells to export the oil and gas to China. No carbon tax is paid on that coal (or oil or gas), but when the coal is burned in China, the carbon goes into the same atmosphere as if it were burned in the United States. (That is, climate change is a global problem, not a U.S. problem.) The answer I got for Senator Whitehouse’s aide was two-fold: (a) Yes, my hypothetical accurately describes this provision of the bill; and (b) Senator Whitehouse did this on purpose, believing that the provision was a political necessity.

One final set of observations: it is worth comparing and contrasting the American Opportunity Carbon Fee Act to the 2009 Waxman-Markey bill (that passed the House but died in the Senate). (I am not thinking here of the obvious contrast that Waxman-Markey priced carbon by means of a cap-and-trade system, while the Whitehouse bill prices carbon by means of a carbon tax.) Waxman-Markey was a 986-page monstrosity; it took me a full week just to read through it and understand how it worked. In contrast, the Whitehouse bill runs 28 pages; it is short, direct, and easy to understand. Moreover, Waxman-Markey had huge give-aways to the fossil fuel industry. In fact, the immediate give-aways to certain coal companies would have tripled the book value of those companies overnight. At the time Waxman-Markey was pending, one environmentalist, with tongue firmly in cheek, said that if Waxman-Markey passed, investors would have been well advised to sink their entire retirement savings into coal mining companies (because of those give-aways). The Whitehouse bill has no such pernicious give-aways to fossil-fuel industries (though there is the export loophole that is significant).

All in all the American Opportunity Carbon Fee Act is a very significant bill well worth knowing about.

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