Many economists champion a carbon fee, but isn’t it one of those ideas that is nice in theory but has never been tried in the real world?
Almost 40 nations and more than 26 sub-national jurisdictions have adopted carbon pricing, and these programs cover 12 percent of the world’s greenhouse gas emissions. The list includes Sweden, Norway, and New Zealand.
British Columbia implemented a revenue-neutral carbon tax in 2008 and reduced fossil fuel consumption by 16 percent, while use in the rest of that country rose by 3 percent. Meantime, British Columbia’s GDP growth outperformed Canada’s.
Quebec has a cap-and-trade system, linked to California’s, and Ontario is about to do the same. As a result, 85 percent of Canada’s carbon emissions will be priced. Prime Minister Trudeau has announced that his country will move toward a single national carbon price of at least $50 per ton by 2022. This effort has the support of the four largest provincial governments, much of the nation’s hydrocarbon industry, the Canadian Mining Association, and most citizens.
How would carbon be priced under this plan?
A fee, starting at perhaps $35 per metric ton (MT)/C02 emissions and increasing annually by a few percentage points above the cost of living, could be levied “upstream” where carbon fuels are first introduced into the economy--for example, at the mine-mouth for coal, at the refinery for oil and at gathering stations or processing plants in the case of natural gas. A fee at this level would incentivize twice as many emissions reductions in the power sector as the CPP, or more, by 2030.
Why not apply the fee closer to the end user?
An upstream tax can be levied using an existing administrative structure in which carbon fuels are already measured for other purposes. So this approach is simple to envision and execute, applying to fewer than 2,400 taxpayers. It would involve very little additional cost or administrative structure, would be very transparent, and would make it relatively easy to track the exact amounts collected each year.
Why not adopt a cap-and-trade approach, which the House passed in 2009?
That cap-and-trade bill, passed by a 219-212 vote in the Democrat-controlled House, died in the Senate. While a well-designed cap-and-trade system theoretically could put a relatively predictable “price” on carbon, such an approach seems to have far less support (certainly in the Congress) than it did six years ago. One of the reasons: Cap-and-trade systems in Europe, California and the Northeastern states have proved that too many credits tend to be given away to powerful interest groups, creating artificially low prices and reducing effectiveness in limiting greenhouse gas emissions. Prices in cap-and-trade systems also tend to be highly volatile, robbing the system of the predictability needed for business decision making. There are also concerns about the risk that financial players will manipulate a cap-and-trade system and siphon off most the “economic rents.”
If we approve a carbon fee, wouldn’t countries without one have an advantage over U.S. companies?
To encourage our trading partners to price carbon and to make sure that U.S. companies would not be at a disadvantage, we could impose a WTO-compliant border tax adjustment on imports and include a credit for energy-intensive exports. This would make it in the self-interest of our trading partners to impose a similar price on carbon in their economies and keep the money for themselves rather than have their exporters pay it to the United States at our border.
This fee would generate significant revenue. What would be done with that money?
If the system were “revenue-neutral,” a significant portion of the revenue could be used to bring the corporate tax rate from 35 percent (the highest in the industrialized world) to a globally competitive level, spurring growth. In recent years Japan, Canada, and the United Kingdom have reduced their top rate to increase their competitiveness.
Most of the balance of the revenue should be returned to low- and middle-income families, more than offsetting any increase in energy costs.
Some of the revenue could be directed to deficit reduction, since the current ratio of debt to GDP has risen dramatically (by 35%) since 2008 and now totals over 100% of GDP, threatening future economic growth.
Alternatively, some of the revenue could go toward priority infrastructure needs - increasing the impact on economic growth and creating more jobs - and to coal industry-based communities to promote economic transition, or to reduce the cost of higher education.
Can carbon-funded tax cuts make it through Congress?
Yes. This market-based response to climate change would foster economic growth, create jobs, end the long-standing deadlock over tax reform, and replace an expensive and unpredictable regulatory mechanism with a cheaper, faster, more predictable, and more effective solution.
The Partnership for Responsible Growth has held more than 200 meetings on Capitol Hill, focusing on House and Senate members who serve on the five committees that have jurisdiction over tax, environmental, and energy matters. These conversations strongly indicate that there is bipartisan receptiveness to carbon-funded tax cuts, provided the business interests most affected publicly advocate for this solution.
Wouldn’t the fossil fuel-based energy industry fight this fee, making it impossible to enact?
Many in the industry are open to the idea. ExxonMobil CEO Darren Woods supports a carbon tax, and the CEOs of the six largest European oil companies wrote to the UN requesting a dialogue and negotiation about setting a single European or global price on carbon. U.S. energy producers and utilities see the merit in a simple, predictable broad-based price mechanism. The hydrocarbon and mining industries in Canada have largely supported a national-wide carbon price on the grounds that such an approach is central to the competitiveness of their businesses and of Canada’s economy.
What is The Partnership for Responsible Growth?
Created in 2014 by three political leaders and business executives, the Partnership for Responsible Growth is a 501(c)(3) nonpartisan advocacy organization that supports a free-market, pro-growth approach to combating global climate change. For more information visit: http://www.partnershipforresponsiblegrowth.org/.