Debate over the prospects for Congress approving a carbon tax bill is intensifying with the release of new papers from both proponents and foes of the concept, and an upcoming think tank forum to discuss how options to mitigate the global competitive impacts of a carbon tax could affect the cost effectiveness of the approach.
The debate is building in the wake of the early August introduction of carbon tax legislation by Rep. Jim McDermott (D-WA), and after a separate closed-door discussion in July hosted by the American Enterprise Institute (AEI) on ways to build support for a tax, which proponents say can have the dual benefits of raising revenues and cutting carbon emissions.
Senate Majority Leader Harry Reid (D-NV) also appeared to endorse a carbon tax at an August energy conference in his home state, expressing hope for renewed Senate activity on a carbon "price" just days after McDermott introduced his bill, H.R. 6338, "The Managed Carbon Price Act of 2012."
Despite the talk of carbon tax legislation advancing, proponents are muting their public discussion of the plan in advance of the November elections, as carbon tax critics attack McDermott's bill for not also including provisions that could win over doubters -- such as language barring EPA climate rules in exchange for the tax. Critics also say the bill could undercut efforts by AEI or others to defend a carbon tax as part of a deficit reduction plan, after AEI had been organizing meetings with carbon tax backers from across the political spectrum to discuss how to sell a carbon tax as part of fiscal reforms.
Even though prospects for a carbon tax clearing Congress before the elections are slim at best, the idea continues to generate growing debate as observers expect more movement on the issue starting in 2013.
For example, the investment firm Capital Alpha Partners notified its clients recently that prospects for enactment of a carbon tax could increase dramatically if President Obama wins a second term.
In its carbon tax analysis, Capital Alpha Partners warns the McDermott bill could impose up to a $5.20 per-gallon gasoline tax and cost consumers an additional $1,100 to heat their homes each year, based on calculations using maximum prices set by McDermott for the year 2024 and Energy Information Administration consumption data.
The firm, which provides investment advice on energy and other issues, believes a carbon tax will be "a big topic for discussion this fall and into next year," the firm's Managing Director James Lucier tells Inside EPA in an Aug. 29 interview. The firm suggests the McDermott approach approach may be starting off as an extreme but that does not mean a carbon tax will not be taken seriously, especially if Obama wins reelection.
The paper outlines a number of possible pathways for a carbon tax bill including a "regulatory swap" where it is "more properly considered a leverage point to achieve far-reaching EPA reform, rather than tax reform, where an entirely different set of tradeoffs prevails." The paper suggests that "the moment when push comes to shove may not arrive until EPA begins work on" GHG performance standards for gas-fired power plants.
"But that moment will come in time," the paper says. While swapping EPA rules for a tax is "economically rational," nevertheless "deeply entrenched regulations" under "the Clean Air Act might be difficult to change," such as GHG tailpipe rules widely supported by automakers, the firm says. But such a swap "could move the EPA from outmoded and unworkable facilities-based and process controls to an integrated multi-pollutant policy that would apply economically rational cap and trade across all pollutants rather than facilities-based control; emphasize outcomes over process; and apply economic cost-benefit analysis consistently to all decisions."
Dueling Carbon Tax Papers
Opponents and advocates of a tax are also stepping up debate over the idea, with the free-market Heritage Foundation releasing a background paper Aug. 21 that warns of harms of a tax, and while a new research paper by the Massachusetts Institute for Technology (MIT) calls the tax "a win-win-win."
MIT researchers Sebastian Rausch and John Reilly endorse a carbon tax in their new paper, "Carbon Tax Revenue and the Budget Deficit: A Win-Win-Win Solution?," that says a tax could offset revenue losses from the expiration of Bush-era tax cuts at the end of the year.
If a carbon tax is enacted, "Congress could reduce personal or corporate income tax rates, extend the payroll tax cut, maintain spending on social programs, or some combination of these options." In addition, they write, income tax cuts would spur economic growth while GHG emissions and oil imports would be reduced.
In the Heritage Foundation's paper, "A Carbon Tax Would Harm U.S. Competitiveness and Low-Income Americans Without Helping the Environment," author Derrick Morgan says while supporters of the tax are trying to garner backing from across the political spectrum by emphasizing deficit reduction and environmental benefits, such an approach would "do next to nothing to lower global temperatures." It would also harm domestic competitiveness and low-income populations by raising energy prices.
RFF Climate Events
Meanwhile, the economic think tank Resources for the Future (RFF) is hosting a Sept. 4-5 workshop and a related Sept. 5 seminar, both taking place in Washington, D.C., on the role of "border measures" in the design of a unilateral climate policy. The title of the event refers to taxes, permits or other rebates that the United States or other developed nations could levy on imported goods or award to their own energy-intensive industries if they adopt climate policies like a carbon tax but other nations like China do not.
A tentative agenda notes participation by numerous international and domestic experts, including officials from EPA, the Department of the Treasury, the Congressional Budget Office, the International Trade Commission and former Obama energy adviser Joseph Aldy, now at Harvard's Kennedy School of Government.
A source familiar with the RFF event says a major focus will be how border adjustments or other measures for curbing emissions leakage, which results from displacement of production to unregulated countries, affect the cost effectiveness of a carbon tax or other policies by nations that choose to adopt them.
The RFF events underscore the challenge of crafting carbon tax or other policies in ways that address such competitiveness concerns, which have been major impediments to passage of domestic climate legislation.
Initial discussions will include a "model comparison study" with contributions from a dozen expert groups that will examine the efficiency and distributional impacts of border measures.
Prior to the conference, RFF also released a paper coauthored by RFF's Carolyn Fischer and the United States International Trade Commission's Alan Fox that examines the overlap of possible carbon tax policies with existing tax policy and border measures. Among the conclusions of the paper, "Climate Policy and Fiscal Constraints: Do Tax Interactions Outweigh Carbon Leakage," is that measures to address the emissions leakage produce less cost savings than using revenues of a carbon tax or other climate policy to lower other taxes, such as taxes on labor, but the cost savings are still significant, particularly as emissions reduction targets become stricter and if the number of countries that adopt emissions controls is small. -- Dawn Reeves & Doug Obey