Could taxes be the key to curbing climate change?

A national price on carbon currently has little traction in Washington, but the Environmental Protection Agency power plant rule could open the door for a straightforward state-based tax. EPA just needs to set a minimum tax trajectory that any state could adopt.

Seth Perlman/ AP Photo/ File
A conveyor belt moves underground mined coal to the surface at Peabody Energy's Gateway Mine near Coulterville, Ill. The U.S. Environmental Protection Agency (EPA) is developing a proposed rule due out in June that could allow states to use carbon excise taxes or fees to limit the one-third of U.S. greenhouse gas emissions that come from power plants.

The U.S. Environmental Protection Agency (EPA) is developing a proposed rule due out in June that could allow states to use carbon excise taxes or fees to limit the one-third of U.S. greenhouse gas emissions that come from power plants. The tax approach, one of several options EPA could offer states, could provide an important test for price-based limits on climate-changing activities.

A national price on carbon currently has little traction in Washington, but EPA’s power plant rule could open the door for a straightforward state-based tax. EPA just needs to set a minimum tax trajectory that any state could adopt. Here are some potential benefits to such a system:

  1. It’s market-based, flexible, compatible with existing fuel mixes, accommodates the “remaining useful life” of equipment, and doesn’t undermine electricity reliability.
  2.  A tax option is feasible and consistent with the law. If EPA can allow cap-and-trade under the rule, as the agency has indicated it will, it can allow an excise tax or fee.
  3. A carbon fee discourages each fuel’s use in exact proportion to its damage to the climate. This changes the relative prices of different fuels and encourages all pollution reductions that cost less than the tax. EPA can set a tax that reflects the Administration’s estimates of the damages of the pollution.
  4. A tax incentivizes changes at power plants (for example, more efficient boilers and lower-carbon fuels) and greater energy efficiency by consumers.
  5. A tax encourages abatement in ways EPA and states can’t predict, for example by helping drive a market for new technologies. Standards based on existing technologies may not do that.
  6. A tax would be an easy way for states to implement EPA curbs on power plant emissions. Some states already have excise taxes on natural gas. In contrast to cap-and-trade, states wouldn’t have to allocate allowances, create a registry, monitor trades, or enforce a price floor. They wouldn’t have to measure electricity generation, transmission, or consumption. They’d just monitor fossil fuel use and collect the money.

  7. Under a tax, regulated firms wouldn’t have to manage volatile allowance prices or other uncertainties. A predictable compliance price fosters the long term investments that are critical to reducing the use of carbon-based fuels in a cost effective way.
  8. A traditional emissions standard would impose different incremental abatement costs in different states, potentially distorting investment across state lines. In contrast, an EPA-specified tax option available to all states would allow them to harmonize their pollution policies without having to link them directly, for example through a regional allowance market.
  9. States could use the revenue however they wish. For instance, they could lower inefficient taxes, potentially providing pro-growth state tax reform along with environmental benefits.
  10. In its power plant rule, EPA can signal that the same tax will also work for future carbon rules for industrial facilities. This would allow states to adopt only one tax law and help industries invest wisely in pollution reduction before EPA imposes new regulations.
  11. A price-based standard is diplomatically far superior to an emissions rate standard (i.e. “X tons of CO2 per kilowatt hour generated”) because it clarifies the economic ambition of US climate policy and starts a useful international carbon pricing dialogue.
  12. A carbon price in the rule would signal to Congress what the Administration would accept as a federal carbon tax alternative to Clean Air Act rules.

Finally, members of Congress who denounce EPA regulations might support agency rules that give states the flexibility to adopt a modest carbon fee schedule instead of mandated emissions standards. States could choose which option suits them best, leaving the decision and the potential revenue in their control.

You've read  of  free articles. Subscribe to continue.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.