Obama Climate Plan Revives Talk of a Carbon Tax

Sweeping power-plant regulations would enable states to use pollution trading, fees to cut heat-trapping emissions.

President Barack Obama speaks about climate change during an event in the East Room at the White House August 3, 2015 in Washington, DC.
National Journal
Ben Geman
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Ben Geman
Aug. 3, 2015, 3:55 p.m.

The big na­tion­al cap-and-trade plan died on Cap­it­ol Hill five years ago, and it re­mains very much dead. A car­bon tax — the per­en­ni­al aca­dem­ic solu­tion for curb­ing green­house-gas emis­sions — had even less trac­tion in Con­gress and lives on mostly in think tanks.

But Pres­id­ent Obama’s En­vir­on­ment­al Pro­tec­tion Agency cli­mate reg­u­la­tions for power plants, un­veiled on Monday, may give those policies new life at the state level.

In a change from the draft plan, the fi­nal EPA rule now ex­pli­citly says states can use “fees” (i.e., taxes) as a tool for meet­ing their emis­sions-cut­ting re­quire­ments. That’s on page 899 of the massive 1,560-page rule. Plans that states craft to com­ply with the man­date, the rule states, “could ac­com­mod­ate im­pos­i­tion by a state of a fee for CO2 emis­sions from af­fected [elec­tric gen­er­at­ing units], an ap­proach sug­ges­ted by a num­ber of com­menters.”

That lan­guage is a rather brief bless­ing but enough to ex­cite the ad-hoc, Left-Right mix of en­vir­on­ment­al­ists, eco­nom­ists, and a few con­ser­vat­ive car­bon-tax ad­voc­ates who have long been swim­ming up­stream at the na­tion­al and state level.

Dav­id Book­bind­er, a former high-level Si­erra Club law­yer, says car­bon-tax back­ers will im­me­di­ately be­gin fresh dis­cus­sions about how they can con­vince states to get on board. “We have all been wait­ing for this,” said Book­bind­er, now an ad­junct schol­ar at a think tank called the Niskan­en Cen­ter. “The calls will prob­ably start to­night or to­mor­row.”

“The next step is to en­sure that states know about this op­tion and con­sider it ser­i­ously,” said Brook­ings In­sti­tu­tion eco­nom­ist Ad­ele Mor­ris, who has long ar­gued that EPA should let states use taxes to meet the power-plant man­dates.

Mor­ris said she’s “de­lighted” by the new rule lan­guage.

“This is great news for states that want to pur­sue a cost-ef­fect­ive, eas­ily-ad­min­istered, mar­ket-based ap­proach,” Mor­ris said. “States can not only com­ply with the new rule, they can also solve fisc­al short­falls and ac­com­plish pro-growth tax re­form.”

Car­bon taxes don’t guar­an­tee emis­sions cuts, however, so it’s among the state meas­ures that would re­quire a “back­stop” of “fed­er­ally en­force­able emis­sion stand­ards” in case they don’t bring about the man­dated re­duc­tions.

While the rule very briefly blesses car­bon taxes as an op­tion, ex­perts pre­dict that an­oth­er form of put­ting a price on car­bon emis­sions — the trad­ing of pol­lu­tion cred­its or al­low­ances — is more likely to gain steam un­der EPA’s rule. The Clean Power Plan provides de­tailed dis­cus­sions of how states can use emis­sions-trad­ing sys­tems to com­ply with the rules, which are aimed at cut­ting power-plant emis­sions 32 per­cent over­all by 2030.

The plan also de­scribes how states can make their power plants “trad­ing ready,” which al­lows them to par­ti­cip­ate in trad­ing with plants in oth­er states even in the ab­sence of form­al in­ter­state pacts.

EPA’s pro­mo­tion­al ma­ter­i­als on the rule call trad­ing “cost-ef­fect­ive,” and the agency is vow­ing to sup­port states’ ef­forts on track­ing emis­sions and emis­sions cred­its in or­der to help im­ple­ment multistate trad­ing.

“Clearly EPA is do­ing what they can to make it easy for states to opt for emis­sions trad­ing,” said Kev­in Kennedy, a cli­mate ex­pert with the World Re­sources In­sti­tute.

The rule could sub­stan­tially ex­pand use of mar­ket-based trad­ing sys­tems bey­ond what’s in place in Cali­for­nia and the Re­gion­al Green­house Gas Ini­ti­at­ive, a con­sor­ti­um of North­east­ern states with a re­gion­al cap-and-trade sys­tem for power plants.

“I think we can ex­pect de­vel­op­ment of more mar­kets around the coun­try,” said An­thony Paul of the en­vir­on­ment­al think tank Re­sources For the Fu­ture, who pre­dicts that “many more” states will ad­opt car­bon-pri­cing policies. “We could see rather large mar­kets that in­volve many states un­der the Clean Power Plan.”

To be sure, Re­pub­lic­ans turned against cap-and-trade years ago, even though it was once favored among many con­ser­vat­ives as a way to cut pol­lu­tion us­ing mar­kets to steer the most cost-ef­fect­ive and ef­fi­cient emis­sions curbs.

But now that EPA has fi­nal­ized the rules, Paul pre­dicts that trad­ing could find fa­vor in states with GOP lead­ers. “The ad­vant­ages of mar­ket-based reg­u­la­tions are many, and I think even in Re­pub­lic­an states it will be hard to ig­nore those ad­vant­ages,” he said.

Book­bind­er notes that Clean Air Act rules are the only tool avail­able to cut power-plant emis­sions, but says the am­bi­tious but com­plex rules will bring years of leg­al chal­lenges.

He ar­gues that a fed­er­al, “rev­en­ue-neut­ral” car­bon tax is a bet­ter ap­proach, and be­lieves that if some states ad­opt taxes to com­ply with Obama’s rules, it could make Con­gress more open to the idea.

“It’s the most eco­nom­ic­ally ef­fi­cient way of re­du­cing emis­sions. … If we can get states to do this, it will give Con­gress some com­fort that it can be done in a bi­par­tis­an man­ner,” Book­bind­er said, ar­guing that there are open­ings for car­bon taxes in states with di­vided gov­ern­ment, such as Illinois.

Mor­ris, for her part, says tax back­ers need to make their case to states.

“When the dust settles, I think states will come to see this as a very vi­able op­tion. For ad­voc­ates of tax­ing car­bon, EPA’s fi­nal rule is a threshold achieve­ment,” she said. “The next step is to en­sure that states know about this op­tion and con­sider it ser­i­ously.”

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