Policy - 07/September/2021

United States baulks at the political cost of a carbon price

As major markets around the world add various forms of carbon tax, in the United States a country-wide price on carbon is a political non-starter

Political hurdles are harming the United Stateschances of cutting emissions through financial instruments


 

MISSING IN ACTION Repeated attempts to launch a federal tax on carbon have failed, despite having some success at state level

POLITICAL CAPITAL US lawmakers know the opposition to a carbon tax is so great it is better to focus climate mitigation policies elsewhere

KEY QUOTE Carbon pricing is not a silver bullet; it is a powerful tool

 


 

The Green New Deal was introduced with great fanfare on Capitol Hill by lawmakers Alexandria Ocasio-Cortez and Ed Markey and hailed as the United States’ flagship package to combat climate change in 2019. Notably, for such a package, it did not contain any carbon pricing mechanism. Then, Joe Biden’s $1.7 trillion infrastructure plan launched in May 2021—fundamentally the administration’s central climate change mitigation policy package—also did not include carbon pricing.

The US is becoming an outlier on the international stage. According to the Centre for Climate and Energy Solutions (C2ES), a US environmental non-profit organisation, about half of the nations signed up to the Paris Agreement plan to—or already do—use market-based approaches to help achieve emissions reduction. Globally, 22% of the world’s emissions are already covered by carbon pricing, notes Jessica Green at the University of Toronto and a critic of carbon pricing.

Other major economies use some form of carbon pricing. China, the world’s largest carbon emitter, launched a national scheme that covers its thermal power sector in the first half of 2021, while several Chinese cities and provinces—some with heavy industry sectors—have had carbon caps since 2013.

The European Union Emissions Trading System (EU ETS), the world’s largest carbon market, was launched in 2005 and is regularly being strengthened. The EU also unveiled a Carbon Border Adjustment Mechanism, a levy on the carbon content of imports to the bloc, in July 2021.

Canada also has a carbon tax, while the system in the province of British Columbia, an earlier adopter, has been described as being close to a textbook example of successful pricing by the Organisation for Economic Cooperation and Development (OECD).

For a carbon tax, a government sets a price that emitters must pay for each ton of greenhouse gas (GHG) emissions. Under cap and trade systems, governments set a limit on emissions. Regulated sources can then buy allowances to meet the emissions cap from those that have not used them, or they can reduce their emissions. Offsets can often be purchased.

 

 

As carbon pricing mechanisms are more widely adopted, it might be a case of when—and not if—the US establishes its own programme. However, it is not yet on the horizon.

 

IMPACT ON BUSINESS

There are plenty of benefits of introducing some form of carbon tax. Brandon Pizzola, from business services firm EY, co-authored a report in May 2021 that projected the impact of a $25 per metric ton carbon tax on US business. It would raise an estimated $1.1 trillion in revenue over ten years, equivalent to raising the corporate income tax rate by 10%. Biden’s infrastructure plan proposes raising the rate by 7% on corporate tax.

Across eight key industries, the tax would on average increase production costs by 0.7%, EY found. The electric power generation sector could see costs rise by as much as 11.8% due to added production fees, but for areas such as publishing, film, telecommunications or data processing—the information sector—the cost increase could be as little as 0.1%, EY said.

Another EY report Pizzola co-authored in 2018 found that a revenue-neutral carbon tax would cut CO2 for significantly less than regulatory controls. The report found that regulation could reduce gross domestic product (GDP) by 1.1%, approximately $1,770 per household annually, whereas a carbon tax could increase annual GDP by $1,170–$5,090 per household.

 

 

BUSINESS ATTITUDES

Businesses tend to prefer the price certainty of a carbon tax rather than a cap and trade programme, but that is only if there has to be a carbon pricing system at all. Rachel Cleetus at the Union of Concerned Scientists (UCS), an American NGO, notes the power of the US’s well-funded fossil fuel lobby in opposing aggressive climate solutions.

In July 2021, a furore erupted when NGO Greenpeace UK released a video of Keith McCoy, a senior director for federal relations at oil major Exxon Mobil, suggesting the company’s support for a carbon tax in the US was merely a “talking point” for a policy that would never be adopted. McCoy boasted of the company’s efforts to discredit climate science and undercut Biden’s infrastructure plan.

Exxon’s CEO issued a rare apology, saying that McCoy’s comments did not represent the company’s stance. But the video raises the question of how sincere fossil fuel companies are in supporting a carbon tax. In early August 2021, Exxon was suspended from the Climate Leadership Council, a business group that backs a carbon tax and a carbon border adjustment.

Tom Green, a climate solutions policy analyst at the David Suzuki Foundation, a Canadian environmental organisation, sees much of Big Oil’s support for a carbon tax as “astroturfing”—such as BP publicly supporting a carbon fee in Washington State in 2019 but privately donating to groups fighting the policy.

 

PRICE POINT

Part of the reticence to carbon pricing from business and lawmakers in the US is due to the uncertainty over its effectiveness. Jessica Green, of the University of Toronto, says there is little peer-reviewed research on the impacts of carbon pricing to reduce emissions. One review concluded that the EU ETS reduced emissions only by 0-2% a year. “You do not get a whole lot of bang for your buck,” she says. Carbon prices globally are just not high enough, she says. The World Bank has found them often to be only $20/metric ton on average.

But carbon pricing can help reduce emissions if the price is high enough. A more successful carbon price would be $150-200/metric ton, but that is not on the cards for political leaders because of the political costs, Jessica Green says. She says carbon pricing has contributed to the polarisation of the climate issue and stoked class divisions, a cause of the “gilets jaunes” protests in France in 2018-2019. The Network for Greening the Financial System (NGFS), a group of 83 global federal banks and financial supervisors, has said that a carbon price of $160 per metric ton will be required by 2030 to reach net zero.

Elsewhere, some experts believe carbon pricing has made a difference. Tom Green at the David Suzuki Foundation notes how in British Columbia, even as the province doubled down on fossil fuels and froze the tax for several years at C$30/metric ton, a 2019 paper for the Brookings Institute by Gilbert Metcalf of Tufts University found that the tax reduced emissions by 7.8%. A 2018 study found that the tax contributed to a 6.9%-10.1% decrease in natural gas consumption in the province’s residential areas. The impact of the carbon tax was more than seven times the equivalent change in market price, the report found.

In the Regional Greenhouse Gas Initiative (RGGI) region—one of the US’s few state-level programmes that spans eleven northeast states—power sector emissions have fallen more quickly on average than the rest of the country while the region’s economies have thrived, notes Jordan Stutt at the Acadia Centre, a clean energy, research and advocacy group in Maine. Without RGGI, emissions would have been 24% higher from 2009 to 2015, a Duke University study found.

Under another state scheme in California, GHG emissions dropped 5.3% from the start of the programme in 2013 to 2017. Causality is hard to determine, but C2ES notes that the cap-and-trade programme covers about 85% of the state’s emissions while investing billions of dollars in emission-reducing projects. UCS’s Cleetus says other policies are also needed to support further decarbonisation, such as support for public transit, electricity transmission and energy storage. “Carbon pricing is not a silver bullet; it is a powerful tool,” she says.

Offsetting programmes may also not be regulated properly, Jessica Green adds. Cap-and-trade allowances may also be too generous because of political pressure. She also points to political opposition and the desire of politicians, such as Joe Biden, to spend their scant political capital elsewhere: “In practice, the well around carbon pricing is too poisoned,” she says.

 

 

POLITICALLY UNMOTIVATED

Politically, so far at least, a carbon tax tends to be more popular than a cap-and-trade programme. By all accounts, President Biden favours some form of carbon pricing, at least in theory. In January 2021, Biden’s then-nominee for Treasury Secretary, Janet Yellen, wrote to members of the US Senate Finance Committee: “I am fully supportive of effective carbon pricing and I know that the President is as well.” Yellen is the former chair of the US Federal Reserve Bank and a member of the Climate Leadership Council.

“There’s a pretty strong phalanx of us in the Senate who don’t see how you can get there if you don’t include a price on carbon in the mix,” Sheldon Whitehouse, a Democrat and member of the Senate Budget Committee, told the Wall Street Journal. A bill Whitehouse co-sponsored in June proposed a $54/metric ton tax on CO2, estimating it would raise some $2.4 trillion over ten years.

Generally, public acceptance of carbon pricing is difficult to predict. Carbon pricing can impact those with lower incomes or those in rural areas with no public transit or those who work in fossil fuels. However, a dividend can be returned to individuals, such as in British Columbia, in the form of tax breaks for citizens so that many are better off than before. In 2018, the “gilets jaunes” protests started when rural motorists—with little access to public transport and stagnating incomes—opposed a fuel tax increase to combat climate change. The increase had to be suspended as a result of public opposition. And in Australia—not known for its progressiveness on climate change—a carbon tax was installed in 2012 but quickly repealed in 2014.

Biden, however, has still made significant progress on the cost of carbon. In February, he reinstated the Obama administration’s $51/metric ton price tag on the social cost of carbon, used in evaluating the cost of new policies and regulations. His predecessor, Donald Trump, had reduced the cost to $1/metric ton. The Biden administration is also re-evaluating the cost and is expected to issue a revised figure in January 2022.

 

RECONCILIATION

There is a small chance of a federal carbon pricing mechanism being passed this autumn as part of a $3.5-trillion budget resolution bill released by Democrats in July. It could be passed through a procedure of the United States Congress called reconciliation. This allows budgetary measures to be advanced with a simple majority vote, made possible by the Democratic control in the Senate and thereby bypassing Republican opposition. Even so, all Democratic senators would need to be on board, including some moderates such as Senator Joe Manchin who previously campaigned vehemently against cap and trade programmes.

Kevin Kennedy, a senior fellow with the US Climate Initiative at the World Resources Institute (WRI), says carbon pricing is “fairly unlikely” in the current Congress, adding that he would also be surprised if it is part of any reconciliation bill. Marc Hafstead from the Carbon Pricing Initiative at Resources for the Future, a Washington DC-based think tank, also predicts that any carbon tax passed through reconciliation would be modest, perhaps $15-25 per metric ton. For such a low price, the key would be to work out how to start low and ramp it up, he says.

Longer-term, analysts are more hopeful of US national carbon pricing, and that is just as well. “Drastic climate change needs a lot of action, and it will be very, very hard without cap and trade or a tax,” says EY’s Pizzola.

 


TEXT Ros Davidson PHOTO Mike Marrah

Share


Comments are closed.

Related articles

Entry of China heralds emissions trading shake up

When China later this year introduces its emissions trading system, it will double the combined size of all existing carbon markets.

Read more

EU ETS revenues can help unlock the clean energy transition

A recent World Bank study reveals global carbon revenues are rising sharply, but only around 42% are used for environmental projects. It shows European and American citizens prefer their governments to spend carbon revenues on low-carbon initiatives, so why is political will lagging behind asks Susanne Dyrbøl from Rockwool Group

Read more

Brexit may boost global cooperation on carbon trading clubs

Brexit, by excluding the UK from Europe’s carbon emissions trading system, has stripped British industry of the value of its carbon credits. Rescue options being considered by the UK government include linking back to the EU market, but also taking the risk of joining an immature multinational carbon trade cooperation

Read more

Carbon pricing is no silver bullet to decarbonise buildings across Europe

The introduction of a carbon price in the building sector will only encourage fuel switching and burden those least able to pay with the cost of decarbonisation. If implemented, it should be complemented with legislation to boost energy efficiency, says Monica Frassoni of the European Alliance to Save Energy

Read more

Using trade measures for climate gain

Europe is considering taking the bold step of introducing a border carbon adjustment tariff on goods imported from regions where carbon pricing is lacking, placing trade right in the middle of its climate ambitions

Read more

The EU cannot ‘go it alone’ on Border Carbon Adjustments

Border carbon adjustments (BCAs) are technically difficult to design and politically challenging to implement. If BCAs are going to succeed, the European Union (EU) will need to engage trade partners from the start, says E3G’s Johanna Lehne

Read more