28 May 2014

EPA’s 111(d) draft carbon rules for existing power plants could set the stage for a carbon tax

Written by Jim Pierobon

For all of the fiscal and environmental logic that supports the case for a carbon tax in the U.S., the politics keep getting in the way. Besides the opposition from most elected conservatives, two developments looming in the future could change all this.

One is the currently low interest rates on U.S. Treasury securities making it palatable to finance the ever-growing U.S. debt that almost surely are going to rise in the future. The other is the expected draft this coming Monday, June 2, of new rules under Section 111(d) of the Clean Air Act coming from the U.S. Environmental Protection Agency, slated to be finalized by 2016.

Let’s take the 111(d) rules first. Already, there is shop talk in policy circles how utilities and the states they operate in are going to meet the anticipated emissions limits. This will prove especially challenging for coal-dependent regions. States will have options on how to comply. Everyone will be asking: what’s the cheapest way to achieve the mandated reductions?

While California is making measurable progress with its AB 32 law and regulations, and those states in the Regional Greenhouse Gas Initiative in the Northeast have their own cap and trade system for power plants, other states may seize the option to impose their own carbon tax in order to achieve the required 111(d) emissions reductions while plugging into this potentially sizable source of new revenue.  Given that it would be both the cheapest way to comply with EPA’s rules and would produce revenues for the states, the growing interest in state carbon taxes is understandable. And once the states show that a carbon tax both reduces emissions and raises revenue, can the federal government be all that far behind?

Stay with me here. Just about any carbon tax, starting at an economically digestable level and scaling up to achieve a goal within 5-10 years, would be transparent and predictable. It would be relatively easy to administer and not riddled with the types of rules that would afflict a cap-and-trade scheme. As it is, cap-and-trade, experts say, could only achieve maybe half of the emissions reductions of a carbon tax.

If, as the Congressional Budget Office estimated in 2013 here, a cap-and-trade program could raise $1.2 trillion, think what a substantive carbon tax would raise. Think too what its impact might be on the economy, but also how it could boost the fledgling climate economy that is getting a foothold throughout the U.S. and the world.

For states that balk, the Federal tax would apply in full. Congress could welcome that source of new revenue when development #2 kicks in: rising interest rates, driving up the U.S. debt at an ever-quickening pace. This revenue could be used for debt management; or, in order to help sell it to businesses and individuals, Congress might dedicate part or all of this new money to reduce corporate and / or personal income taxes.

This combination of events is among the scenarios in the crystal ball of two forward-thinking climate policy guys and once strange bedfellows, David Bailey (an economist) and David Bookbinder (a lawyer). Strange because David Bailey used to work on climate policy for ExxonMobil and was instrumental in getting the oil giant to advocate for a carbon tax. David Bookbinder did something similar, albeit for the Sierra Club, the nation’s largest environmental advocacy group.

When their paths crossed, Bailey and Bookbinder discovered a common grasp of baseball as well as the myriad hurdles facing prospective climate laws and environmental regulations designed to mitigate global warming. They have since come together as Element VI Consulting in McLean, Virginia to assUS carbon tax scenarios, 2010 refernce case, CREDIT US EIA_1ess for clients the realities of various climate mitigation options.

“Our mission right now,” said Bookbinder in a separate interview here that drills down on their earlier work, “is to distribute accurate thinking about what is going on. We aren’t in the business of advocating anymore—we’re in the business of reading the realities of the political system: how things will or will not work, understanding the climate debate and where it is going, understanding the undergrowth of incentives and subsidies between the federal government and the energy industry, and approaching the issues from a business and public policy point of view.”

Added Baily: “While we believe that a carbon tax is the right way to go, we acknowledge enough about how the jungle works to know the best way through.” He said any climate proposal must be “a solution we can afford, not an ideological position that sacrifices either the environment or the economy or that cannot pass. A carbon tax is the best approach.

The basis for their strategic thinking is the set of principles they worked on back in 2009, which were never finalized at that time or formally agreed to by their employing organizations because of the policy hiatus in the wake of the legislation co-sponsored by then-Senators John Kerry, D-MA and Joe Lieberman, I-CT. Those principles envisaged a broad based carbon tax, with national emission reduction goals and tax rates being set for five years at a time – and then reviewed in the light of effectiveness and economic impact, with 90% of the revenue being recycled to reduce other taxes, and including measures to support affected communities and trade-exposed businesses.

If not precipitated by a federal debt crisis, a carbon tax could come with an overhaul of the tax code along with it challenges to ‘sacred cows’ such as the mortgage interest deduction for principal residences. Rather than hit homeowners, a sure-fire losing proposition at the polls, a slew of energy incentives for renewable and other tax breaks for fossil fuels could get wiped off the tax code in the process. It might boil down to a tit-for-tat compromise. But for proponents of a carbon tax – as I am – this could enable the marketplace to determine the most cost-effective, lower carbon, energy source, help clean up our air and water and, importantly, lead by example for other countries yet to grapple pursue climate solutions.

If you think this through, a carbon tax is simple and transparent. It could make so much sense at the end of the debate – and then succeed – the cards held by many environmental groups might disintegrate. There may no longer be a need for their activism on this issue because the biggest hurdle would have been cleared, at least in the U.S. Wouldn’t many CEOs of oil companies, slow-moving utilities and their allies like the Koch brothers welcome THAT byproduct.

Bookbinder, the former Sierra Club staffer, told me that’s exactly why many environmentalists will say they are skeptical of any carbon tax scenario – perhaps because they don’t want it to. “If a carbon tax succeeds in getting the entire economy in the business of reducing carbon, there is not a lot left for environmental groups to deal with on that issue. And when I raised this point with environmental leaders,” he said, “it was met with totally blank stares, with one exception: Carl Pope.”

Pope is the former long-time Executive Director and Chairman of the Sierra Club. He was known for considering practical means for achieving environmental goals, including accepting large donations from Chesapeake Energy, a leader in the hydraulic fracturing of natural gas. That practice was spurned when Pope’s successor and current Executive Director, Michael Brune, succeeded him in 2011.

During a telephone interview Thursday, May 29, Pope explained the political atmosphere could improve once the impacts of the draft 111(d) rules are digested and the environmental community will, or should, be ready to engage.

“The politics of a carbon tax are better,” Pope said. Besides, he said, the ‘blank stare’ reaction “doesn’t reflect the realities that drive people inside the environmental community.  They’re getting more money now to mitigate climate change than they are to reduce pollution. There is still a lot of work to be done.”

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