Energy regulation is not a major pre-election topic as we head into summer but may gain prominence closer to the November elections. In mid-June the Democratic party is evidently debating whether a carbon tax should be part of the party's election platform: Bernie Sanders supports the tax; Hillary Clinton has not taken a formal position, although she is committed to reducing carbon emissions. Donald Trump has proposed to rescind President Obama's climate change rules and states that he will not support a carbon tax. The Republican agenda introduced by House Speaker Paul Ryan proposes less regulation and more affordable and reliable energy, but does not explicitly mention carbon pricing.
Congressional Republicans consistently oppose a carbon tax. However, there is a sense that Republicans may prefer a carbon tax to additional carbon emissions regulations or as part of comprehensive tax reform.
As a sign of congressional opposition, Senator Roy Blunt (R-Mo.) recently introduced a Senate resolution that expresses the sense of Congress that a carbon tax would be detrimental to American families and businesses. In addition, the House recently voted overwhelmingly to support a resolution offered by Rep. Steve Scalise (R-La.) opposing a carbon tax.
Some multi-national major oil companies support pricing carbon. One reason may be that a regulated, fixed carbon price would be better for setting long-term investment decisions than locally variable and frequently changing regulations. Another plus for industry: a revenue neutral carbon price allows consumers to participate in emission decisions, whereas regulations are imposed only on the producer of a particular product. Independent oil companies generally oppose a carbon tax.
Currently, California and nine other states, most of Canada, and the European Union price carbon, generally through cap and trade systems.
Carbon Tax versus Cap and Trade
Both cap and trade and a carbon tax are intended to put a price on carbon emissions, creating incentives to switch to more efficient or lower emission energy. In their simplest forms, a carbon tax sets the price of emissions; a cap and trade system sets a ceiling on emissions and lets the market set the price through auctions of emissions allowances.
Problems abound for either approach. Some major concerns:
- The impacts on consumers, industrial sectors and the economy depend on the size of the tax rate and how the tax would be used. Popular options include funding clean-energy projects (e.g., the California bullet train) or using the money to reduce other tax obligations.
- In many existing programs, carbon prices may be too low to significantly influence energy use.
- A carbon tax enacted by the U.S. without parallel efforts around the world would have little impact on the Earth's climate.
- Emissions benefits are unclear, given data gaps, and controversies—for example, about the valuation of climate damage and the link between air quality and mortality risk.
- The impacts on industry and consumers are complicated by emissions regulations that are simultaneously driving energy use patterns.
California is a cautionary tale:
- California aims to reduce emissions 80 percent from 1990 to 2050 through a cap and trade system.
- The tax law (Assembly Bill 32) passed in 2012, and was applied to electricity generators and large industrial facilities in 2013 and to natural gas and transportation fuels in 2015. The February 2016 auction price was $12.73/ton for allowances.
- The tax is estimated to have increased gasoline prices by 11 cents per gallon and diesel by 13 cents per gallon. Consumers probably did not notice because fuel prices were falling in response to lower crude prices.
- By 2015 quarterly auction revenues increased to more than $600 million per quarter and were expected to continue growing. However, the May 2016 auction generated only 2 percent of expected revenues. Analysts believe the revenue drop is due to there being more allowances for sale than there are buyers.
- The law requires revenues be spent helping get California to its 2020 emission reduction targets. Impacted communities and industries receive funds. One controversial beneficiary is the bullet train, which gets one quarter of all revenue. The train, of course, requires more funding than the most recent auction can provide. In addition, the train will not be completed in time to contribute to 2020 emissions reductions.