Carbon Tax Plans: How They Compare and Why Oil Giants Support One of Them

Two plans gaining traction would both put a price on fossil fuel pollution and send revenue back to taxpayers as dividends. Only one has big oil companies on board.

Highway and industry. Credit: Kena Betancur/VIEWpress/Corbis via Getty Images

There are significant differences between the carbon tax proposal backed by Big Oil and the approaches backed by environmental activists, including whether the industry would be protected from climate lawsuits and other regulations. Credit: Kena Betancur/VIEWpress/Corbis via Getty Images

Not long ago, a carbon tax was the untouchable third rail of climate politics.

"We have done extensive polling on carbon tax. It all sucks," John Podesta, Hillary Clinton's campaign chairman, wrote to another adviser in a memorable January 2015 email from the Wikileaks stash.

But four years later, amid the political upheaval wrought by President Donald Trump, several carbon tax proposals are getting a serious look on Capitol Hill. Ironically, the president's rejection of climate science and his fossil fuel-focused agenda may have helped usher in an era when carbon taxation is politically thinkable.

One carbon fee-and-dividend plan has already been introduced in Congress and more are expected. Editorial pages and conservative pundits are talking about carbon taxes as a pragmatic way to achieve the goals of the Green New Deal. And the opinion polls look a lot different than the ones that caused Podesta to recoil.

A plurality of Americans—44 percent—say they support a policy to reduce greenhouse gas emissions by taxing carbon-based fuels, according to a poll conducted last November by the Energy Policy Institute at the University of Chicago and the Associated Press. (Only 29 percent said they were opposed, while 25 percent were neutral.) A survey of registered voters by the Yale Program on Climate Change Communication and George Mason University found that 58 percent said they would favor a Republican-proposed carbon tax that would return all revenue to households in the form of monthly rebate checks.

More and more states and local governments are jumping in with carbon pricing plans of their own to fill the climate leadership void that Trump has created. Energy companies face the prospect of 50 different regulatory approaches on greenhouse gases in the United States—a powerful incentive for them to seek one uniform, predictable, national approach. ExxonMobil and ConocoPhillips are among the oil companies backing a campaign to get their favored version of a carbon tax introduced in the Senate this year, one that would also protect them from other climate regulations and lawsuits.

There are significant differences between the carbon tax proposal backed by Big Oil and the approaches backed by environmental activists. And while carbon pricing could help put the U.S. on track to zero emissions by mid-century, experts warn that a poorly designed plan could be too weak to get the job done.

A close look at two economy-wide carbon tax proposals—the oil industry-backed plan, developed by former Republican Secretaries of State James Baker and George Shultz, and legislation backed by a grassroots environmental group, Citizens' Climate Lobby—highlights some of the key questions that policymakers will face as they weigh competing carbon tax plans.

How High a Carbon Tax?

Baker-Shultz proposal: Although its plan has not been formally introduced yet, the framework laid out by the Climate Leadership Council, a coalition of industry and environmental groups that support the Baker-Shultz proposal, would start a carbon tax at about $40 per ton, escalating by 2 to 5 percent annually, and reaching as high as $65 per ton by 2030.

Energy Innovation and Carbon Dividend Act: The bipartisan measure sponsored by Rep. Ted Deutch (D-Fla.) and Rep. Francis Rooney (R-Fla.) would levy a carbon tax beginning at $15 per ton, escalating by $10 annually, and reaching $115 a ton by 2030. That averages out to a 24 percent annual increase—higher than any other recent climate proposal.

Chart: 2 U.S. Carbon Tax Proposals Compared

Why it matters: Cutting carbon emissions rapidly and deeply will be costly but necessary if the world aims to keep the global temperature increase to no more than 1.5 degrees Celsius. No one knows how high the carbon price will have to be to meet that goal, but it will depend on the pace of technological advances and other policies to encourage investors and consumers to choose clean energy, said Noah Kaufman, an economist at Columbia University's Center on Global Energy Policy, who has studied the current carbon pricing proposals.

"The more complementary policies you have, the lower the carbon price you need," he said.

In a recent report on the challenge of the 1.5 degree Celsius goal, the Intergovernmental Panel on Climate Change closely studied the economic calculations of many peer-reviewed studies. It concluded that taxing emissions was part of the answer, but that a moderate tax couldn't solve the problem alone. Other policies, like energy efficiency standards and support for deployment of clean technology, are also needed. "There is no silver bullet for this deep decarbonization," the report said.

David Doniger, senior strategic director of the Climate and Clean Energy Program at the Natural Resources Defense Council, said the need for deep decarbonization is what guides his group's thinking about carbon tax proposals. "The atmosphere is a physical system that cares about the quantity of pollution, not an economic system that cares about price," he said. "We're looking for a limit to pollution, rather than price, even in a market-based system."

How Much Regulatory Rollback?

Baker-Shultz proposal: Streamlining regulations and curbing state authority over climate policy are among the goals of the industry-backed Americans for Carbon Dividends, the political action group backing the Baker-Shultz plan. Its managing director, Ryan Costello, says the group has not yet decided on how broad a regulatory rollback it would seek. Exxon, in backing the proposal, has said existing carbon regulations would be made "superfluous" by a carbon tax.

Energy Innovation and Carbon Dividend Act: The Deutch bill would pause the Environmental Protection Agency's regulation of greenhouse gas emissions under the Clean Air Act for 10 years. If national climate goals remain unmet at that point, EPA's authority under the Clean Air Act would be restored. (The Trump administration has proposed revoking and replacing the EPA regulations.) The bill would leave in place limits on emissions from vehicles, including California's authority to apply more stringent emission standards. The bill also specifies that it would not preempt or supersede any state law or regulation, protecting renewable energy and clean fuel standards, the Northeast's Regional Greenhouse Gas Initiative and other steps that states have taken on climate change.

Why it matters: Any rollback of EPA's authority to regulate greenhouse gases would mean the demise of the Obama administration's dormant Clean Power Plan, but economists agree that either of the carbon tax plans would drive down the use of coal for electricity, cutting emissions in that sector just as quickly as President Barack Obama's regulatory approach.

But other sources of emissions are more difficult to tackle with a tax—especially those from transportation, where petroleum is the primary fuel. A $50 per ton carbon tax, for example, would translate to 44 cents a gallon of gasoline, not enough to drive large changes in behavior when there are few alternatives available to drivers.

The research firm Rhodium Group, in a report for Columbia University's Center on Global Energy Policy, found that petroleum consumption would barely be affected under carbon tax levels that drive coal consumption down sharply. Although a carbon tax that starts at $50 per ton would certainly be more effective than current policy and would help the U.S. meet its short-term goal under the Paris accord, the benefits would wear thin in the long-run. Instead of trending toward zero by mid-century, carbon emissions would flatten out after 2030, the Rhodium analysts found. "Unless there is a dramatic acceleration in the decarbonization of buildings, transportation, and industry, it may fall far short of delivering long-term U.S. emission goals," they wrote.

Chart: What Impact Would a $50 Carbon Price Have on U.S. Emissions?

That's why many environmentalists are wary of too broad a regulatory rollback.

"We should be adding tools to the tool box" of laws and policies to address climate change, Doniger said. "We shouldn't be preempting or removing any of the existing tools. You could end up with a watered-down token carbon tax and gutting the existing tools, putting us in worse shape than we were before."

But elimination of some regulations likely would be key to gaining Republican and industry support.

Should Industry Get Protection?

Baker-Shultz proposal: Part of the package that is especially important to the proposal's industry supporters is curbing lawsuits against energy companies involving climate change—"once and for all, putting a can on that ... so that we have a comprehensive climate solution," said Costello.

Energy Innovation and Carbon Dividend Act: The right to sue would be protected by the Deutch bill's provision that it would not preempt or supersede any state law or regulation.

Why it matters: The oil and gas industry currently is embroiled in legal disputes brought by states, cities and children over the industry's role in global warming. The companies have won some opening rounds of this litigation, but that doesn't diminish the liability peril they face.

"They are in the position where they have to win everything," said David Bookbinder, chief counsel of the libertarian think tank Niskanen Center, who is representing Boulder and other local governments in Colorado that are suing oil companies for climate damages, "Because as soon as they lose one case, things are going to go very bad for them very quickly." Any defeat for fossil fuel companies would trigger more lawsuits against them.

Big Oil would not be the first industry to seek protection from lawsuits in a federal law that has a larger public health and welfare purpose. Food and drug industry companies routinely argue that federal food and drug safety laws protect them from lawsuits—courts sometimes have agreed and sometimes have disagreed. The tobacco industry in the 1960s lobbied for "preemption" language in the laws that required them to put a Surgeon General's warning on their products and banned them from TV advertising. Those laws helped tobacco companies fend off lawsuits for the next 25 years.

Costello argues that the transition to cleaner energy will be stymied if the industry is tied up in lawsuits. "We're asking energy companies moving forward to pay a price, and frankly start to make substantial capital investments in their existing fleet, as well as in new technologies and research and development," he said. "The more contingent liabilities you have to list to your shareholders, the less you're going to be able to invest in 'R and D' to really drive and accelerate lower- or zero-carbon technologies."

But James May, co-director of the Environmental Law Center at Widener University, who has written widely on climate damages cases, argues that fossil fuel companies already have access to ample legal defenses. "There are actions and inactions that haven't yet seen the light of day because the oil industry has been fighting the ability of people in towns, cities and states to sue them on every single ground possible," he said. "The oil industry does not believe they should ever have to walk into a courtroom to defend themselves on climate change." But they already have protections in corporate law, Constitutional law, various statutes, "and of course, the power of the purse," May said. "I think that's enough."

Bookbinder said he would not be averse to some litigation protection for the energy companies being included in a carbon tax program—if the legislation addresses the costs communities face due to climate change.

"If Congress were to say 'we will give immunity, but we will use all of this money to address adaptation and public infrastructure—we will fund the things that otherwise state and local governments would have to fund'—that would make sense from a policy perspective," Bookbinder said. "As far as I know, no one's [carbon tax] bill has ever come close to talking about using the money for climate adaptation. It's an afterthought in people's climate policy thinking."

Where Should the Money Go?  

Both the Baker-Shultz proposal and the Energy Innovation and Carbon Dividend Act would return all of the tax revenue to American households in the form of monthly rebate checks. For most households, the rebates would exceed the increased costs they would pay for fuel.

Not all carbon tax proposals have taken this approach, however.

Last fall, Washington state voters rejected a carbon tax that would have spent the revenue on clean energy and water initiatives and adaptation. In France, massive protests forced President Emmanuel Macron to back down from an environmental fuel tax that would have used all the revenue to reduce the national budget deficit.

"One lesson from Washington State and France is that proceeds must be returned to the people in order to be politically viable and popular," argued Carlton Carroll, a spokesman for Americans for Carbon Dividends, the political action group backing the Baker-Shultz plan. The rebate "is a big reason why it is so popular with voters from both parties," he said. In fact, the Yale-GMU survey found that Trump supporters favor a carbon dividend more strongly than any other political grouping, with 63 percent in favor.

But making the carbon tax revenue neutral would rule out using any of the money for projects to hasten a clean energy transition—the kind of strong government action that the IPCC said will be needed.

There is some evidence that the public would support using carbon tax revenue to help tackle the climate crisis. In the AP survey, the number who supported a carbon tax grew from 44 percent to 66 percent when asked how they would feel if the proceeds were used for environmental restoration. More than half would support a carbon tax if the funds were used toward research and development for renewable energy programs and public transportation.

Former Rep. Carlos Curbelo, a Republican who represented the heavily Democratic southern tip of Florida and lost his congressional seat in the November election, thinks that policy makers should not rule out potentially politically popular ways of spending the revenue of a carbon tax that are in sync with the purpose of addressing climate change. As an example, he notes Miami residents' vote in 2017 to tax themselves to fund $200 billion in government spending to help quell tidal flooding, among other projects. In his final weeks in office, Curbelo introduced a carbon tax bill that would have devoted the revenue to infrastructure. He believed there was bipartisan support (the need to address infrastructure was just about the only thing Trump and Democratic candidate Hillary Clinton agreed on in 2016), and there were strong stakeholders—local governments, builders, workers—around whom he could build a coalition.

"I believe the key to passing this kind of revenue-generating legislation is for people to be able to enthusiastically embrace the expenditure side," Curbelo said. "We know that they're not going to enthusiastically embrace the tax side. As long as the investment is perceived to be valuable and is going to be executed with integrity, I think that makes carbon pricing legislation viable. The expenditure side—I think that's where the magic happens."

Correction: An earlier version of this story incorrectly listed Rep. Brian Fitzpatrick (R-Pa.) as a co-sponsor of the current Energy Innovation and Carbon Dividend Act. He co-sponsored a version of the same bill in November 2018 but did not sign on as a sponsor this year.

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