The Petroleum Industry May Want a Carbon Tax, but Biden and Congressional Republicans are Not Necessarily Fans

The new administration has made clear that its approach to reducing emissions will involve regulation, incentives and other government actions.

Gina McCarthy, the White House National Climate Advisor, speaks at the Queen theater on December 19, 2020 in Wilmington, DE. Credit: Joshua Roberts/Getty Images

Gina McCarthy, the White House National Climate Advisor, speaks at the Queen theater on December 19, 2020 in Wilmington, DE. Credit: Joshua Roberts/Getty Images

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The largest U.S. oil industry trade group is considering an endorsement of carbon taxes for the first time. But the biggest news may be how little that is likely to matter, as U.S. climate policy moves decisively in an entirely different direction.

The American Petroleum Institute confirmed that its member companies are trying to arrive at a consensus about carbon pricing—a position that almost certainly will involve trade-offs, including less government regulation, in exchange for the industry’s support of taxes or fees.

Economists have long favored making fossil fuels more expensive by putting a price on carbon as the most simple and cost-effective way to cut carbon dioxide emissions. Most big oil companies, including ExxonMobil, BP, Shell, and Chevron, endorse carbon pricing, although they have done little to push for it becoming policy. But API’s move for an industry-wide position comes just as the Biden administration has made clear that it is moving forward with regulation, investment in clean energy research and deployment and a broad suite of other government actions to hasten a transition from energy that releases planet-warming pollution.

Unsurprisingly, many view the API move as a cynical effort to stave off a looming green  onslaught. “The American Petroleum Institute is considering backing a carbon tax — but only to prevent ambitious regulation of greenhouse emissions,” tweeted the Center for Biological Diversity.

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The White House had no immediate comment on the news. But for now, anyway, there is little sign that the Biden administration is prepared to surrender regulatory authority on climate in exchange for a tax. Biden’s team includes avowed advocates of carbon taxes—most notably, Treasury Secretary Janet Yellen. But the unmistakable message from the White House is that it will pursue a government-led drive for action on climate change, not a market-driven approach where taxes or fees do most of the work of weaning the nation off fossil fuels. The administration clearly has been influenced by political and economic thinkers who argue that pricing carbon may be necessary for reaching the goal of net zero emissions, but it would be more politically savvy—and ultimately, more effective—to start with other action to mandate or incentivize cuts in greenhouse gas pollution.

“The problem with doing taxes or even a cap-and-trade program as your first step is that produces a lot of political resistance,” said Eric Biber, a professor at the University of California’s Berkeley Law school. “Basically, you’ve made an enemy of everyone who makes money off of carbon. And if you win, you’re probably only going to get a small tax.”

He and other experts agree that a small tax won’t drive the kind of investment or economic transformation needed to achieve Biden’s ambitious goal of putting the nation on a path to net-zero emissions by 2050, and his interim target of carbon pollution-free electricity by 2035. Most carbon tax proposals that have been introduced in Congress start at $15 to $50 per metric ton of carbon, while the Intergovernmental Panel on Climate Change has said that a price from $135 to $5,500 per metric ton by 2030 may be needed to hold warming below 1.5 degrees C (2.7 degrees Fahrenheit). That huge IPCC range reflects the fact that if no other government policies, like regulations, are put in place to drive down emissions, a higher carbon price will be needed.

Unicorns, Striped and Polka-Dotted

At a major energy industry conference last week, Gina McCarthy, Biden’s White House climate adviser, affirmed that her team is focused on developing a suite of policies, including regulation and government investment, to achieve the president’s climate goals.

“My job is really to establish an action plan that uses every bit of our agency expertise, every bit of our federal dollars, every bit of our policies and our regulations and standards to actually drive the kind of change that we need to have in the United States,” said McCarthy, in a virtual discussion session at CERAWeek by IHS Markit, an annual conclave of top oil, gas, and electricity executives. As part of the U.S. re-entry into the Paris climate accord, the administration plans to announce its 2030 carbon emissions reduction goal and its plans for achieving that target at an Earth Day summit of major emitting nations on April 22, McCarthy said.

At the same conference, ExxonMobil’s Chairman and CEO Darren Woods expressed support for some government mandates—in particular, rules to curb leaks of the potent warming gas methane—and said he’d like to see “stability” in regulations. And Woods ranked carbon pricing as a top policy goal for his company. 

“Getting a market price on carbon is going to be really important to make sure that we’re using market forces to most cost-effectively reduce CO2 emissions,” he said in response to a question about the government’s role in a lower carbon future. “I would also say that government should not pick winners and losers.”

That’s an industry mantra that roughly translates to: “Don’t subsidize alternative energy.” But on the same day that Woods was speaking, McCarthy and Biden’s economic advisers were examining precisely that in a virtual meeting with leaders of electric vehicle infrastructure companies. The session was about Biden’s pledge of federal government investment to build a national network of more than 500,000 EV charging stations—a policy that the American Petroleum Institute has said it will oppose. Since petroleum products currently fuel more than 90 percent of U.S. transportation, such government support literally puts money on electricity over oil as the highway fuel of the future.

As for carbon pricing policy, when McCarthy was asked about it directly by E&E News in February, she said, “There is nothing that is off the table and out of consideration.” But Treasury Secretary Yellen made clear that other policy initiatives will take precedence at her Jan. 19 confirmation hearing. When asked to name one step with which the administration could begin to tackle the climate crisis, Yellen quickly turned to Biden’s plan for government investment in U.S. infrastructure, including build-out of the EV charging network. 

Another key player on the Biden climate policy team is expected to be Jared Bernstein, one of three members of the White House Council of Economic Advisers, who has written about carbon pricing as both a policy imperative as well as a political quagmire. Bernstein, who served as an economic adviser to Biden during his vice presidency, wrote about the pitfalls of both carbon taxes and cap-and-trade in a 2015 opinion piece in The Washington Post, including the danger of setting a tax too low and the give-aways to industry that have become inevitable in the design of cap-and-trade systems. But Bernstein stressed that the biggest problem was that neither carbon taxes nor cap-and-trade was politically viable in Washington. To ask which approach was better, Bernstein wrote, was “a little bit like asking: Do you like your unicorns to be striped or polka-dotted?”

Republicans are Not On Board

One intriguing window into how Biden’s team is thinking about carbon taxes was a December tweet by Joseph Goffman, then director of Harvard Law’s energy and environmental law program and a member of Biden’s environmental transition team. Goffman is now principal deputy assistant administrator of the Environmental Protection Agency’s Office of Air and Radiation, helping to lead the effort to revive greenhouse gas regulations for power plants, vehicles and industry sectors like oil and gas.

“Do *not* allow your next thought to form about carbon taxes before listening to this brilliant discussion,” tweeted Goffman, linking to a podcast by his colleagues at Harvard. In it, Matto Mildenberger, a political scientist at University of California Santa Barbara and author of a recent book on climate politics, argues that there’s a built-in advantage for the fossil fuel industry in any policy designed around carbon taxing.

“It’s going to make consumer costs and policy costs extremely salient, extremely visible, and extremely prominent,” Mildenberger said. “And it’s going to take all the benefits and background them, make them sort of politically obscure, put them into the future, and sort of hide them. Most people would say that that’s a pretty bad way to design a policy, particularly a policy that might transform our economy.”

In the view of Mildenberger and others who’ve studied climate politics around the world, subsidies, regulation, and other policies that provide more immediate and visible benefits—like jobs creation—are a better way to jump-start climate policy, even if they cost more in the short run. That’s because they stimulate investment to help lower the cost of alternative energy, and at the same time help broaden political support for stronger climate policy. New actors with real investments they want to protect and advance will want more aggressive action, and politicians will respond.

Biber, at Berkeley Law, said the most obvious example of that in U.S. politics is the bipartisan support on Capitol Hill for ethanol (although he believes that subsidies for corn-based fuel have been of questionable benefit to the climate). Biber said the dynamic also can be seen in Republican support for renewable energy tax credits and tax credits for carbon capture and storage, because of the constituencies who support those policies in Midwestern wind energy states, and in Wyoming, home to one of the world’s largest carbon capture plants.

There’s no such natural constituency for a carbon tax. In fact, before the Senate passed a budget resolution to fast-track Biden’s Covid relief package on Feb. 5, every one of the Senate’s 50 Republicans voted in favor of an amendment that would have prohibited a federal carbon tax. (The amendment, sponsored by Senator John Hoeven of North Dakota, failed.)

That solid Republican opposition reveals that the chief selling point of a carbon tax—its appeal to free-market conservatives—falls flat in the current U.S. political landscape, where GOP opposition to taxes has become dogma. The Citizens Climate Lobby, a group that has been devoted to forging a bipartisan consensus around a carbon tax, could only get one Republican—Rep. Francis Rooney of Florida—to sign on to its signature legislation in the last Congress, and Rooney is now retired. 

Charles Komanoff, co-founder and director of the New York-based Carbon Tax Center, said the idea of a carbon tax “is really kind of orphaned right now.”

He predicted that Democrats will focus on other tools for reducing emissions, such as vehicle and energy efficiency standards, until after the 2022 elections. House Democrats introduced such a measure, the CLEAN Future Act, last week. “All those things that Biden is trying to do to make every lever of government bend towards decarbonisation—I am all in on that as downpayments, as real progress,” Komanoff added. 

Both Right and Left See the Ground Shifting

If nothing else, API’s potential positioning on carbon taxes does show that the political ground is shifting on climate change. It follows a move by the big business lobby, the U.S. Chamber of Commerce, to adopt a position for the first time in favor of “a market-based approach” to speed greenhouse gas reductions throughout the economy. 

API’s thinking on the issue was welcomed by Alex Flint, head of the Alliance for Market Solutions, a four-year-old group of conservatives who are pushing for Republicans to acknowledge climate and get on board with policies such as a revenue-neutral carbon tax in lieu of regulations. They argue that a lack of engagement on climate is one reason the GOP risks losing key voting blocs in future elections, especially those voters most likely to swing between parties, including young voters and college-educated women.

“The time is ripe for API to have a clear position on climate and to be able to speak on behalf of its members about it,” Flint said in an interview.

It remains to be seen whether advocacy by API, the U.S. Chamber of Commerce, and others in the establishment business community will be enough to win any Republican support for a carbon tax in Congress. In theory, it could be considered in a budget reconciliation measure later in the spring. 

“If reports are correct, we’re pleased to see API’s recognition that an economy-wide carbon price is the best mechanism to begin addressing climate change,” said Kyle Kammien, senior business relations representative for the Citizens Climate Lobby. However, CCL, which has citizen lobbyists in all 435 Congressional districts, supports a robust tax that would rebate all revenue back to households in order to offset higher energy costs, and would not bargain away key federal government policy tools. Kammien said the group is looking forward to seeing further policy details from API, but added, “Regardless, their new position should send a clear signal to Congress that a carbon price is a durable, bipartisan climate solution that is good for people, business, and the planet.”

Joseph Majkut, director of climate policy for the conservative Niskanen Center, which advocates carbon pricing, says his discussions on Capitol Hill show a growing number of members of Congress want to see a constructive, bipartisan conversation on climate policy.

“It ends up being a very interesting time where tectonic plates seem to be shifting, both on the left and on the right, in regards to climate, and now our hope is that the merits of a carbon price will help bridge some of these new gaps,” he said.

“You know, a lot of the things that we’ve seen happen over the last three months were like things that were dream-board material a few years ago,” Makjut said, referring to the recent climate steps announced by industry and the trade associations. “Further on down the dream board is a substantial number of Republicans supporting meaningful carbon pricing.”

Nicholas Kusnetz contributed reporting.