Can a Carbon Tax Calm the ‘War On Coal?’
By Ryan Gerlach
Electric power generation accounts for roughly a third of U.S. greenhouse gas emissions. Consequently, on June 2, the EPA is expected to announce proposed rules to regulate carbon dioxide emissions from electricity generating power plants. This is a huge and significant move and represents a key pillar of the Obama Administration’s push to address climate change.
The problem is this type of regulation is a mediocre way to address global warming. Regulations of this type are cumbersome and expensive, hard to implement, and difficult to enforce. Moreover, the process of designing sector-specific regulations, comprising countless hours of negotiation, inquiry into technical feasibility, and review of public comment, will have to be repeated over and over again as the EPA sets out to regulate other sectors, such as refineries and manufacturing facilities.
In general, regulatory levers are an expensive way to get what you want. Vehicle emission standards, for example, have achieved carbon reductions at the not-very-impressive cost of somewhere between $300-$1200 per ton, depending on whom you ask. Similarly, power sector regulations will incur significant costs associated with implementation and oversight. Functionally, they will place the majority of the emissions reduction burden on a single industry – coal – and those states whose economies depend on it, leading some to accuse Obama and the EPA of waging a “war on coal.”
A better way is to simply assess a tax on carbon dioxide. If you want less pollution, make it cost more.
Fortunately, freshman congressman John Delaney, a Representative from Maryland, announced recently he would propose legislation presenting such an alternative. If passed, his bill would give states the option to implement a carbon tax, thereby preempting the EPA regulations.
It is very possible the Administration would prefer this route as well, but given the pervasive dysfunction in Washington DC, concluded the regulatory authority of the Clean Air Act provides a better route. Nonetheless, if Mr. Delaney’s bill moves forward – that “if” is admittedly huge – it presents a vastly superior option.
On the other hand, a carbon tax, if priced and implemented correctly, can achieve the same or better emission reductions as top-down regulations while avoiding the vast majority of significant criticisms. Economists across the political spectrum agree on this. The Brookings Institute, for example, compared an economy-wide carbon tax to a power sector only approach and found carbon taxes produce greater emission reductions at substantially lower cost.
This is because a carbon tax possesses a key attribute near and dear to the economist heart: efficiency. It is not prescriptive and does not mandate specific solutions. Rather, carbon taxes let the market, not congress or the EPA, determine the best ways to reduce emissions. For example, the Brookings study found the burden of reduction in a power sector approach is born almost exclusively by the coal industry, whereas a tax is spread throughout the economy and across industries. In a competitive economy, it becomes incumbent on every producer to find less carbon-intensive pathways to bring his or her wares to market. Instead of placing the sole burden of emission reductions on a single sector, a carbon tax effectively crowd-sources the challenge throughout the entire economy. You might think of it as a Manhattan Project meets Wikipedia style push for clean energy.
Moreover, pricing carbon needn’t result in onerous new costs for the economy. The revenue raised by the tax could be used to offset existing obligations, going towards some combination of deficit reduction; cuts to payroll, income, or corporate taxes; or, as in the case of British Columbia, simply giving people a check at the end of the year which helps to avoid regressive impacts on poor and/or retired populations. These methods keep the tax revenue neutral, making it more of a reshuffling rather than a new imposition.
The debates on climate action are frustrating, though not altogether surprising. The lead up to the coming EPA regulations have led critics to claim the White House is imposing a costly government intervention, an example of a federal bureaucracy picking winners and losers, and, moreover, waging a “war on coal.” Meanwhile, environmentalists point out that the long-term costs of inaction are far higher than the price of regulation and dismiss criticism by claiming the opposition is simply coming from vested fossil fuel interests looking to protect their pocket books.
There are truths in both arguments. The science is loud and clear that addressing climate change and reducing emissions is a global imperative. But it’s also true that regulations impose real costs and can be inefficient instruments in achieving their intended outcomes. How you choose to weight the relative importance of these consequences is likely an indicator of your personal politics.
The beauty of a carbon tax is that it requires so much less in the way of compromise. Even if you don’t agree that climate change is the imminent threat that scientists tells us it is, it still stands that our taxes would be better assessed on pollution rather than on prosperity. And if you’re concerned that preempting EPA mandates removes the teeth from prevailing regulation, rest assured people and businesses respond to incentives; it’s the outcome that matters. A carbon tax reduces emissions, but forgoes the need for costly and burdensome regulation.
To this point, the idea of a national carbon tax has languished politically. It has been described as “the right policy, with the wrong politics.” Here’s hoping the forthcoming EPA regulations can, if nothing else, tilt the decision making calculus and let the politics catch up.
Good luck, Rep. Delaney.
Ryan Gerlach is a Stakeholder Engagement Analyst at Future 500, a global nonprofit specializing in stakeholder engagement and building bridges between parties at odds to advance systemic solutions to urgent sustainability challenges.