Clean Power Plan vs. Carbon Fee and Dividend Laser Talk

How does the Carbon Fee and Dividend compare with the Clean Power Plan?

The most fundamental difference between Carbon Fee and Dividend (CF&D) and the Clean Power Plan (CPP) is that Carbon Fee and Dividend would be implemented by Congress, whereas the Clean Power Plan is being implemented by Executive direction under legal precedent set by Massachusetts v. EPA in 2007. Thus, when passed Carbon Fee and Dividend would be less prone to change by either the courts or a new president.

Second, Carbon Fee and Dividend is both more mindful of the economy and more ambitious in terms of emissions reductions. It would address economy-wide emissions, whereas the Clean Power Plan is limited to only a portion of the economy: the power sector, accounting for about 40% of emissions. By the EPA’s own accounting, each state could achieve the Clean Power Plan 2030 emissions reductions targets with a carbon tax of between $0-$39 (Figure 1). By contrast, Carbon Fee and Dividend reaches a uniform nationwide $115 per ton by 2030 if implemented in 2020, meaning every single state would be in compliance with the Clean Power Plan without having to lift a finger.

Finally, and perhaps most importantly, Carbon Fee and Dividend includes a border adjustment that removes the incentive for businesses to relocate to countries where they can pollute more. Such a border adjustment is not possible with the Clean Power Plan.

Figure 1

cpp picture 1
Figure 1: EPA estimates for the “shadow price” a state must place on CO2 emissions from the power sector to be in compliance with the Clean Power Plan by 2030 assuming Mass-Based compliance.5

Figure 2

Clean Power Plan's shadow price
Figure 2: EPA estimates for the “shadow price” a state must place on CO2 emissions from the power sector to be in compliance with the Clean Power Plan by 2030 assuming rate-based compliance (right).5

How does the Carbon Fee and Dividend compare with the Clean Power Plan?

In his 2014 State of the Union Address, President Obama said: “I urge this Congress to pursue a bipartisan, market-based solution to climate change.” Congress has failed to act, so the President had no choice but to use a regulatory approach, the result of which is the Clean Power Plan (CPP).1,2

Regulations like those in the Clean Power Plan are dictated by the Executive branch under existing law, as opposed to Congressional action which would establish new law. The Clean Power Plan covers only the power generation sector, which accounts for about 40% of U.S. CO2 emissions. The Clean Power Plan requires each State to develop a plan (called a State Implementation Plan, or SIP) to meet power plant emissions targets under complex constraints imposed by the EPA. If a State fails to do so, the EPA will impose its own plan (a Federal Implementation Plan, or FIP). Overall, the Clean Power Plan is intended to reduce CO2 emissions from the electricity sector by 32% below 2005 levels, and to do this within 14 years, by 2030.

In contrast, Carbon Fee and Dividend is a uniform national policy that affects all energy sectors, does not require any costly and contentious legislative battles within the States, does not dictate what kinds of technical solutions businesses and consumers can or cannot employ to reduce emissions, and would reduce emissions far more than the Clean Power Plan.

The graph below compares emissions reduction with the Clean Power Plan and with the Carbon Fee and Dividend, and that is just for the electricity sector, which is the only sector the Clean Power Plan touches. In 14 years, the Clean Power Plan would lower emissions by 32% compared to doing nothing, but Carbon Fee and Dividend would lower them in the same period by nearly 90%.

Comparing goals for the Clean Power Plan (red) with the baseline case, i.e. $0 carbon tax.

Comparing power sector emissions forecasts for ‘business as usual’ (blue), the Clean Power Plan (red) and CCL’s CF&D (yellow) according to REMI. These results are for the electricity sector only and are a subset of the results reported in the REMI study.3

The greater effectiveness of the Carbon Fee and Dividend can be seen in the so-called shadow prices of carbon for the various States. A shadow price is the equivalent carbon fee level that would result in a State meeting its obligation under the Clean Power Plan. The maps below show what these carbon fee equivalents would be for two different standards – mass-based and rate-based – that are available to the States for CPP compliance.

The EPA’s shadow prices vary from $0 to $39 per ton by 2030.4,5 By contrast, CCL’s carbon fee reaches a uniform nationwide $115 per ton by 2030 if implemented in 2020. The takeaway is: even if CCL’s policy does not get enacted until 2025, within four years all states would be in compliance without having to lift a finger.

Figure 1

cpp picture 1
Figure 1: EPA estimates for the “shadow price” a state must place on CO2 emissions from the power sector to be in compliance with the Clean Power Plan by 2030 assuming Mass-Based compliance.5

Figure 2

Clean Power Plan's shadow price
Figure 2: EPA estimates for the “shadow price” a state must place on CO2 emissions from the power sector to be in compliance with the Clean Power Plan by 2030 assuming rate-based compliance (right).5

Besides far deeper and faster emissions reductions, the Carbon Fee and Dividend offers many other advantages over the Clean Power Plan. Here is a summary of those advantages.

  • The Carbon Fee and Dividend is much simpler and cheaper to set up and administer.
  • The flow of money through the Carbon Fee and Dividend mechanism is absolutely transparent.
  • The Carbon Fee and Dividend covers all CO2 emissions from every emission source in every part of the economy without having to set targets for individual emission sources like power plants.
  • There is no volatility in the cost of the carbon fee, giving businesses the year-by-year predictability they cherish.
  • As a national policy, the Carbon Fee and Dividend can incorporate a border adjustment to prevent cross-border leakage of fossil fuels … and jobs. The CPP cannot do this.
  • Legislative action like Carbon Fee and Dividend cannot be reversed by executive action of a future President.
  • Being an act of Congress, the Carbon Fee and Dividend is also less vulnerable to court challenges.
  • Unlike the Clean Power Plan, the Carbon Fee and Dividend will not impose a burden on the states to engage in costly internal political battles over whether and how to comply.
  1. “Clean Power Plan.” From Wikipedia. https://en.wikipedia.org/wiki/Clean_Power_Plan. Consulted 22 Feb 2016.
  2. “Clean Power Plan Proposed Rule”. United States Environmental Protection Agency. March 2, 2015. http://www2.epa.gov/carbon-pollution-standards/clean-power-plan-proposed-rule.
  3. “REMI Report”. June 9, 2014. Citizens’ Climate Lobby. https://citizensclimatelobby.org/remi-report/
  4. http://www.rstreet.org/wp-content/uploads/2015/08/RSTREETSHORT13.pdf
  5. Michael Wara, Associate Professor and Justin M. Roach, Jr. Faculty Scholar Stanford Law School

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