Almost ten years has passed since the first attempt to pass a national emissions trading system in the United States. In 2009, the American Clean Energy and Security Act (also known as the Waxman-Markey bill) passed the House 219 – 212, but was ultimately not considered in the Senate. Now, after a period of relative quiescence, the last few months have seen multiple legislators introducing bills that push for carbon pricing legislation at both state and national levels. With some differences among the various bills, each nevertheless calls for a national carbon pricing system to lower global warming-causing emissions.

The two basic proposed options are either a carbon tax or a cap-and-trade (or cap-and-dividend) system. Both are market-based strategies designed to address the negative environmental and public health impacts associated with burning fossil fuels. These harmful effects are referred to as negative externalities by economists, since the impacts of the pollution are not reflected in the cost of fossil fuel use (they are not internalized).

Both proposals aim at reducing greenhouse gas (GHG) emissions in order to mitigate the harmful effects of climate change, but do so using different mechanisms. A carbon tax, as the word suggests, is a fee per ton of carbon dioxide emitted imposed by the government on the owners of the emission sources. Additionally, the tax on emissions generally increases over time. In this way, the industries subject to the tax are incentivized to continually seek to cut their emissions.

Cap-and-trade measures consist of two parts. The “cap” is a limit on greenhouse gases emissions set by the government across a given industry or the entire economy. At the same time, the government issues allowances permitting regulated companies to emit a certain amount of GHGs. The emission allowances are then auctioned or allocated to regulated entities. The “trade” enables firms to buy and exchange these permits among themselves. The cap-and-dividend system uses a cap-and-trade mechanism, but directs the proceeds from the auction of permits towards citizens in the form of a dividend.

Early in 2018, two bills on carbon pricing were re-introduced in the Senate and the House. The first is the Healthy Climate and Family Security Act (H. R. 4889 and S.2352), a bicameral effort from Representative Beyer (D-VA) and Senator Van Hollen (D-MD), calling for a national cap-and-dividend. The second bill, the American Opportunity Carbon Fee Act (S. 2368 and H.R. 4926), would implement a carbon tax and was introduced by Senators Whitehouse (D-RI) and Schatz (D-HI), and Congressmen Blumenauer (D-OR) and Cicilline (D-RI).

Even though the bills employ different strategies to tackle GHGs, the solutions they put forward share the same market-based nature. The American Opportunity Carbon Fee Act sets a fee starting at $50 per metric ton of emissions in 2019 to increase annually by two percent, while the Healthy Climate and Family Security Act sets a declining cap for carbon dioxide emissions leading to a reduction of 80 percent below 2005 levels by 2050. As a cap-and-dividend measure, the Healthy Climate Act sees the returns originating from the auction of permits going in equal amounts to every U.S. resident with a valid social security number. In a slightly different way, the Carbon Fee Act requires that the revenue generated from the tax be used to give individuals an annual $800 refundable tax credit, meaning that the carbon tax revenue would be subtracted from the amount U.S. citizens pay for taxes.

Both bills envision some kind of return, or benefit for U.S. residents and taxpayers from the collection of pollution-related fees. The proposers of these bills stressed the importance of the market approach to entice both energy producers and consumers. Senator Schatz, co-sponsor of the American Opportunity Carbon Fee Act, commented that “market-based solutions have support across the ideological spectrum,” and Senator Whitehouse pointed out that a carbon fee is a solution most economists agree is necessary in order to counter GHG emissions.

Earlier in 2017 another similar carbon pricing bill, the America Wins Act, was introduced by Climate Solutions Caucus member Rep. John Larson (D-CT) and co-sponsored by 16 other Democrats. Very much like the American Opportunity Carbon Fee Act, the bill envisions an initial fee of $49 per ton of carbon emissions in 2019 that then rises yearly by two percent over inflation. But instead of equally distributing the revenue from the tax to U.S. residents, Larson’s bill calls for the creation of a “Build America Trust Fund.” In this way, the generated earnings would go toward a variety of projects, including infrastructure investments and direct monthly payments to targeted communities and low-income American families.

While there is still disagreement among many stakeholders about what to do with any revenue collected from carbon taxes, the idea has broad appeal across the political spectrum. This market-based approach is not only backed by economists, but it has been gaining momentum within a broad spectrum of public interest groups. For instance, the Citizens’ Climate Lobby has come up with its own proposal, the Carbon Fee and Dividend Policy, which, similarly to the Healthy Climate Act, calls for equal per-person monthly dividend payments based on the carbon fees collected.

Tea-party Republican and former Congressman Bob Inglis (R-NC) is pushing for a “revenue neutral” carbon tax. His plan, similarly to the American Opportunity Carbon Fee Act, calls for 100 percent of the money collected through the carbon tax be matched dollar for dollar with corresponding cuts on other taxes. In other words, this is a tax-shifting approach.

Carbon taxes have also been criticized from both sides of the aisle. Some environmental organizations are worried that carbon taxes may provide additional support for doing away with other environmental regulations, while others have pointed to the difficulties faced by the European Union in promulgating a cap-and-trade system that provides a sufficient incentive to meaningfully lower emissions.

Several conservative groups have also opposed such proposals, with groups raising concern regarding the possible negative impact on the U.S. economy. Tim Huelskamp, president of the free-market advocate and climate action opponent Heartland Institute, said that “a carbon tax will jack up our utility bills and harm America’s competitive place in the world.”

Despite these criticisms, the market-based approach to counter GHG emissions is gaining momentum as it seems to represent a common-ground, bipartisan solution that could bring together both sides of the political spectrum on a very pressing issue.

 

Author: Pietro Morabito