Regulating Carbon in the U.S.
The global effort to address climate change began in earnest with the negotiation of the United Nations Framework Convention on Climate Change (UNFCCC) at the Rio Earth Summit in 1992. The following year, the Clinton Administration proposed a tax on energy consumption, but by excluding energy produced from wind, solar and geothermal sources, the proposal resembled a carbon tax. President Clinton’s “BTU Tax” legislation passed the House but failed in the Senate. Some moderate House Democrats blamed their subsequent loss in the 1994 midterm elections on their BTU tax vote, and the experience left many politicians allergic to energy or environmental taxes of any kind.
The Kyoto Protocol (1997) included the first national emissions reduction commitments, but it was not ratified by the U.S. Senate due to concerns about the lack of developing country commitments and the potential economic effects of domestic emissions reductions.
As concern about climate change grew in the early 2000s, elected officials increasingly looked to cap-and-trade systems, a form of carbon pricing that had been pioneered by the President George H.W. Bush administration and used successfully by the EPA to reduce other pollutants, as the preferred strategy for reducing GHG emissions. A number of cap-and-trade bills were introduced in the United States Congress, culminating in the American Clean Energy and Security Act, which passed the House in 2009. Yet that legislation failed in the Senate, and once again, a number of moderate House Democrats lost their seats in the subsequent midterm election and Democrats lost their House majority. The U.S. Congress has not seriously considered carbon pricing legislation since that time.
However, U.S. states have made progress implementing carbon pricing policies. Nine states in the Northeast participate in the Regional Greenhouse Gas Initiative (RGGI), a cap-and-trade program covering the power sector that was first implemented in 2009. The California Global Warming Solutions Act of 2006 included an economy-wide cap-and-trade program for the state, which launched in 2013.
At the federal level under the Obama Administration, the United States signed the Copenhagen Accord (2009) and the Paris Climate Accord (2015), committing to reducing U.S. emissions 26-28 percent below 2005 levels by 2025, and outlining a vision for emissions cuts of at least 80 percent by 2050. In 2016, the U.S. also agreed to the Kigali Amendment to the Montreal Protocol, which will phase down the global use of hydrofluorocarbons (HFCs), a highly potent GHG.
Following the defeat of legislative action, and in some cases as legally required by current statutes following the Environmental Protection Agency’s finding that GHG emissions threaten public health, President Obama sought to reduce GHG emissions using existing executive authorities under the Clean Air Act, the Energy Independence and Security Act, and other statutes. Some of the more significant regulations promulgated as part of the Obama “Climate Action Plan” included carbon dioxide emission standards for new and existing power plants, methane emission standards for oil and gas production, and GHG standards for both cars and trucks.
Indeed, the United States has made important progress in reducing GHG emissions. Energy-related CO2 emissions in 2016 were 14 percent below 2005 levels, the lowest point in nearly 25 years, and economy-wide GHG emissions were 11.5 percent below 2005 levels in 2015, and likely declined further in 2016. A range of market and policy factors were responsible for this decline, including the decreasing costs of energy produced from both natural gas and renewables. If fully implemented, the Obama climate regulations would have resulted in additional GHG emissions reductions, but even under optimistic assumptions, would have still left the United States short of its Paris Agreement commitments for 2025 and beyond.
The Trump Administration has thus far taken steps in the opposite direction, and is in the process of rolling back various regulations and restrictions put in place by the Obama Administration. In addition, President Trump initiated the process of withdrawing the United States from the Paris Climate Accord.
In recent years, the idea of a carbon tax in the United States has begun to attract attention from outside the academic community and across the political spectrum, including from prominent conservative politicians. In 2012, former South Carolina Representative Bob Inglis launched the Energy and Enterprise Initiative (now RepulicEn) to promote free enterprise solutions to climate change, including a federal carbon tax. In June 2014, former Treasury Secretary and Goldman Sachs CEO Hank Paulson published an op-ed in The New York Times calling for a carbon tax. Republican statesmen George Shultz and James Baker III did the same in a Wall Street Journal op-ed in February, 2017. A few months later in May, a group of conservative business leaders and former government officials launched the Alliance for Market Solutions, which also advocates for a carbon tax. And in June 2017, the Climate Leadership Council announced a group of founding members, including corporations like General Motors and Exxon, and prominent business leaders and senior Republicans, that support a federal carbon tax. In September 2017, Senator Lindsey Graham (R-SC) expressed his support for a price on carbon.
On the other side of the aisle, Senator Bernie Sanders made a carbon tax a centerpiece of his 2016 Presidential campaign, and the 2016 Democratic Party platform stated that “carbon dioxide, methane, and other greenhouse gases should be priced to reflect their negative externalities.” Various Democratic senators and congressmen have proposed carbon tax bills in recent years. In 2017, bills were raised by Senators Whitehouse and Schatz in July and by Representative Larson in November.
Meanwhile, over forty countries and twenty-five sub-national jurisdictions around the world are putting some form of price on carbon, including the United States’ largest trading partners. In particular, all Canadian provinces and territories are required to a put a price on carbon starting in 2018, the European Union is strengthening its long-existing carbon pricing policy, and China is developing a national GHG emissions trading system.
Carbon tax supporters hoped for an opening for Congressional action in 2017. After all, the Trump Administration and Congressional Republicans needed to identify revenue sources to pay for tax cuts, and membership in the House Climate Solutions Caucus grew to over 30 Republican members. However, a carbon tax never was seriously considered as part of the December 2017 tax legislation, and President Trump has not indicated that he will reconsider his stated opposition to a carbon tax.
Still, if the wave of increased support for carbon pricing policies in the United States and abroad continues, the political landscape could rapidly change, and a price on carbon may receive serious consideration from U.S. federal policymakers. CGEP’s research will primarily focus on a carbon tax, as opposed to other forms of carbon pricing such as cap-and-trade, because prominent policymakers, businesses and thought leaders on both sides on the political spectrum are calling for a federal carbon tax.
U.S. emissions have fallen in recent years due in large part to market forces and technological progress, but, to achieve the deep emissions reductions commensurate with stabilizing global temperatures this century, and to mitigate the effects of climate change on human health, the economy, national security and the environment, a strong policy response is also needed.
A carbon tax continues to draw significant attention and support, and most economists consider a carbon tax to be an attractive centerpiece of a national strategy to reduce GHG emissions for reasons including:
A carbon tax encourages emissions reductions wherever and however they can be achieved at the lowest cost, without requiring prior knowledge of where these cost-effective opportunities will arise.
A carbon tax raises large sources of government revenue that can be used in productive ways, including to reduce the deficit, lower other taxes, invest in clean energy, and compensate those adversely affected by increased energy prices, among other possibilities.
A carbon tax encourages private sector innovation in clean energy and other low carbon technologies.
When Congress next seriously considers climate legislation or needs a large new source of revenue, the time may be ripe for a carbon tax to enter the discussion. Given the speed at which legislative windows open and close, comprehensive, rigorous, and data-driven policy analysis needs to be prepared in advance, so that when the time comes, policymakers have the necessary tools to understand the range of important decisions associated with the design of carbon tax policy and their implications on the U.S. energy system, environment and economy.