To comply with the Clean Power Plan, states should tax carbon

Adele Morris and Evan Weber

Two years ago, with meaningful legislation to reduce climate-disrupting greenhouse gas pollution stalled, President Obama instructed the Environmental Protection Agency (EPA) to begin regulating emissions from our nation’s largest source: electric power plants. Under its Clean Air Act authority, the EPA recently released a final rule that sets state-specific emissions limits for 2030 and outlines ways states can achieve their targets. One of these options, as EPA has now clarified, is “a fee for CO2 emissions from affected [Electricity Generating Units]”—or more simply, a carbon tax. For many states, a carbon tax could be the most easily administrable and cost-effective compliance approach, and they should start taking the idea seriously.

Since the release of the final rule, much attention has been given to how states can trade emissions allowances across borders to reach goals jointly, allowing more abatement where costs are lowest. The requirements for these complicated schemes occupy hundreds of pages of the rule, while EPA devotes only one sentence (in the preamble) to the potentially equally cost-minimizing carbon tax approach. The agency clearly prefers cap-and-trade over other options, as evidenced by the detail in the rule and EPA’s accompanying proposed federal plan for states who do not submit an acceptable (or any) implementation plan.

However, another factor accounts for EPA’s apparent short shrift for a tax approach: the concept is remarkably simple to understand—one-sentence simple—and just as easy to administer. By gradually increasing the cost of emitting greenhouse gases from coal- and natural gas-fired power plants by charging a per-ton fee for the CO2 emissions the plants already monitor, states could both reduce electricity demand from fossil fuel sources and level the playing field for zero-emissions alternatives like wind and solar. States already know how to implement such a tax; every state already taxes fuels such as gasoline, diesel, and natural gas. A state would just need to show, by modeling (the kind EPA already does), that its proposed carbon tax trajectory will hit its Clean Power Plan target and be prepared to adjust it or take other actions if emissions are off course.

This simplicity can provide real economic and environmental benefits. British Columbia, the first government in North America to implement a straight-up carbon tax, reduced its emissions 7.1 times faster than analysts expected, in part because the transparent and predictable price signal allowed business and consumers to invest efficiently and with foresight. A new paper from the Brookings Institution shows that a carbon tax has a slight efficiency edge over tradable performance standards. And, unlike trading schemes, a carbon tax won’t transfer ratepayer dollars from one state to utilities in other states.

The benefits of a carbon tax, state or federal, will depend heavily on how the revenue is used. States could use the revenue any way they wish, including giving dividends to households or swapping out other taxes. Studies show that the most cost-effective policy would lower (or prevent increasing) other taxes that discourage working, investing, and saving. States could also use revenue to protect low-income households from energy cost increases, assist coal workers in the energy transition, fund climate adaptation, repair infrastructure, reduce budget shortfalls, or pursue other goals.

Importantly, states that adopt a carbon tax can demonstrate the policy’s viability and inform both federal and international efforts. The Clean Power Plan, assuming it survives the inevitable litigation, addresses just one sector in one country through 2030. To stabilize concentrations of greenhouse gases in the atmosphere, stronger and more coherent and transformative legislation, carefully leveraged to achieve ambitious action abroad, will be essential, and economists agree that pricing carbon is a core strategy.

Already there are campaigns underway to put a price tag on climate pollution in Massachusetts, New York, Oregon, Rhode Island, Washington, and Vermont; the approach would be even better-suited to states like Illinois, who need to make significant greenhouse gas reductions and have unfunded liabilities. State innovations have led to some of the biggest federal policy changes in our nation. By allowing states to pursue fees on carbon, the Clean Power Plan opens the door for states to lead once again.

Editor’s Note: This piece originally appeared on The Hill.


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