The fiscal cliff

Illustration by Kyle Webster
Illustration by Kyle Webster

Hopes for bipartisan support over a carbon tax in the United States look set to slide off the fiscal cliff. President Barack Obama told journalists in November he had no carbon tax proposals in his fiscal cliff package and both Treasury and White House spokespeople confirmed this to Corporate Knights. At the same time, Republican House Speaker John Boehner signed the “no climate tax” pledge.

Yet in its September report “Carbon Tax – Deficit Reduction and Other Considerations,” the Congressional Research Service (CRS) promoted fiscal effectiveness over climate issues, forecasting that a carbon tax of $20 per tonne of carbon dioxide – designed to rise annually by 5.6 per cent – could halve the projected federal deficit to $1.1 trillion in 10 years.

Many Republicans see no chance of this happening, at least in the short term. “We have been offered tax hikes for tax cuts before,” Republican arch-lobbyist Grover Norquist of Americans for Tax Reform told CK. “New Jersey’s income tax was introduced to reduce property taxes; in Texas, Bush raised sales taxes promising lower property taxes. The result is always the same. New tax grows. Old tax grows back.”

Memories are long on Capitol Hill, said John Gimigliano, a principal with KPMG’s energy sustainability tax practice in the U.S. He points to former U.S. President Bill Clinton’s BTU (British thermal unit) tax to conserve energy and raise $30 billion per year. While not enacted after being proposed in 1993, it was still succeeded by a motor fuel tax of 5 cents per gallon.

The CRS report has nonetheless sparked some political discussion. Two months after its release the conservative American Enterprise Institute (AEI) organized a one-day carbon tax conference, which included International Monetary Fund and Treasury officials. Citing one admittedly extreme scenario, the AEI’s Kevin Hassett suggested Republicans may be willing to accept a carbon tax under the right conditions. “If we had a one-cent carbon tax and we took 10 percentage points off corporate taxes, what do you think the reaction would be?” he offered rhetorically.

ExxonMobil would also accept a carbon tax if enforced, but would not advocate for one, company spokesman Alan Jeffers told CK, conceding that carbon taxes were administratively more efficient and provide greater price certainty than carbon markets based on cap-and-trade. Exxon would insist, however, on revenue neutrality and not tolerate a revenue grab, said Jeffers.

The devil is certainly in the details, but Republicans and Democrats risk missing a great opportunity by not taking the carbon tax option seriously. To address the fiscal deficit, Obama has two basic choices: broaden the tax base through measures such as taxing carbon emissions or increasing existing taxes; or cut welfare and health care spending. The latter is politically costly.

But policy tradeoffs do exist through so-called revenue neutrality – recycling carbon tax receipts to offset increased energy prices or, for example, reducing payroll or corporate taxes and continuing with Bush-era tax cuts.

Individual taxes raised $1.09 trillion in 2011, or 47 per cent of total federal receipts, while social insurance and retirement receipts provided 36 per cent. Corporate taxes raised $181 billion, just 8 per cent of federal receipts, according to the CRS report. It estimated that a $20 carbon tax could raise $88 billion in year one, increasing to $144 billion by 2020 with a 5 per cent annual increase.

Opposition to carbon taxes often stems from trade-exposed, energy intensive industries such as the coal industry and coal-fired power utilities. The CRS report projected a $20 per tonne price would increase the cheapest coal prices by $38 a short ton, four times its 10-year price average, while the most expensive coal, anthracite, would see its 10-year price average increase 80 per cent to $48 a ton.

Furthermore, a $20 per tonne carbon tax would represent 10 per cent of the average U.S. utility’s revenue, according to a 2007 Carbon Disclosure Report, which estimated North American utilities emitted 5,000 tonnes of CO2 per million dollars in revenue – 2,000 tonnes more than European Union utilities.

Consequently, the American Coalition for Clean Coal Electricity claims carbon pricing could cost $220 billion, forcing the closure of 69,000 megawatts of power generation capacity and costing up to 900,000 jobs, mainly in electoral battleground states Ohio, Michigan, Missouri, Wisconsin, Illinois and Indiana.

This is likely scare-mongering. In resource-dependent Australia, the government introduced a three-year fixed carbon price of A$15 (about US$15.50) per tonne last July (transforming later to a cap-and-trade market). But tax-free thresholds, above which individuals pay income tax, will triple from A$6,000 to $18,000, offsetting the impact, said Tony Mohr, climate change program manager at the Australian Conservation Foundation.

Besides, carbon taxes could prove to be a competitive advantage for U.S. industry.

Industry often flags the risk of carbon leakage as a consequence of carbon pricing – that is, industries in developed countries will become uncompetitive against those in developing countries like China and India that do not mitigate CO2 by pricing carbon. Therefore, they argue, developed countries’ industries would be encouraged to close shop at home and move operations overseas.

Many consider this a red herring. China is committed to reducing its carbon intensity to between 40 and 45 per cent below 2005 levels during the next decade, a target comparable to the U.S. target of 17 per cent below 2005 levels by 2020. Seven Chinese provinces are planning cap-and-trade markets and Beijing wants a national carbon market by 2015, according to a 2012 FORES/Stockholm Environment Institute report.

Also, a carbon tax plan could be designed to protect U.S. industries from developing-country competition by legally imposing border tax adjustments on nations such as India and Indonesia, which fail to reduce emissions, according to a World Trade Organization-UNEP report released in July 2009.

Republicans must face reality. They lost the climate battle when the U.S. Supreme Court ruled that the Environmental Protection Agency (EPA) could regulate greenhouse gas emissions under the Clean Air Act. At best, the GOP can delay implementation through legal action, but industry observers say this also risks delaying regulations beneficial to the flourishing natural gas industry.

Besides, the EPA regulations can be used by Obama as an olive branch. “There won’t be any concession on our side without EPA pre-emption,” said Dave Banks, a Bush-era Council on Environmental Quality policy advisor turned Tea Party activist.

Should Obama waive EPA regulations, “a sincere conversation” could take place between the “two crowds” in the debate – the energy-environment crowd and the Treasury-tax crowd, said Banks.

Both sides (and crowds) would be wise to seize the mettle, but breaking the impasse likely requires congressmen to perceive how negative consequences of inaction over a carbon tax outweigh the consequences of implementing a carbon tax, explained KPMG’s Gimigliano.

For those watching the discussion unfold, don’t hold your breath.

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