New Climate Bill: Everything’s Coming Up Taxes

by Bill Chameides | March 19th, 2010
posted by Erica Rowell (Editor)

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A new climate bill proposed by a triumvirate of senators to sound the death knell for cap and trade?

While America is transfixed by the impending health care showdown at the country’s modern-day O.K. Corral, formerly known as Congress, senators and their aides continue to work beneath the radar on climate legislation.

Notable in that regard is the tri-partisan effort by Sens. John Kerry (D-MA), Lindsey Graham (R-SC), and Joe Lieberman (I-CT) to cobble together a bill designed to pass the 60-vote supermajority roadblock needed to pass legislation in the Senate.

The senatorial trio reportedly shared an eight-page outline of their proposal with industrial leaders twice this week.

At first blush the proposal seems kind of ho-hum, pretty much like the Waxman-Markey bill that passed the House last June and the Kerry-Boxer bill that remains stalled in committee — the Kerry-Graham-Lieberman (KGL) proposal includes a cap-and-trade mechanism and targets of reducing 2020 emissions by 17 percent below 2005 levels, and by 80 percent by 2050.

But scratch below the surface and one finds some major differences between KGL and its predecessors: there appears to be more carbon tax than cap and trade.

What’s Capped, What’s Not

The first thing to note is that the proposed cap and trade is not economy-wide. It is to be applied to power plants first and then later to large industrial sources but not to gasoline — which is treated entirely differently.

Gasoline, it is reported, is to be regulated using a fee or tax applied at the pump. The amount of tax per gallon of gasoline will be determined by the carbon content of the fuel and the price of carbon set by the cap-and-trade market. So it seems as if gasoline would be treated as a sort of hybrid between a tax and cap and trade. A hybrid because a fee is applied at the point of purchase like a tax, but the cost is determined by the marketplace like a cap and trade. But now let’s look at the so-called cap and trade in KGL.

A Price Collar: A Porous Cap

It turns out that the cap in the KGL cap and trade is very porous. There is this little thing in the proposal called a “price collar” on carbon allowances. The collar places a floor and a ceiling on carbon allowances: the floor would prevent the price of carbon allowances from falling below $10 per ton of carbon and the ceiling would disallow prices from rising above $30 per ton.

The ceiling is the kicker. Here’s how it works. In a standard cap and trade, an emitter cannot emit more than its assigned cap plus any allowances it purchases from other emitters at a price set by the market. Because the total amount of emission allowances cannot exceed the cap, trading of allowances only moves emissions between emitters but still keeps total emissions below the cap. In such a system, the cap is sacrosanct and cannot be broken regardless of the price of allowances. In other words, it gives emission certainty but price uncertainty.

However, that all changes with a price ceiling. In this case, once the market brings the price of allowances up to the ceiling, emitters are allowed to buy as many allowances they want (usually from the government) at the ceiling price (e.g., $30 per ton in KGL). Hello, price certainty. But bye-bye, emissions cap. And because the price of carbon in the market is now held at the ceiling, the fee on gasoline in KGL would also be pegged at the ceiling. In effect the cap and trade has been transformed into a tax (i.e., emitters can emit all they want for a fee, aka a tax).

Is this a good feature or a bad feature? The answer depends upon how you feel about a carbon tax vis-à-vis a cap-and-trade system. Will the change garner enough votes to get passage in the Senate? We might actually find out if Congress can get past health care.

filed under: carbon dioxide emissions, faculty, global warming
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1 Comment

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  1. Jim
    Mar 19, 2010

    Interesting. It would probably still bring down carbon emissions some, but not as much as with a true cap & trade. I don’t think it can gaurantee the 17% reduction. I’m sure they did this to try and appease industry so they could garner more votes. It’s just a matter of time before it reaches the ceiling and then would probably pretty much stay at or near the ceiling. Is the floor and ceiling adjusted for inflation? James Hanssen always advocated a carbon tax, but he wanted the revenues to go back to the people. This makes no sense to me, it would simply mean the carbon emitters would just raise prices and people would use the tax money to pay for the higher cost of power. It’s just making the money go in a circle.

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