On October 22, the Niskanen Center and the R Street Institute sent a letter out to the members of the Environmental Council of the States urging them to give serious thought about carbon taxation as a central means of complying with the EPA’s Clean Power Plan. The text of that letter follows:
As two center-right think tanks, we urge you to consider a carbon fee as part of your Clean Power Plan compliance (CPP). States that are looking for the least costly way to comply with the CPP and any future regulation under Section 111 should consider a carbon fee as the basis for their plans. Properly implemented, a carbon fee can ensure compliance, cost effectiveness, and a source of revenue for conservative, pro-growth priorities in your state.
Complying with the CPP will impose significant costs on the power sector. Economists agree that attaching a price directly to CO2 emissions is a far more economically efficient compliance strategy than any regulatory mandate. Set the price, and let the market do the rest.
Of the two pricing mechanisms available for CPP compliance, cap-and-trade and a carbon fee, the fee offers three distinct economic advantages to your state.
Most importantly, any multi-state cap & trade system will redistribute compliance costs in unpredictable ways. Cross-border cap-and-trade systems will lower the collective burden of complying with the CPP by allowing states with tough targets to offload abatement responsibilities to other states. However, depending on the complex system of rate-setting in electricity markets in your region and uncertainties around where abatement would occur, the gains from trading emissions allowances may not accrue to citizens of your state. These significant economic and political outcomes are an important consideration in joining a multi-state cap-and-trade system.
Second, unlike the price volatility of a cap-and-trade system, a fee sets a clear and predictable emissions price. This allows the power sector to better make long-term capital investments that achieve compliance. It also protects ratepayers from any manipulation or fluctuation in a cap-and-trade permit market, over which you have little control.
Finally, a fee allows for compliance while also accommodating future economic growth. If the EPA estimates of future energy demand are too low, states adopting mass-based CPP standards run the considerable risk of being unable to build new capacity to satisfy additional demand. This will increase the price of new generation, especially because EPA is also requiring that state plans include specific measures to discourage building any non-renewable capacity.
A carbon fee is simple to administer. It avoids the need for the complex administrative and regulatory action by multiple state agencies necessary to implement and administer the strategies (renewables generation, efficiency investments, etc.) otherwise necessary for CPP compliance. All EGUs monitor and report their CO2 emissions; after that, it is simple arithmetic to multiply the reported emissions by the fee rate and send a check to the State treasury.
A fee is also administratively superior to cap and trade, as the latter requires the state to either allocate allowances or conduct auctions, monitor trades and positions, and possibly enforce price controls. A state could easily expand a fee to cover future additional 111(d) source categories. In contrast, a cap-and-trade approach would require separate registries and allowance systems for each source category because the allowances cannot be fungible under the Clean Air Act.
Getting your implementation plan approved should also be relatively easy with a carbon fee approach. Standard available modeling tools can demonstrate to EPA that your plan is likely to achieve your target. If it turns out that emissions are off course, you can easily adjust your fee rates (or other policies) accordingly.
We and our associates in the research community can help you. We welcome the opportunity to provide technical support consistent with our educational missions as you consider your CPP compliance options, including economic modeling and legal analysis.
Adjunct Scholar, Niskanen Center
Director of State Affairs, Niskanen Center
Director of Energy Policy & Senior Fellow, R Street Institute