Capstone Project ” Benefits of putting Carbon Tax on Ohio State”. Should be written with proper citation. Project needs proper indext citation with references. Googel and Wkipedia can’t be used for the project. .GOV and .ORG sites can be used. The papers or research papers should be peer reviewed. I am paying $170 for the project.Question: Daisy Arabella Only!!Please see the attachemnt for more materials.
CONFINED SPACE FATALITY RATE COMPARISON, U.S. & CANADA, 1996-2005 Paul Joseph Hagarty AA, AAS, BS FALL 2011 Capstone Advisor: William J. Doyle, Ph D. Copyright by Paul Joseph Hagarty 2011 ABSTRACT People have climbed into pits, caves, or others areas man-made or not and never escaped. In industry, these locations are called “confined spaces”. By statistically comparing U.S. and Canadian Confined Space Fatality (CSF) data from 1996 to 2005, and by using event & exposure codes 384 and 3411, any difference based upon age of worker, year, and industry can be discovered. In order to test the hypotheses, paired-sample t-tests were performed to determine whether CSF rates significantly differed between US and Canadian workers during 1996-2005. Resulted indicated that in the age groups of 20-24, CSF rates in Canada were found to be nearly 3 times as high as in American workers. No significant differences in CSF rates were found between workers aged 25-34 & 35-44 years. Significant results were found when comparing CSF rates among workers aged 45 to 54 years. Very significant differences in CSF rates were found between workers ages 55 and 64 and amongst workers over age 65. Alternatively, no statistically significant difference was found between the U.S. and Canada on basis of any particular year. However, a number of analyses were found to be approaching significance. Lastly, statistical analysis between the U.S. and Canada in the construction, manufacturing, mining and transportation industries indicated significant differences occurred between 1996 and 2005. To James & LaVonne ACKNOWLEDGMENT I am forever indebted to my wife Tiffany for all the love, support & sacrifice she has provided throughout the years. She, along with my children Brandon, Nieraiz, Gillian-Rose & Paul II are the source of my strength. TABLE OF CONTENTS Chapter 1: Introduction 1 Chapter 2: Background 4 Chapter 3: Purpose 9 Chapter 4: Literature Review 11 Chapter 5: Methodology 17 Chapter 6: Results 28 Chapter 7: Conclusions 32 References 34 LIST OF TABLES Table 1: Hypotheses Table 2: Variables Table 3: Age of Workers Table 3a CSF per Age Group (1996-1997) Table 3b CSF per Age Group (1998-1999) Table 3c CSF per Age Group (2000-2001) Table 3d CSF per Age Group (2002-2003) Table 3e CSF per Age Group (2004-2005) Table 4: Year Table 5a: Industry of Workers (Manufacturing/Construction) Table 5b: Industry of Workers (Transportation/Mining) Table 6: Paired T-Test Results (Age) Table 7: Paired T-Test Results (Year) Table 8: Paired T-Test Results (Industry) Table 9: Hypotheses Testing Results LIST OF ACRONYMS LFM: Liquid Fuels Maintenance T.O.: Technical Order NIOSH: National Institute Occupational Safety & Health CSF: Confined Space Fatality ICD: International Classification of Disease ISI: International Statistics Institute OIICS: Occupational Injury and Illness Classification System BLS: Bureau of Labor Statistics CDC: Centers for Disease Control NAICS: North American Industry Classification System SIC: Standard Industrial Classification ISIC: International Standard Industry Classification NTOF: National Traumatic Occupational Fatalities CFOI: Census of Fatal Occupational Injuries FACE: Fatality Assessment and Control Evaluation AWCBC: Association of Workers’ Compensation Boards of Canada NWISP: National Work Injuries Statistics Program WCB: Workers’ Compensations Board CHAPTER 1 INTRODUCTION: Derek S. had no idea when he woke up on the bright spring day in May 1995, that it would be his last. His typical morning routine went smoothly as he poured a big cup of coffee. After a brief look at the morning paper Derek said goodbye to his wife and 12 year old daughter still struggling to ready for school. After a 15 minute drive to the Air Force Base where he worked as a civilian Liquid Fuels Maintenance (LFM) Specialist. Derek parked his car and walked towards the aircraft hangar. After another cup of coffee and a few minutes of schoolyard banter with his co-workers, Derek set about his first task of the day. Cleaning of JP-8 refueling truck tanks was never a task that Derek relished, although he was familiar with the Technical Orders (T.O.) on how to safely perform it. He knew which respiratory protection system to use as well as proper entry and the exit procedures for the confined space. While Derek did not enjoy the task, he was confident he could accomplish it. Derek donned his harness and supplied air respiratory protection system, set up the tripod over the hatch for emergency extractions, then waited. 5 minutes then 10 minutes went by…no other coworker was available to act as entry supervisor. Impatient to get started, Derek lowered himself into the 25,000 gallon fuel truck tank and proceeded to move around the baffles inside the dark, cramped tank. Unknown to Derek, his compressed air hose did not adequately attach due to the LFM shop’s improper use of a connector that was not certified by the National Institute of Occupational Safety & Health (NIOSH) for use with the airline respirator system. About the moment Derek realized he was no longer getting air in the respirator hood, he had already reached the furthest-most baffle of the fuel tank. Desperate for air and escape, Derek started
CAPSTONE 698 – INTEGRATED PROJECT PROSPECTUS FORM STUDENT NAME: ID# CONTACT ADDRESS PHONE # DATE: PROJECT TITLE: DESCRIPTION OF RESEARCH: Problem Statement: Research Effort: Does the Project involve human or animal research? Y / N , if yes attach approval memorandum from Research Review Committee Final Product Envisioned: Estimated Completion Time (person hours): Credit Hours: Advisor Preference: PROGRAM GOALS – EVALUATION CRITERIA: The student and faculty advisor should predetermine the weighting of the following program goals as they apply to the nature of the capstone project. In general, each area should be evaluated to some extent, however it is recognized due to the variability of projects that each individual area may have a different emphasis. BUSINESS KNOWLEDGE – Ability to incorporate cost counting and finance data into recommendations or decisions and/or address regulatory issues in business. ANALYTICAL SKILLS – Ability to employ analytical tools to assess data from production, research, quality control or administrative operations. MANAGERIAL SKILLS – Ability to manage project time and coordinate with the advisor and other project associates. TECHNICAL SKILLS – Ability to integrate technical and regulatory knowledge of subject area into problem-solving techniques for compliance in ES&H fields. INTEGRATIVE SKILLS – Ability to effectively integrate the above goals into a cohesive written document or presentation package (PowerPoint, training manual, etc.) Business Skills Analytical Skills Managerial Skills Technical Skills Integrative Skills DATE REVIEW: Student Signature Advisor Signature Program Director Signature:
Electronic copy available at: http://ssrn.com/abstract=1355988Electronic copy available at: http://ssrn.com/abstract=1355988 VERMONT LAW SCHOOL LEGAL STUDIES RESEARCH PAPER SERIES Research Paper No. 09-20 Carbon Taxes in the United States: The Context for the Future Janet E. Milne (2009) Janet E. Milne Director of the Environmental Tax Policy Institute and Professor of LawVermont Law School 164 Chelsea Street, PO Box 96 South Royalton, VT 05068 802-831-1266 [email protected] Electronic copy available at: http://ssrn.com/abstract=1355988Electronic copy available at: http://ssrn.com/abstract=1355988 Janet E. Milne ∗ TABLE OF CONTENTS Introduction ………………………………………………………………………………………1 I. A Brief Introduction to the Vocabulary and Concepts of Energy-related Taxes ……………………………………………………………………………………………3 II. The Clinton Btu Tax and Its Lessons ………………………………………………6 A. The Clinton Btu Tax …………………………………………………………………6 B. Lessons from the Btu Tax Experience ……………………………………….10 1. The Fundamental Choice of Tax Base…………………………………….10 2. Refining the Tax Base ………………………………………………………….12 3. The Taxpayer/Collection Point………………………………………………13 4. The Tax Rate ………………………………………………………………………14 5. The Use of the Revenue………………………………………………………..15 6. A Viable Concept?……………………………………………………………….17 III. The Present Context for Carbon Taxes …………………………………………18 A. Carbon Taxes …………………………………………………………………………19 B. Cap-and-Trade Regimes…………………………………………………………..23 C. Carbon Tax Issues in the Cap-and-Trade Context ……………………….27 Conclusion………………………………………………………………………………………30 INTRODUCTION When the Group of Eight met in Japan in July 2008, the leaders of major economies in the developed world recognized the role of market- based instruments in reducing greenhouse gas emissions: Market mechanisms, such as emissions-trading within and between countries, tax incentives, performance-based regulation, fees or taxes and consumer labeling can provide ∗ Professor of Law and Director of the Environmental Tax Policy Institute, Vermont Law School, South Royalton, Vermont, USA, [email protected] C ARBON TAXES IN THE U NITED STATES : THE C ONTEXT FOR THE FUTURE Electronic copy available at: http://ssrn.com/abstract=1355988 2 V ERMONT JOURNAL OF ENVIRONMENTAL LAW [Vol. 10 pricing signals and have the potential to deliver economic incentives to the private sector. We also recognize that they help to achieve emissions reduction in a cost effective manner and to stimulate long-term innovation. We intend to promote such instruments in accordance with our national circumstances and share experience on the effectiveness of the different instruments. 1 Although the George W. Bush Administration has not been sympathetic to climate change measures that will increase the price of energy, 2 the national debate about how to reduce greenhouse gas emissions will continue under a different president and a new Congress in 2009. They will determine whether energy taxes or emissions trading regimes are “in accordance with our national circumstances.” Four decades ago, the United States was a leader in considering the use of taxes to reduce pollution. In 1970, President Nixon proposed a tax on lead additives to gasoline and in 1972 a tax on sulfur dioxide emissions. 3 Although these proposals were not enacted, a tax on gas-guzzling cars went into law in 1978, 4 followed in 1980 by a tax on chemicals to finance the Superfund, a fund dedicated to cleaning up hazardous waste sites. 5 The United States was also a pioneer in permit-trading regimes, using them to implement the regulation of lead in gasoline in the early 1980s, ozone depleting chemicals in 1988, and sulfur dioxide in 1990. 6 In recent years, however, European countries have seized the initiative in using environmental taxes and trading regimes. As detailed in other articles in this volume, a number of European countries have enacted significant, 1. G8 Hokkaido Toyako Summit Leaders Declaration § 33 (July 8, 2008), http://www.g8summit.go.jp/eng/doc/doc080714__en.html. 2. See, e.g., Statement of the White House Press Secretary (July 11, 2008), http://www.whitehouse.gov/news/releases/2008/07/print/20080711-7.html (“The wrong way [to deal with climate change] is to sharply increase gasoline prices, home heating bills and the cost of energy for American businesses . . . .”). 3. See W ILLIAM A. IRW IN & RICHARD A. LIROFF , ECONOMIC DISINCENTIVES FOR POLLUTION CONTROL : LEGAL , POLITICAL AND ADMINISTRATIVE DIMENSIONS 126–27 (1974) (prepared for the United States Environmental Protection Agency); S TA N L E Y SURREY , PAT H WAY S T O TAX REFORM 164 (1973) (discussing Nixon’s proposed pollution tax on the sulfur content of fuel). 4. 26 U.S.C. § 4064 (2000). The tax starts at $1,000, increasing to $7,700 for vehicles with fuel economy less than 12.5 miles per gallon, but the tax has been eviscerated by its exemption for “non- passenger” vehicles which, with changes to vehicle design, now applies to SUVs. Id. § 4064(b)(1)(B). 5. Id. §§ 4661–4662. The tax remained in effect until 1996. See also id. §§ 4681–4682 (imposing a tax on ozone depleting chemicals effective in 1990). 6. See David Harrison, Jr., Tradable Permits for Air Pollution Control: The US Experience, in O RGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT , IMPLEMENTING DOMESTIC TRADABLE PERMITS FOR ENVIRONMENTAL PROTECTION 28–37 (1999) (explaining and evaluating U.S. permit-trading program regimes). 2008] Carbon Taxes in the United States 3 broad-based energy taxes or carbon taxes. In addition, the European Union has put into place the Emissions Trading Scheme for carbon emissions from 11,500 facilities, 7 and it may expand the Scheme in the future to include other facilities and greenhouse gases. 8 This article provides background and context for considering the use of broad-based energy taxes to reduce greenhouse gas emissions at the federal level in the United States. After a brief introduction in Part I to the concept of energy taxes and their design alternatives, Part II reviews the United States’ most significant experience with enacting broad-based energy taxes—President Clinton’s proposal to tax energy based on its energy content as measured by British thermal units (Btus) 9—and the possible implications of that experience for today’s debate over carbon taxes and permit trading. Part III sets pending carbon tax alternatives and actions in the context of the current proposals and programs for using tradable permits for greenhouse gas emissions. While it does not undertake to analyze the pros and cons of tax instruments versus other instruments, an exercise that would require many more pages than allowed here, it highlights analytical issues that are key when comparing carbon taxes and cap-and-trade regimes. The article concludes by suggesting that policymakers and advocates should not dismiss the possibility of using taxes to reduce greenhouse gas emissions despite the political volatility of tax proposals. If held to the same analytical standards, taxes and trading regimes bear many similarities and involve some of the same politically difficult choices. I. A BRIEF INTRODUCTION TO THE VOCABULARY AND CONCEPTS OF ENERGY -RELATED TAXES The basic formula for taxation is universal and relatively simple, building on three fundamental components and a very straightforward mathematical formula. The tax base multiplied by the tax rate equals the tax revenue: 7. See generally Council Directive 2003/87/EC, 2003 O.J. (L 275) 32 (establishing a greenhouse gas emission trading scheme); J. ROBINSON ET AL ., CLIMATE CHANGE LAW : EMISSIONS TRADING IN THE EU AND THE UK 35 (2007). 8. Commission Proposal for a Directive of the European Parliament and the Council amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emissions allowance trading system of the Community, 4 COM (2008) 16 final. 9. E XECUTIVE OFFICE OF THE PRESIDENT OF THE UNITED STAT E S , A VISION OF CHANGE FOR AMERICA 105 (1993). A Btu is the “quantity of heat required to raise the temperature of one pound of water one degree Fahrenheit.” W EBSTER ’S NEW WORLD DICTIONARY 178 (3rd college ed. 1991). 4 V ERMONT JOURNAL OF ENVIRONMENTAL LAW [Vol. 10 Tax Base x Tax Rate = Tax Revenue Energy-related taxes are defined by the fact that the tax base (the commodity being taxed) is some form of energy. The specific tax base can vary significantly depending on the design of the tax. In the case of a carbon tax, the tax base is either the carbon content of fuels or the carbon dioxide (CO 2) they produce when combusted, usually measured in tons. By defining the tax base as carbon or CO 2, the tax is limited to fossil fuels. If the tax base also draws in non-fossil forms of energy, such as nuclear power or hydropower, it is often called a broad-based energy tax. A classic broad- based energy tax would define the tax base in terms of the energy content of the identified range of energy sources. However, the tax base for a broad- based energy tax could also be defined in terms of the market price per unit of energy (often called an ad valorem tax) or in terms of the volume of the fuel (such as a tax per barrel of oil). The dominant federal energy tax in the United States—18.4 cents per gallon of gasoline 10—is a volume-based energy tax but not a broad-based energy tax because the tax base is limited to gasoline. In the climate change context, using either carbon or CO 2 as a tax base would be preferable because the tax base provides the most direct link to the environmental problem—the emission of CO 2. However, greenhouse gas emissions more broadly might also serve as a tax base. Although carbon dioxide emissions account for 85% of U.S. greenhouse gas emissions, most of which come from combustion of fossil fuels, other types of greenhouse gases contribute to global warming: methane (8% of U.S. greenhouse gas emissions), nitrous oxide (5%), hydrofluorocarbons (2%), and perfluorocarbons and sulfur hexafluoride (less than 1%). 11 A classic greenhouse gas tax would define the tax base in terms of tons of emissions, adjusted for their global warming potential based on CO 2 equivalents. Identifying the tax base also involves determining what commodities or emissions are exempt from the tax or should qualify for refund after the tax has been imposed. For example, a carbon tax that uses carbon content as a surrogate for eventual emissions presumably would exempt fossil fuels that are consumed in manufacturing processes for non-fuel purposes as “feedstocks;” not combusted, they will not yield emissions. 10. 26 U.S.C. § 4081(a)(2)(A)(i), (B) (2000). See also id. § 4081(a)(2)(A)(ii)–(iii) (imposing an excise tax on aviation fuels, diesel, and kerosene). 11. See U.S. ENVTL . PROT . AGENCY , INVENTORY OF U.S. GREENHOUSE GAS EMISSIONS AND SINKS : 1990-2006 ES-4-6 tbl.ES-2 (2008), available at http://www.epa.gov/climatechange/emissions/do wnloads/08_CR.pdf (basing 2006 emissions on carbon dioxide equivalents). 2008] Carbon Taxes in the United States 5 Although often tempered by political considerations, the tax rate of an environmentally related energy or greenhouse gas tax may reflect an environmental theory, such as the internalization of the external costs of emissions or the need to attain a certain degree of behavioral change. In the former instance, the tax rate would be defined by the external costs, and in the latter instance by the level necessary to achieve the specific behavioral effect. Alternatively, the environmental benefit may come primarily from the way in which government will use the revenue, with the rate set to generate the targeted amount. If the tax signal itself is strong enough to achieve some or all of the desired environmental result, however, revenue from the tax can be used to address non-environmental goals, such as measures that might mitigate regressive effects of the tax, fund unrelated programs, reduce the deficit, or reduce the burden of other tax rates in ways that will stimulate the economy. 12 If all of the revenue from the tax is used to provide tax relief of some form, the tax is “revenue neutral.” The new revenue offsets the revenue loss from the tax cuts, rendering the tax package as a whole revenue neutral. Finally, an important design question is determining who will pay the tax. From an environmental perspective, the tax or ultimate incidence of the tax should fall on taxpayers who are most able to change their behavior in ways that will achieve the environmental goal. Political, economic, and administrative considerations, however, may come into play. For example, although consumers are often aware of the federal gas tax at the pump, the tax is actually paid when the fuel is removed from the refinery or terminal, thereby facilitating the collection of the tax. 13 12. See generally Janet Milne, Environmental Taxation: Why Theory Matters, in 1 C RITICAL ISSUES IN EN V IR O N M E N TA L TAXATION : INTERNATIONAL AND COMPARATIVE PERSPECTIVES 1, 19–24 (Janet Milne et al. eds., 2003) (discussing theories underlying environmental taxes and their implications for the use of revenue). 13. 26 U.S.C. § 4081(a)(1)(A) (2000). 6 V ERMONT JOURNAL OF ENVIRONMENTAL LAW [Vol. 10 Figure 1: Basic Choices in Desi gning Energy or Greenhouse Gas Taxes Taxpayer/Collection Point Tax Base x Tax Rate = Tax Revenue Broad-based energy tax Keyed to: Dedicate to problem Carbon tax Energy Content External costs Address regressivity Carbon or Co 2 Sales Price Behavioral impact Reduce tax rates Volume Funding needs Reduce deficit Exemptions (environmental or Increase spending other) Greenhouse gases II. THE CLINTON BTU TAX AND ITS LESSONS A. The Clinton Btu Tax The experience with the Clinton Btu tax illustrates how environmental, economic, equity, and political factors influence the basic choices governing which type of tax to use, its design features, and its fate. Just four weeks after taking office in January 1993, President Bill Clinton announced to a joint session of Congress that a tax on energy would be part of his five-year, deficit-reduction package. 14 He proposed an energy tax based on energy content as a way to reduce the deficit “because it also combats pollution, promotes energy efficiency, [and] promotes the independence economically of the country . . . .” 15 Although the proposed Btu tax was ultimately replaced by a 4.3-cent increase in the gas tax and 14. 139 C ONG . REC. H674, H678 (1993) (State of the Union Address by President Clinton on Feb. 17). 15. Id. 2008] Carbon Taxes in the United States 7 other measures, 16 the experience with the Btu tax provides some useful lessons for considering the design and role of energy taxes today. The tax base of Clinton’s proposed excise tax covered an extraordinarily broad range of energy sources—fossil fuels, ethanol and methanol used as fuel, and domestic and imported electricity produced from nuclear or hydro power. 17 Although the tax excluded renewable sources of energy, such as wind, solar, geothermal, and biomass, it was essentially an economy-wide energy tax. To provide a present-day context, Figure 2 summarizes the United States’ fuel consumption patterns in 2006: Figure 2: U.S. Consumption by Type of Fuel 18 Fuel Percent of Consumption Liquid fuels 40.1 Natural gas 22.3 Coal 22.5 Nuclear electricity 8.2 Hydroelectricity 2.9 Biomass 2.5 Other renewables 0.9 The basic rate for the Btu tax, to be phased in over three years, was 25.7 cents per million Btus, with a supplemental tax of 34.2 cents per million Btus for refined petroleum products; each rate was indexed for inflation after 1997. 19 Without the supplemental tax on petroleum, the tax on natural gas would have been higher as a percentage of market price than on oil, potentially discouraging the use of natural gas, which is a cleaner fuel. 20 These rates translated into an average of $3.24 per barrel of oil (or 7.5 cents per gallon of gasoline), $0.26 per million cubic feet of natural gas, $5.57 per short ton of coal, and $2.66 per thousand kilowatt hours for 16. See generally O MNIBUS BUDGET RECONCILIATION ACT OF 1993, H.R. REP. NO. 103-213, at 658 (1993), as reprinted in 1993 U.S.C.C.A.N. 1088, 1347 (containing conference agreement on the House and Senate bills). 17. S TAFF OF THE J. COMM . ON TAXATION , 103 D CONG ., SUMMARY OF THE PRESIDENT ’S REVENUE PROPOSALS 61 (Comm. Print 1993). 18. E NERGY INFORMATION ADMINISTRATION , ANNUAL ENERGY OUTLOOK 2008, at 115 tbl.A1 (2008), available at http://www.eia.doe.gov/oiaf/aeo/pdf/tables.pdf. 19. S TAFF OF THE J. COMM . ON TAXATION , supra note 17, at 61. The Btu content was based on a national average for alcohol fuels and for all fossil fuels except coal, which was based on actual Btu content. Id. 20. O FFICE OF TAX POLICY , DEP’T OF TREASURY , FREQUENTLY ASKED QUESTIONS REGARDING THE ADMINISTRATION ’S PROPOSED MODIFIED BTU TAX 2 (1993). 8 V ERMONT JOURNAL OF ENVIRONMENTAL LAW [Vol. 10 electricity from hydro and nuclear power (based on the national average of Btus required to produce electricity from fossil fuels). 21 Estimated to raise $22 billion per year when fully phased in and over $70 billion during the five-year budget period from 1994 to 1998, 22 the proposed broad-based tax represented a significant addition to the relatively limited portfolio of existing federal fuel taxes. The revenue from the tax contributed to the budget package’s deficit reduction goal of $500 billion over five years, achieved through a combination of tax increases and spending cuts. Thus, deficit reduction was the primary use of the revenue. Nevertheless, the budget package as a whole contained other revenue-losing or increased-spending provisions that related to the Btu tax, in particular an increase in the earned income tax credit that would offer greater relief to lower income taxpayers 23 and expansion of the food stamp program and the Low Income Home Energy Assistance Program. 24 Thus, although new dollars from the Btu tax were not explicitly dedicated to offsetting relief, the total budget proposal provided some compensating measures to address the potential regressivity of the Btu tax. The Btu tax proposal had a short but dramatic life. In a party-line vote, the House Ways and Means Committee approved it in May 1993 with relatively minor changes. 25 The committee’s statement in support reads much like a present-day manifesto for carbon reduction: In addition to deficit reduction, imposition of an energy tax will foster several worthwhile goals. First, the United States is one of the developed world’s most intensive energy consumers. Most of the nation’s energy is derived from non-renewable resources. Increasing the cost of non- renewable energy resources to individuals and businesses 21. O FFICE OF TAX POLICY , DEP’T OF TREASURY , THE ADMINISTRATION ’S MODIFIED BTU ENERGY TAX PROPOSAL 2 (1993); O FFICE OF TAX POLICY , DEP’T. OF TREASURY , SPECIFICATIONS OF THE ADMINISTRATION ’S MODIFIED BTU ENERGY TAX PROPOSAL 1 (1993). 22. S TAFF OF J. COMM . ON TAXATION , 103 D CONG ., ESTIMATED BUDGET EFFECTS OF THE ADMINISTRATION ’S REVENUE PROPOSALS CONTAINED IN THE FISCAL YEAR 1994 BUDGET , JCX-2-93 2 (1993). 23. 139 C ONG . REC. H674, H678 (1993) (State of the Union Address by President Clinton). 24. Administration’s Energy Tax Proposals: Hearings Before the Comm. on Finance, 103d Cong. 7 (1993) [hereinafter Senate Finance Energy Tax Hearing] (prepared statement of Hon. Lloyd Bentsen, Secretary, Dep’t of Treasury). 25. See S TAFF OF H. COMM . ON WAYS AND MEANS , 103 D CONG ., FISCAL YEAR 1994 BUDGET RECONCILIATION RECOMMENDATIONS OF THE COMMITTEE 292–309 (Comm. Print 1993) [hereinafter W AY S & MEANS RECOMMENDATIONS ] (explaining the provisions of the Btu tax bill); David Rosenbaum, Clinton Proposal for Tax Increases Passes First Test, N.Y. TIMES , May 14, 1993, at A1 (describing the committee’s changes). 2008] Carbon Taxes in the United States 9 will provide an economic incentive to conserve these irreplaceable resources. Second, the burning of fossil fuels contributes to atmospheric pollution and increases the potential for global warming. Consumers of fossil fuels do not directly bear the cost of the environmental damage pollution creates. Imposing an energy tax on the consumer of fossil fuels will give consumers a financial incentive to reduce energy use. The committee believes that providing an economic incentive to conserve energy use, while also providing an incentive to use renewable resources, will lead to a cleaner environment. 26 The House of Representatives passed the budget proposal, including the politically sensitive Btu tax, by a margin of six votes in late May 27 after President Clinton and the House leadership struggled to win the necessary last minute votes. 28 Even with the passage of the bill in the House, however, support for the Btu tax was eroding in the Senate. The Finance Committee, which has jurisdiction over tax matters in the Senate, could not hold together its slim, two-vote Democratic majority when Oklahoma Senator David Boren and Louisiana Senator John Breaux signaled that they would not support the tax. 29 With the President’s agreement, the committee replaced the Btu tax with a 4.3-cent increase in the gasoline tax and other measures, 30 including controversial increased spending cuts, to make up the difference in lost revenue. This modified plan passed the Senate in June as part of the budget package, with Vice President Gore voting to break the deadlock, 31 and the gas tax increase prevailed over the Btu tax when the Senate and House went to conference to negotiate differences between the 26. W AY S & MEANS RECOMMENDATIONS , supra note 25, at 293. 27. 139 C ONG . REC. H3301 (1993) (Roll No. 199, 219 yeas and 213 nays). 28. See Clifford Krauss, When the President Rings, Mavericks Run for Cover, N.Y. TIMES , May 29, 1993, at A1 (describing Democratic efforts to gain a majority in the House). 29. See, e.g., K. Nelson, Clinton Yields to Opponents of Energy Tax Economy, L.A. TIMES , May 29, 1993, at A1; David Hilzenrath & Eric Pianin, Accord on Energy Tax, Spending Cuts Seen; But Senate Finance Committee Chief ’s Assessment Seems at Odds With Other Members’, W ASH . POST , May 24, 1993, at A11; David Hilzenrath & Eric Pianin, Senator Boren Targets Clinton Energy Tax; Lawmaker Seeks Deeper Budget Cuts, W ASH . POST , May 21, 1993, at A1. 30. S TAFF OF J. COMM . ON TAXATION , 103 D CONG ., DESCRIPTION OF CHAIRMAN ’S MARK ON REVENUE RECONCILIATION PROPOSALS SCHEDULED FOR MARKUP BY THE SEN. COMM . ON FINANCE , JCX-6-93, at 80 (1993). 31. 139 C ONG . REC. S7986 (1993) (Roll call Vote No. 190); see also Eric Pianin & David Hilzenrath, Senate Approves Budget Plan, 50-49; Vice President Gore Casts Deciding Vote, W ASH . POST , June 25, 1993, at A1 (reporting break of deadlock that occurred when six Democrats voted against the budget plan). 10 V ERMONT JOURNAL OF ENVIRONMENTAL LAW [Vol. 10 House and Senate bills. 32 The final $500 billion deficit-reduction plan, containing the gas tax increase but no Btu tax, passed both the House and Senate by the narrowest of margins in early August 33 and was signed into law by President Clinton. 34 B. Lessons from the Btu Tax Experience 1. The Fundamental Choice of Tax Base: The Significance of Regional Burden-Sharing and Political Postures If the Clinton Administration’s only consideration had been climate change, it presumably would have proposed a carbon tax. However, as the Administration considered its alternatives—an increase in the gas tax, a carbon tax, an energy tax, or a sales tax on energy—and presented its decision to pursue the Btu energy tax, it became clear that regional burden- sharing played a decisive role in defining the tax base. A significant increase in the gas tax would have disproportionately affected regions where people have to drive longer distances, particularly where public transit is not available. 35 A carbon tax would have placed the greatest tax burden on coal, which has a higher carbon content than oil or natural gas, thereby impacting coal-producing states and states dependent on coal for electricity more than states that rely primarily on nuclear power or hydropower. 36 Significant regional differences would have generated 32. O MNIBUS BUDGET RECONCILIATION ACT OF 1993, supra note 16, at 658–62. 33. See 139 C ONG . REC. H6271 (1993) (Roll call Vote No. 406) (passing the House by a vote of 218 to 216); 139 C ONG . REC. S10763 (1993) (Roll call Vote No. 247) (passing the Senate by a vote of 50 to 50, with the Vice President casting the deciding vote); see generally David Rosenbaum, Clinton Wins Approval of His Budget Plan as Gore Votes to Break Senate Deadlock, N.Y. TIMES , Aug. 7, 1993, at A1 (reporting on the tie-breaking vote). 34. Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66, 107 Stat. 510 (1993). 35. See 139 C ONG . REC. H674, H678 (1993) (State of the Union Address by President Clinton); Keith Bradsher, Less for Environment Than Energy in Tax Bill, N.Y. TIMES , Mar. 18, 1993 (discussing the impact of a gas tax on southern, oil-producing states); Steven Pearlstein & Thomas Lippman, Industry Analysts See Broad-Based Energy Tax in Clinton’s Future, W ASH . POST , Jan. 1, 1993, at A4 (noting the political unpopularity of a gas tax in western states with limited mass transit); David Wessel, Bentsen Sees Higher Taxes on Consuming, W ALL ST. J., Jan. 25, 1993, at A2 (reporting on Secretary of Treasury Bentsen’s concerns about regional impacts of a gas tax). 36.Senate Finance Energy Tax Hearing, supra note 24, at 7 (prepared statement of Hon. Lloyd Bentsen, Secretary, Department of Treasury). See also Dawn Erlandson, The Btu Tax Experience: What Happened and Why It Happened, 12 P ACE ENVTL . L. REV. 173, 175–76 (1994) (stating that Senator Robert Byrd from the coal-rich state of West Virginia single-handedly caused the carbon tax to be rejected); Thomas W. Lippman, Energy Tax Has ‘Green’ Tint; Environmentalists Back Plan They Helped Draft, W ASH . POST , Mar. 2, 1993, at D1, available at http://www.washingtonpost.com (explaining that a carbon tax was politically impossible given Senator Byrd’s position as Chairman of the Appropriations 2008] Carbon Taxes in the United States 11 questions of equity, economic impact, and the political opposition that comes with each. According to the Administration, the Btu tax’s broad tax base would treat states relatively equally, while the higher energy cost and the exemption for renewable energy would still serve environmental goals. The Administration estimated that the tax would range by region from 0.54% to 0.67% of taxpayers’ disposable personal income, a variation of only 0.13%. 37 Even so, as indicated above, the tax was not an easy sell. Thus, the Clinton Btu tax experience in 1993 underscores the political and economic challenges of proposing a tax that targets only fossil fuels and generates regional disparities. Perhaps the argument that polluters should pay despite regional differences might be more persuasive now with the increased awareness of the risks of climate change. 38 But the 1993 events also serve as a reminder that cap-and-trade regimes for greenhouse gases may have similar regional impacts because they target the same base as a carbon tax or greenhouse gas tax. Despite the relative political opaqueness of cap-and-trade regimes, the same policy choice underlies broad-based carbon trading regimes that will place the financial burden disproportionately on some regions. The political landscape of the moment influenced the choice of tax base as well. President Clinton would have had difficulty defending a significant gas tax increase after opposing, during the presidential race, Ross Perot’s campaign proposal to increase the gas tax by fifty cents. 39 In addition, a carbon tax would have run counter to the interests of the powerful Senator Robert Byrd from coal-producing West Virginia, Chair of the Senate Appropriations Committee—a potentially lethal flaw. 40 The choice of tax base reflected the realities of political postures. Committee); Matthew L. Wald, Pondering an Energy Tax That Can’t Please All the People, N.Y. TIMES , Jan. 31, 1993, at F10 (comparing the relative impacts of the carbon tax on the energy sources of Ohio and Washington). 37. Senate Finance Energy Tax Hearing, supra note 24, at 120 (prepared statement of Hon. Lloyd Bentsen, Secretary, Department of Treasury). The Administration chose to define the tax base as the Btu energy content of these sources, rather than the price of the energy as with an ad valorem or sales tax, so that the tax burden would not vary with the price of energy. 139 C ONG . REC. H674, H678 (1993) (State of the Union Address by President Clinton). 38. See generally W ORKING GROUP II CONTRIBUTION , INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE , CLIMATE CHANGE 2007: IMPACTS , ADAPTATION , AND VULNERABILITY 7–18 (Martin Parry et al., eds. 2007) (chronicling current knowledge about worldwide impacts of climate change). 39. Timothy Noah, Clinton Aides Seek Gasoline Tax Boost, New Carbon Levy, W ALL ST. J., Dec. 9, 1992, at A2. 40. Erlandson, supra note 36, at 175; Lippman, supra note 36; Wald, supra note 36. See also Senate Finance Energy Tax Hearing, supra note 24, at 7 (statement of Hon. Lloyd Bentsen, Secretary, Department of Treasury) (noting disproportionate impact of a carbon tax on coal-producing states). 12 V ERMONT JOURNAL OF ENVIRONMENTAL LAW [Vol. 10 2. Refining the Tax Base: The Significance of International Competitiveness and Political Strategy The Clinton Administration recognized the need to put imports on equal tax footing with domestic products in order to preserve the competitive position of domestic activities. The initial proposal provided that “imported taxable products” would be subject to tax at a level equivalent to domestic products. 41 The Ways and Means Committee’s version of the Btu tax imposed a tax on imported energy-intensive products, defined as those with two percent of their value attributable to energy that would have been taxable if the products had been manufactured in the United States. 42 Conversely, exported energy sources were exempt from the tax. 43 Although always subject to compliance with the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization trade rules, 44 a border tax adjustment can mitigate concerns about the economic impact of the tax. While imposition of a tax on imports is consistent with the environmental goal of reducing carbon emissions, which are transboundary in nature, exempting exports is less justifiable on global environmental grounds. Refinements to the tax base also illustrate the significance of strategic decisions once a tax is proposed. Not long after the Clinton Administration announced the proposed Btu tax, it signaled that it would revise some of the elements of the tax, in particular by broadening the list of exemptions. For example, faced with objections from states highly dependent on home heating oil, the Administration indicated it would exempt home heating oil from the supplemental tax on refined petroleum products. 45 In addition, proponents of ethanol argued that it should receive the same tax-exempt treatment as other renewable energy, 46 such as solar and wind. 47 The 41. D EP’T OF TREASURY , SUMMARY OF THE ADMINISTRATION ’S REVENUE PROPOSALS 164 (1993). See also Senate Finance Energy Tax Hearing, supra note 24, at 137 (responses of Hon. Lloyd Bentsen, Secretary, Department of Treasury, to questions submitted by Senator John Danforth). 42. H.R. R EP. NO. 103-111, at 746–47 (1993), reprinted in 1993 U.S.C.C.A.N. 378, 977–78. 43. D EP’T. OF TREASURY , SPECIFICATIONS OF THE ADMINISTRATION ’S MODIFIED BTU ENERGY TAX PROPOSAL 3 (1993); H.R. R EP. NO. 103-111, at 746–47 (1993), reprinted in 1993 U.S.C.C.A.N. 378, 977–78. 44. See generally O RG. FOR ECONOMIC CO-OPERATION AND DEV., THE POLITICAL ECONOMY OF ENVIRONMENTALLY RELATED TAXES 93–106 (2006) (discussing general and specific restrictions the GATT regulatory framework places on border tax adjustments). 45. O FFICE OF TAX POLICY , DEP’T OF TREASURY , THE ADMINISTRATION ’S MODIFIED BTU ENERGY TAX PROPOSAL 2 (1993); Rick Wartzman, Administration Alters Proposal for Energy Tax, W ALL ST. J., Apr. 2, 1993, at A2. 46. See Senate Finance Energy Tax Hearing, supra note 24, at 10 (statement of Hon. Lloyd Bentsen, Secretary, Department of Treasury, noting Senators’ concerns with application of tax to ethanol). 2008] Carbon Taxes in the United States 13 Administration’s modified proposal, released in April, acquiesced. 48 Although the House Ways and Means Committee rejected the ethanol change, 49 the Administration’s willingness to modify helped open the door to other changes in the tax proposal and the budget plan and emboldened the opposition. 50 “The opponents of the energy tax smelled blood.” 51 The controversial Btu tax was defeated at least in part because of the way the Administration played its hand. 52 Strategic decisions for any tax bill will turn on the particular political landscape of the time, but the Clinton experience illustrates how flexibility with exemptions after the proposal is released can erode the strategic momentum of the plan and its perceived or real integrity. 3. The Taxpayer/Collection Point: A Technical Issue with Non-technical Consequences The Clinton Administration originally intended to collect the tax as far upstream as possible, a logical standpoint considering administrative feasibility and the benefits of influencing upstream choices. 53 It fell sway, however, to industry pressures and agreed to allow the tax to be paid by end users of coal, 54 natural gas, and electricity, although the tax would still be collected by the natural gas or electric utility. 55 Not only did this contribute to the sense that the tax plan was negotiable, but it also undercut support for the tax among environmental groups, which argued that imposing the tax on 47. See Lippman, supra note 36 (reporting that Iowa Senator Tom Larkin complained to Treasury Secretary Bentsen about ethanol’s inclusion in the Btu tax while other renewable sources were exempt). 48. O FFICE OF TAX POLICY , D EP’T. OF THE TREASURY , SPECIFICATIONS OF THE ADMINISTRATION ’S MODIFIED BTU ENERGY TAX PROPOSAL 3 (1993). 49. W AY S & MEANS RECOMMENDATIONS , supra note 25, at 295. 50. Erlandson, supra note 36, at 177–78; Steven Greenhouse, The White House Struggles to Save Energy Tax Plan, N.Y. TIMES , May 10, 1993, at A1. 51. Erlandson, supra note 36, at 178. 52. See Richard Morgenstern, Issue Brief 8: Addressing Competitiveness Concerns in the Context of Mandatory Policy for Reducing U.S. Greenhouse Gas Emissions, in A DDRESSING U.S. CLIMATE CHANGE POLICY OPTIONS 112 (2008) (explaining that exemptions to President Clinton’s Btu tax proposal contributed to its demise in the Senate). 53. D EP’T OF TREASURY , S UMMARY OF THE ADMINISTRATION ’S REVENUE PROPOSALS 65 (1993). 54. Compare D EP’T OF TREASURY , S UMMARY OF THE ADMINISTRATION ’S REVENUE PROPOSALS 65 (1993) (proposing that the tax on coal be imposed at the minemouth), with O FFICE OF TAX POLICY , DEPARTMENT OF TREASURY , DESCRIPTION OF MODIFIED BTU TAX 2 (1993) (indicating that the tax on coal would be imposed on the end user). 55. Jackie Calmes & David Wessel, Clinton Changes Course on Part of Energy Tax— Agreement Would Ease Restrictions on Utilities to Pass Along the Levy, W ALL ST. J., May 11, 1993, at A2. 14 V ERMONT JOURNAL OF ENVIRONMENTAL LAW [Vol. 10 electric utilities would give utilities a greater incentive to use cleaner energy. 56 In addition, it heightened the political visibility of the tax to voting end users, leading a representative of utility regulators to comment that the Clinton administration did not want reminders that “this isn’t the ‘BTU tax,’ it’s ‘the Bill-is-taxing-you tax.’” 57 In finding the right collection point, a tax proponent needs to balance the administrative considerations, the environmental impacts, and the political repercussions—a choice perhaps less likely to occur with permit trading regimes where upstream trading is more feasible than downstream. 4. The Tax Rate: Balancing the Multiple Driving Factors of Deficits, Environmental Protection, and Economic Impact The political impetus for the Clinton Btu tax sprang from the need to reduce the deficit. Although discussions about using some form of energy tax appeared on the table a month after President Clinton’s election in November 1992, 58 the concept was quickly wrapped into the question of how to reduce the deficit. 59 Consequently, the Btu tax’s relatively low tax rate—only $3.24 per barrel of oil even with the supplemental rate on petroleum—generated the $70 billion over five years needed as a key part of the deficit-reduction package. However, the tax rate did not appear to be grounded on an explicit environmental calculation, such as a refined notion of cost internalization or behavioral impact. The environmental aspect of the tax rate’s effect was real, but modest; the Administration estimated it would reduce the anticipated growth in energy consumption by seven percent. 60 56. Liam Eaton, Clinton, Democrats Near Energy Tax Compromise Legislation: The Levy’s Collection Point Would Shift Closer to Consumers, L.A. TIMES , May 11, 1993, at A12. 57. Calmes & Wessel, supra note 55. Before this concession, the Clinton proposal would have required utilities to pass the cost of the tax on to consumers in order to encourage conservation, but the utilities would have paid the tax so that it would not have appeared as a line item on consumers’ bills. O FFICE OF TAX POLICY , DEP’T OF TREASURY , THE ADMINISTRATION ’S MODIFIED BTU ENERGY TAX PROPOSAL 2 (1993). 58. Noah, supra note 39, at A2. 59. See Jeffrey Birnbaum & Michael Frisby, Clinton Puts Emphasis On Deficit Reduction Goals as He Maps Economic Plans, W ALL ST. J., Dec. 18, 1992, at A1 (explaining that deficit reduction was President Clinton’s highest priority and specifying where the energy tax fit into his plan); David We s s e l l & R i c k Wa r t z m a n , Clinton’s Options; Tax Increases Seem Inevitable, Including Some on Middle Class, W ALL ST. J., Jan. 22, 1993, at A1 (discussing the President’s concerns about the deficit and his advisors’ interest in using an energy tax to reduce the deficit). 60. O FFICE OF TAX POLICY , supra note 45, at 1. See C ONG . BUDGET OFFICE , AN ANALYSIS OF THE PRESIDENT ’S FEBRUARY BUDGETARY PROPOSALS III-6 (1993), available at http://www.cbo.gov/ftpdocs/75xx/doc7531/93doc10.pdf (concluding that the environmental and national security benefits of the tax were likely to be real but minimal). 2008] Carbon Taxes in the United States 15 The tax rate presumably also reflected a desire to limit the financial burden on individuals and industry. The Administration estimated that the tax, when fully phased in, would impose a direct cost of $9.50 per month on a family of four with an income of $40,000 and would increase manufacturing costs on average by 0.1% 61 while still generating $22 billion per year. Yet even that level of relatively modest additional cost met with immediate opposition from industry. 62 The relatively low tax rate, combined with a broad tax base extending beyond fossil fuels, suggests that while the Btu tax had environmental characteristics, its environmental features were muted by other considerations. This result was not inconsistent with the need of traditional tax policy to consider issues of economic impact and equity. At the same time, the Clinton experience dramatically underscores how the need for revenue can provide an opportunity to introduce a new type of environmental tax. Political opportunities in the future may come from the environmental side of the equation, or they may come from the revenue side, or both, but it will require delicate compromise to take advantage of a revenue-driven opportunity while maintaining the environmental features of the tax itself, in particular, the tax rate. 5. The Use of the Revenue: A Crucial Part of the Picture As mentioned above, revenue demands can create a motive and an opportunity for a tax. In addition, the revenue from the tax can help build a package that reduces the regressivity of the tax itself and may produce broader benefits that can have significant political and policy implications. The Clinton Administration was aware of the regressivity issue from the start. In presenting the budget proposal to Congress, President Clinton announced that the Btu tax would “cost American families with incomes under $30,000 nothing,” 63 given the budget proposal’s increases in the earned income tax credit and programs for food stamps, home energy assistance, and home weatherization that would reduce the burden on low- 61. Senate Finance Energy Tax Hearing, supra note 24, at 6–7, 121 (statement of Hon. Lloyd Bentsen, Secretary, Department of Treasury). The Administration estimated that the tax would raise costs for energy-intensive industries by less than four percent, but those industries might also benefit from tax relief provisions in the proposed budget plan. O FFICE OF TAX POLICY , supra note 45, at 3. 62. See, e.g., Gerald F. Seib & David Rogers, Interest Groups and Lobbyists To Fight Plan, W ALL ST. J., Feb. 18, 1993, at A12. 63. 139 C ONG . REC. H674, H678 (1993) (State of the Union Address by President Clinton). 16 V ERMONT JOURNAL OF ENVIRONMENTAL LAW [Vol. 10 income taxpayers. 64 Although the revenue from the Btu tax was not specifically dedicated to these forms of relief, the total package, which included the new revenue, allowed the Administration to argue that it was protecting low income households—an issue that must be confronted for any energy-related tax. President Clinton promoted the Btu tax as serving environmental, energy security, and deficit-reduction goals. 65 The implementation of the tax itself would serve the first two goals, and deficit reduction would be achieved by the use of its revenue. The placement of the $70 billion tax within a $500 billion deficit-reduction package allowed the Clinton Administration to present the tax in a broader light and to cite the economic advantages of deficit reduction as reasons to support the tax. The Administration pointed to benefits such as lower interest rates, 66 which would reduce capital costs for industry and mortgage interest costs for homeowners, 67 providing benefits to a broad range of taxpayers and constituents. The President argued that lower interest rates would “more than offset” the additional cost of the tax to middle income people. 68 The President’s campaign promises not to raise taxes politically tarnished this net-benefit argument, 69 but the proposal nonetheless illustrates how the use of the revenue and the combined package can generate reasons to support a tax and potentially alleviate concerns. Different decisions about how to use new revenue from a climate change tax could be made at other times—such as whether to use all the revenue for offsetting tax relief on a revenue- neutral basis in order to strengthen the economy, or whether to dedicate some or all of the revenue to the environmental problem, which in turn may strengthen the economy. The point remains, however, that an assessment of the feasibility and merit of a tax is bound to the question of the use of its revenue. 64. O FFICE OF TAX POLICY , supra note 45, at 2; O FFICE OF TAX POLICY , DEP’T OF TREASURY , FREQUENTLY ASKED QUESTIONS REGARDING THE ADMINISTRATION ’S PROPOSED MODIFIED BTU TAX 10–11 (1993). 65. 139 C ONG . REC. H674, H678 (1993) (State of the Union Address by President Clinton). 66. Id. 67. Senate Finance Energy Tax Hearing, supra note 24, at 6–7 (statement of Hon. Lloyd Bentsen, Secretary, Department of Treasury). 68. 139 C ONG . REC. H674, H678 (1993) (State of the Union Address by President Clinton). 69. See David Hilzenrath, Politics Overtakes Policy in Energy Tax Debate, WASH . POST , July 20, 1993, at C1 (noting that the energy tax proposal reversed President Clinton’s campaign promises). Es Risen, Energy Tax Hits Consumer More than Oil Firms, L.A. TIMES , May 27, 1993 (citing legislators’ perception of energy tax as a repudiation of the President’s campaign promises). 2008] Carbon Taxes in the United States 17 6. A Viable Concept? In sum, the Clinton Btu tax shows how an environmental tax proposal is inevitably shaped by issues of economic impact, equity, and politics. The challenge is to ensure that, if it is truly an environmental instrument, it maintains sufficient environmental integrity while also guarding against unacceptable impacts on the economy and taxpayers. This is not an easy challenge, and the Clinton Btu tax shows how the environmental features, while present, probably did not dominate design decisions. Nonetheless, it offered a creative compromise with its broad tax base, relatively low tax rate (which could have been susceptible to subsequent increases), and equity and economic benefits through the use of the revenue. The fate of the Clinton Btu tax need not necessarily ring the death knell for a federal carbon tax in the United States. There is no doubting the visceral reaction a new tax seems to inspire and the difficulty of adding additional costs to energy when the price of oil is high or the economy weak. Political prognostication is risky at best, but certain factors might help generate a more positive reaction in the future. For example: • A wider majority in Congress would leave less political power in the hands of a few players, unlike the two-Senator margin President Clinton faced with the Senate Finance Committee. • A stronger national commitment to address climate change could create greater political will to pursue a carbon tax. • A strong need for revenue that can finance increased spending, reduce the deficit, or provide tax relief could add a second set of forces to propel a tax proposal. For example, as former Vice President Al Gore said in July 2008 when he reiterated his support for reducing payroll taxes by using carbon tax revenues, “[w]e should tax what we burn, not what we earn.” 70 • A heightened awareness of how increases in the price of fuel can change behavior could build support for price signals that economic instruments can maintain over time. Although economically painful, higher gas prices in 2008 are starting to change behavior and provide evidence that price signals can work. • A more thorough discussion of the economic benefits of addressing climate change, with more active support from the 70. Al Gore, Address at D.A.R. Constitutional Hall, Generational Challenge to Repower America (July 17, 2008), available at http://www.wecansolveit.org/content/pages/304 (last visited Dec. 2, 2008). 18 V ERMONT JOURNAL OF ENVIRONMENTAL LAW [Vol. 10 industries that will benefit, would help build the factual case and political support for long-term price signals. • A sophisticated political understanding about the economic costs of alternative solutions to climate change would put carbon or greenhouse gas taxes on more equal footing with instruments that have less politically visible profiles. The negative impact of alternatives also can generate strange bedfellows for support, just as Ford, General Motors, and Chrysler supported the Clinton Btu tax in hopes of avoiding more stringent fuel economy regulations. 71 • Campaign rhetoric would need to leave sufficient flexibility for considering a carbon tax unless unforeseen circumstances subsequently diminish the significance of campaign promises. In the ever-changing kaleidoscope of facts and circumstances, it is difficult to predict which combinations might generate more favorable opportunities for a carbon tax. Nevertheless, the fact of one defeat should not preclude the possibility of a carbon tax—particularly if Congress or a president takes off the table cap-and-trade regimes that do not auction allowances to emit greenhouse gases. III. THE PRESENT CONTEXT FOR CARBON TAXES The United States has a number of laws that address greenhouse gas emissions, but it does not have a comprehensive, integrated, nationwide legal regime for reducing its contribution to global carbon dioxide or other greenhouse gases. 72 Although the Environmental Protection Agency (EPA) has solicited comments on the ways in which it might use its authority under the Clean Air Act to regulate greenhouse gases, 73 the EPA Administrator stated his belief that “the Clean Air Act . . . is ill-suited for the task of regulating global greenhouse gases.” 74 This view was shared by the Office of Management and Budget in the Executive Office of the President and numerous Cabinet members in the Bush Administration. 75 A 71. Matthew Wald, The Clinton Fuel Tax Finds a Few Unexpected Allies, N.Y. TIMES , Mar. 14, 1993. 72. For an overview of a number of federal programs related to greenhouse gas emissions, see Regulating Greenhouse Gas Emissions under the Clean Air Act, 73 Fed. Reg. 44,354 (proposed July 11, 2008). 73. Id. at 44,354. 74. Id. at 44,355. 75. Id. at 44,356–44,361. 2008] Carbon Taxes in the United States 19 comprehensive program is likely to require federal legislation, and a number of proposals are pending in Congress, including carbon tax bills and more prominent cap-and-trade bills. In addition, states are starting to implement market-based measures. In order to place carbon taxes in the current context, the discussion below briefly describes proposed and actual carbon taxes and cap-and-trade regimes in the United States, focusing on major actions that can illustrate the current state of play. It does not address the range of tax expenditures for environmentally positive activities already in the federal tax code, such as tax incentives for renewable energy or, conversely, tax subsidies that may be environmentally damaging, such as tax benefits for oil and gas. Although beyond the scope of this article, they are significant market-based instruments that should be kept in mind when considering the portfolio of market-based approaches. A. Carbon Taxes Two carbon tax bills are currently pending in Congress. These bills differ from the Clinton Btu tax in that they focus on fossil fuels and do not tax nuclear power and hydropower. The “Save Our Climate Act of 2007,” H.R. 2069, introduced by Congressmen Fortney “Pete” Stark and Jim McDermott, proposes to tax fossil fuels at a rate of $10 per ton of carbon content of coal, petroleum and petroleum products, and natural gas, increasing by $10 per year until carbon dioxide emissions from the United States are reduced to eighty percent below their 1990 level. 76 The tax would be paid by the manufacturer, producer, or importer of the fuel, but the tax may be refunded if the fuel is used in a way that embeds or sequesters carbon, 77 and exports are exempt from the tax. 78 The bill suggests, but does not require, that the revenue from the tax could be used for tax relief for low- or middle-income taxpayers, funding for developing alternative energy, or other social goals. 79 It also calls for studies every five years of the environmental, economic, and fiscal impacts of the tax. 80 The second bill, “America’s Energy Security Trust Fund Act of 2007,” H.R. 3416, introduced by Congressman John Larson, would tax the CO 2 content of the same fossil fuels, and would be paid by the same classes of taxpayers as the Stark-McDermott bill. 81 The proposed tax rate is $15 per 76. H.R. 2069, 110th Cong. § 3(a) (2007). The taxable fuels exclude fuel placed in the Strategic Petroleum Reserve. Id. 77. Id. 78. Id. 79. Id. § 2(7). 80. Id. § 3(b). 81. H.R. 3416, 110th Cong. § 2(a) (2007). 20 V ERMONT JOURNAL OF ENVIRONMENTAL LAW [Vol. 10 ton, increasing by ten percent plus one percent more than the cost of living adjustment each year. 82 Fuel used as feedstocks and exports are exempt, and taxpayers that carry out offset projects, sequester greenhouse gases, or destroy hydrofluorocarbons in the United States may qualify for a refund or tax credit for taxes paid. 83 According to one estimate, the $15 per ton tax rate on carbon dioxide would translate into $55 per ton of carbon, and by 2017 the tax rate (without inflation adjustment) would be approximately $130 per ton of carbon, compared with $100 per ton of carbon for the Stark-McDermott carbon tax. 84 Unlike the Stark-McDermott bill, the Larson bill would dedicate the revenue from the tax to a trust fund. The fund would finance a tax credit for clean energy technology (the lesser of $10 billion per year or one-sixth of the fund each year), transition assistance for industries adversely affected by the carbon tax (starting at one-twelfth of the revenue into the trust fund the first year and phasing down to zero over ten years), 85 and a “carbon tax rebate” in the form of an income tax credit for individual taxpayers (the remainder of the revenue). 86 The income tax credit would equal the taxpayer’s per capita share of this portion of the trust fund’s revenue, capped at the level of federal payroll taxes paid with respect to that taxpayer or ten percent of the social security benefits the taxpayer received that year. 87 The bill also calls for a study of ways to assess a comparable tax on non-carbon greenhouse gases. 88 The carbon tax concept is not limited to the federal government. Two local areas have chosen to enact modest carbon-related energy taxes. In 2006, the voters of Boulder, Colorado approved a Climate Action Plan Tax, which imposed a tax on the end users of electricity collected by the utility. 89 The tax rates were set for 2007, but the city council has the ability to raise the rates up to specified caps in subsequent years. The maximum rates are 0.49 cents per kilowatt hour for residential users, 0.09 cents per kilowatt 82. Id. 83. Id. 84. Carbon Tax Center, Bills, http://www.carbontax.org/progress/carbon-tax-bills (last visited July 10, 2008). 85. H.R. 3416, 110th Cong. §§ 2(b), 3 (2007). 86. Id. 87. Id. § 3. See also G ILBERT E. METCALF , BROOKINGS INSTITUTION , A PROPOSAL FOR U.S. CARBON TAX SWA P 11 (2007) (proposing a tax on greenhouse gas emissions at the starting rate of $15 per ton of carbon dioxide equivalent, with revenue used for a refundable earned income tax credit, linked to payroll taxes, that would reduce the regressivity of the tax). 88. H.R. 3416, 110th Cong. § 4 (2007). 89. C AROLYN BROUILLARD & SARAH VAN PELT , A COMMUNITY TAKES CHARGE : BOULDER ’S CARBON TAX 11 (2007), available at http://www.bouldercolorado.gov/files/Environmental%20Affairs/c limate%20and%20energy/boulders_carbon_tax.pdf. 2008] Carbon Taxes in the United States 21 hour for commercial users, and 0.03 cents per kilowatt hour for industrial users. 90 The revenue is used to finance the city’s climate action program, which aims to reduce the local greenhouse gas emissions to seven percent below 1990 levels by 2012, 91 and tax rates are based on the amount each sector will receive for programs under the climate action plan. 92 In the region surrounding San Francisco, California, the Bay Area Air Quality Management District has imposed a fee that has more of the features of a traditional carbon tax. The tax base is explicitly defined in terms of emissions, but it also covers greenhouse gas emissions beyond carbon dioxide. 93 Starting in 2008, industrial facilities and businesses that are subject to air quality permit requirements must pay a fee of 4.4 cents per ton of greenhouse gas emissions. 94 The fee is estimated to generate $1.3 million annually which the District will use for its climate programs. 95 In early 2008, San Francisco Mayor Gavin Newsom announced his intention to put a city carbon tax before voters, 96 and the Department of the Environment was instructed to prepare options. 97 Under the Mayor’s revenue-neutral proposal, revenue would be used to reduce the payroll tax. 98 Thus, while carbon tax proposals have received relatively little political attention, they have been introduced in Congress, and local governmental bodies are using carbon-related tax bases to generate revenue to finance climate programs. Figure 3 summarizes the key features of the various tax regimes, as well as the features of the cap-and-trade systems described below, highlighting differences and similarities. 90. B OULDER REV. CODE § 3-12-2, available at http://www.colocode.com/boulder2/chapter3- 12.htm. 91. Id. § 3-12-1. 92. B ROUILLARD & VAN PELT , supra note 89, at 9–10. 93. Bay Area Quality Management District, Reg. 3, sched. T (May 21, 2008), available at http://www.baaqmd.gov/dst/regulations/rg0300.pdf. 94. Id. 95. Press Release, Bay Area Air Quality Management District, Air District Implements Greenhouse Gas Fee (May 21, 2008), available at http://www.baaqmd.gov/pio/news/2008/climate_fee0 80521.pdf. 96. Associated Press, San Francisco to Vote on Business Carbon Tax: Mayor Promises Businesses Would Also See Cut in Payroll Tax, Dec. 6, 2007, http://www.msnbc.msn.com/id/22132812; San Francisco Mayor Gavin Newsom, Inaugural Address 2 (Jan. 8, 2008). 97. C OMMISSION ON THE ENVIRONMENT , SAN FRANCISCO CITY GOVERNMENT , RESOLUTION NO. 00208 COE, at 2 (2008), available at http://www.sfenvironment.org/downloads/library/res00208coe carbontax.pdf. 98. Associated Press, supra note 96. See also City and County of San Francisco Small Bus. Comm’n, Minutes, Item 9, Jan. 14, 2008, available at http://www.sfgov.org/site/sbc_page.asp?id=75330 &mode=text (stating the goal of revenue neutrality for a carbon tax). 22 V ERMONT JOURNAL OF ENVIRONMENTAL LAW [Vol. 10 Figure 3: Comparison of Elements of Tax and Cap-and-Trade Instruments Tax Tax Base Tax Rate Taxpayer Use of Revenue Federal gas tax now in effect (not including taxes on diesel, aviation fuel) Gasoline 18.4 cents per gallon Oil refiner; Position holder of fuel in terminal; Importer Highway Trust Fund; Leaking Underground Storage Tank Trust Fund Clinton Btu tax proposal in 1993 Fossil fuels; Hydropower; Nuclear; Ethanol (in original proposal) 25.7 cents per million Btus, with 34.2 cents per million Btus supplemental rate for oil Oil refiner; End user of coal, electricity; Importer Deficit reduction; Regressivity offsets in budget package H.R. 2069 Save Our Climate Act of 2007 (Stark- McDermott) Coal; Petroleum and petroleum products; Natural gas $10 per ton of carbon, increased by $10 per year until emissions 80% below 1990 level Manufacturer Producer Importer Not mandated H.R. 3416 America’s Energy Security Trust Fund Act of 2007 (Larson) Coal Petroleum and petroleum products; Natural gas $15 per ton of carbon dioxide, increased each year by 10% plus cost of living adjustment Manufacturer Producer Importer Dedicated to: Tax credit for clean energy technology; Transitional industry assistance; Carbon tax rebate Boulder, Colorado, Climate Action Plan Tax Electricity Capped per kilowatt hour at: 0.49 cents (residential) 0.09 cents (commercial) 0.03 cent (industrial) End user (collected by electric utility) Climate action program San Francisco, Bay Area Air Quality Management District Fee Greenhouse gas emissions 4.4 cents per ton of greenhouse gas emissions Industry, businesses subject to air quality permits Climate protection programs 2008] Carbon Taxes in the United States 23 Cap-and- Trade Covered Emissions Cost per Permit Regulated Entity Use of Revenue S. 3036 Lieberman- Wa r n e r Climate Security Act of 2008 (Amendment 4825) Carbon dioxide Methane Nitrous oxide Sulfur hexaflouride Perfluorocarbons Hydrofluorocarbons Unknown; ability to provide relief if economy subject to harm Coal user; Importer or producer of natural gas, petroleum, coal-based fuel, or certain greenhouse gases; Producers of HCFCs Broad range of purposes including: worker assistance; consumer relief; greenhouse gas reduction programs; deficit reduction Regional Greenhouse Gas Initiative (RGGI) Carbon dioxide from electricity generation Unknown; potential for liberalized offset provisions if price above $7/ton Electricity generator Extent of auctioning and use of revenue varies with state We s t e r n Climate Initiative (proposed) Carbon dioxide Methane Nitrous oxide Sulfur hexaflouride Perfluorocarbons Hydroflurocarbons Unknown; anticipates rigorous offset program to reduce cost Broad range of sectors for facilities, starting with electricity sector in 2012 and expanding to other sectors in 2015 Minimum of 10% allowances auctioned in 2012, 25% in 2020, possibly higher thereafter; within guidelines, use of proceeds can vary by jurisdiction B. Cap-and-Trade Regimes The context for carbon taxes in the United States inevitably involves the question of the role of cap-and-trade regimes, which have been gaining momentum. As indicated at the start, this article does not serve as a critique of the relative merits of taxation versus cap-and-trade instruments. Rather, it can only briefly identify some of the relevant proposals or actions in order to put carbon taxes in context and to illustrate how many of the issues 24 V ERMONT JOURNAL OF ENVIRONMENTAL LAW [Vol. 10 that arise with carbon taxes also exist in cap-and-trade regimes. These issues include deciding which energy sources or emissions should be covered, at what point in the supply chain the price signal should be imposed, how to treat imports, and how to use any revenue (see Figure 3). At the federal level, a number of proposals for cap-and-trade regimes for greenhouse gases were introduced in the 110th Congress spanning 2007 and 2008. 99 The most recent legislative activity of note centered on an amendment to the Lieberman-Warner Climate Security Act of 2008, S. 3036. 100 The amendment, submitted by Senator Barbara Boxer on behalf of Senators Joseph Lieberman and John Warner as a replacement for the original language of S. 3036, proposes an economy-wide cap-and-trade program. The amendment was designed to reduce greenhouse emissions to 19% below 2005 levels by 2020 and 71% below 2005 levels by 2050. 101 Although the amendment only received forty-eight of the sixty votes it needed to close debate, 102 it illustrates the type of cap-and-trade program receiving serious legislative attention. The Lieberman-Warner bill, as described in the amendment, focuses on upstream producers or users and greenhouse gases beyond carbon dioxide. The proposed cap-and-trade system applies to entities that: use more than 5,000 tons of coal each year; process or import natural gas or produce natural gas in Alaska; manufacture or import petroleum or coal- based liquid or gaseous fuels; manufacture or import more than 10,000 tons of CO 2-equivalents of CO 2, methane, nitrous oxide, sulfur hexafluoride, or per fluorocarbons; or manufacture hydrochlorofluorocarbons. 103 Starting in 99. See, e.g., S. 3036, 110th Cong. (2008); S. 2191, 110th Cong. (2007); S. 1766, 110th Cong. (2007); S. 1554, 110th Cong. (2007); S. 1201, 110th Cong. (2007); S. 1177, 110th Cong. (2007); S. 1168, 110th Cong. (2007); S. 485, 110th Cong. (2007); S. 317, 110th Cong. (2007); S. 309, 110th Cong. (2007); S. 280, 110th Cong. (2007); H.R. 6316, 110th Cong. (2008); H.R. 6186, 110th Cong. (2008); H.R. 1590, 110th Cong. (2007); H.R. 620, 110th Cong. (2007). 100. The original Lieberman-Warner bill, S. 2191, 110th Cong. (2007), was reported favorably out of the Senate Committee on Environment and Public Works in May 2008 as “America’s Climate Security Act of 2007.” H.R. REP. NO. 110-337, at 1 (2008). However, Senator Boxer, chair of the committee, introduced a substitute Lieberman-Warner bill, S. 3036, 110th Cong. (2008), and subsequently offered Amendment 4825. 154 C ONG . REC. S5048. Because the Senate’s vote centered on Amendment 4825, 154 C ONG . REC. S5333–34 (2008); S. 3036, 110th Cong. (2008), this article focuses on the cap-and-trade program proposed in the amendment. 101. P EW CTR. ON GLOBAL CLIMATE CHANGE , SUMMARY OF THE BOXER SUBSTITUTE AMENDMENT TO THE LIEBERMAN -WARNER CLIMATE SECURITY ACT 3 (2008), available at http://www.pewclimate.org/docUploads/L-WFullSummary.doc. See also Juliet Eilperin, Senate Leaders Pull Measure on Climate, W ASH . POST , June 7, 2008, at A3 (explaining the goals of the bill). 102. David Herszenhorn, After Verbal Fire, Senate Effectively Kills Climate Change Bill, N.Y. TIMES , June 7, 2008,available at http://www.nytimes.com/2008/06/07/washington/07climate.html?_r=1 &scp=1&sq=David%20Herszenhorn,%20After%20Verbal%20Fire&st=cse&oref=slogin. 103. S. 3036, Amend. 4825, 110th Cong. § 4(16), (33) (2008) (defining “covered entity” and “non-HFC greenhouse gas”). 2008] Carbon Taxes in the United States 25 2012, these entities would need one allowance for each ton of CO 2- equivalent emissions or downstream emissions potential. 104 The bill establishes a declining number of allowances from 2012 to 2050 105 and tightly circumscribes the use of domestic offset projects or allowances from foreign trading programs. 106 Limited relief measures could be available, such as increased borrowing against future years’ allowances. 107 To protect competitiveness, importers of products that generated substantial amounts of greenhouse gases during manufacture would have to purchase allowances if the country of origin has not taken comparable climate change actions, 108 somewhat akin to a border tax adjustment for a carbon or broad-based energy tax. Over time, an increasing percentage of the allowances would be auctioned, 109 with proceeds going toward a variety of uses such as workers’ transition assistance, 110 suggested tax relief for consumers hardest hit with cost increases, 111 mass transit, 112 energy efficiency, 113 low- or no-carbon electricity, 114 research, 115 wildlife and land conservation, 116 firefighting, 117 reducing greenhouse gas emissions from activities not covered by the cap- and-trade program, 118 international programs, 119 and deficit reduction. 120 In addition, allowances would be allocated, without charge, to industries dependent on fossil fuels (carbon-intensive manufacturers, 121 electricity generators that use fossil fuels, 122 and petroleum refiners 123) as well as to a variety of entities that would use the allowances to provide relief to consumers, encourage the transition to a lower-emission economy, 124 104. Id. § 202(a). 105. Id. § 201(a). 106. Id. §§ 302(b)(1), (2) (each limited to 15% of the covered facilities allowances). 107. Id. § 521. 108. Id. §§ 1301–1306. 109. Id. §§ 532(c), 582(c), 611(d), 631(c), 1202(c), 1331(c), 1402(c). 110. Id. §§ 533–535. 111. Id. §§ 583–585. 112. Id. §§ 611(f)–(i). 113. Id. § 613. 114. Id. §§ 903, 905–906. 115. Id. §§ 911–912. 116. Id. §§ 631(d), (e), 1201(a)(1)(C). 117. Id. §§ 1211(b), 1212(b). 118. Id. § 527. 119. Id. §§ 1331(b), 1332. 120. Id. § 1403. 121. Id. § 541. 122. Id. § 551. 123. Id. § 561. 124. See, e.g., id. § 601 (allocating to local distribution companies for electricity and natural gas for relief to lower-income consumers and small business); id. § 602 (allocating to states dependent on coal and manufacturing for reducing greenhouse gas emissions and encouraging energy efficiency); id. § 26 V ERMONT JOURNAL OF ENVIRONMENTAL LAW [Vol. 10 address adaptation on an ongoing basis, 125 and reward early action. 126 In addition, the proposed legislation contains a separate cap-and-trade program for hydrofluorocarbon emissions. 127 In the absence of a federal cap-and-trade regime to date, ten states in the Northeast and Mid-Atlantic (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont) have joined together to create a narrower cap-and-trade regime targeting the electricity sector, the Regional Greenhouse Gas Initiative (RGGI). 128 The RGGI cap-and-trade program applies to carbon dioxide emissions from entities that generate at least twenty-five megawatts of electricity 129 with the goal of stabilizing emissions at current levels by 2014 and gradually reducing them to ten percent below 2009 levels by 2018. 130 Although implementation details vary from state to state, 131 the program allows offset projects for up to 3.3% of the emissions and provides more liberal offsets if the price of permits rises to seven dollars per ton or above. 132 The permits will be distributed primarily by auction, and the first auction by six states was held in late September 2008. 133 Another regional program, the Western Climate Initiative (WCI), is taking shape with efforts by seven western states (Arizona, California, Montana, New Mexico, Oregon, Utah, and Washington) and four Canadian 614 (allocating to state leaders in the reduction of greenhouse gas emissions); id. §§ 801–832 (allocating to Climate Change Technology Board for efficient buildings program, efficient manufacturing, and renewable energy); id. § 1011 (allocating to carbon capture and sequestration projects); id. §§ 1102– 1103 (allocating to the Environmental Protection Agency for fuel efficient commercial fleets); id. § 1121 (allocating to the Environmental Protection Agency to reward production of cellulosic ethanol). 125. See id. §§ 621–625 (allocating to Indian tribes and states for coastal, freshwater, agricultural, and other impacts). 126. Id. §§ 701–702. 127. Id. § 1501. 128. See Memorandum of Understanding Governing Regional Greenhouse Gas Initiative § 1 (Dec. 20, 2005), available at http://rggi.org/docs/mou_12_20_05.pdf (initially signed by the governors of seven states). 129. Id. 130. Id. §§ 2C, 2D. 131. See C ONN . GEN. STAT . § 22a-200c (2008); D EL. CODE ANN. tit. 7, §§ 6043–6047 (2008); M ASS . GEN. LAW S ch. 25A, § 6 (2008); N.H. REV. STAT . ANN. §§ 125-O:19–28 (West 2008); N.J. STAT . ANN. § 26:2C-45 (West 2008); N.Y. COMP . CODES R. & REGS . tit. 6, § 242 (2008); M D. CODE ANN., ENVIR . § 2-1002 (2007); M E. REV. STAT . ANN. tit. 38, §§ 580-A to 580C (2007); R.I. GEN. LAW S §§ 23- 82-1-23-82-7 (2007); V T. STAT . ANN. tit. 30, § 255 (2005). 132. See Memorandum of Understanding, supra note 128, § 2F(2)–(4). 133. Press Release, The Regional Greenhouse Gas Initiative, RGGI States’ First CO 2 Auction Off to a Strong Start (Sept. 29, 2008), available at http://www.rggi.org/docs/press_release_9_29_08_fin al.pdf. 2008] Carbon Taxes in the United States 27 provinces (British Columbia, Manitoba, Ontario, and Quebec). 134 WCI’s goal is to reduce greenhouse gas emissions to fifteen percent below 2005 levels by 2020, 135 and it issued recommendations for the design of a regional cap-and-trade system in September 2008. The recommendations propose a broad-based regime for a range of greenhouse gases similar to those covered by the Lieberman-Warner bill described above. 136 They also specifically recognize that the cap-and-trade program can “work in concert” with carbon taxes and that WCI jurisdictions will determine how to integrate British Columbia’s carbon tax (described in another article in this volume) with the cap-and-trade system. 137 The WCI program has been evolving in tandem with California’s efforts to develop programs to meet its statutory commitment to reduce greenhouse gas emissions to 1990 levels by 2020, 138 and the California Air Resources Board has recommended a cap- and-trade system link with the WCI trading program. 139 C. Carbon Tax Issues in the Cap-and-Trade Context If the federal government seriously tackles the issue of climate change, it will have to decide whether to create a broad-based, market-based regime for reducing greenhouse gas emissions. Either a carbon tax or an economy- wide cap-and-trade system would create the backbone for a comprehensive program, although neither would necessarily supplant policies targeted toward specific issues, such as fuel economy requirements for vehicles. The Bay Area Air Quality Management District’s fee on greenhouse gas emissions and RGGI show conversely that tax and cap-and-trade regimes can also be tailored more narrowly, and the Western Climate Initiative is exploring how a tax may work in concert with a cap-and-trade regime. Policymakers can choose combinations from a large portfolio of options, 134. Press Release, Arizona, et al., U.S. States, Canadian Provinces Announce Regional Cap- and-Trade Program to Reduce Greenhouse Gases (Sept. 23, 2008), available at http://www.westernclimateinitiative.org/ewebeditpro/items/10104F19871.pdf. 135. W ESTERN CLIMATE INITIATIVE , STATEMENT OF REGIONAL GOAL (2007), available at http://www.westernclimateinitiative.org/ewebeditpro/items/O104f13006.pdf. 136. W ESTERN CLIMATE INITIATIVE , DESIGN RECOMMENDATIONS FOR THE REGIONAL CAP- AND -TRADE PROGRAM 1 (2008), available at http://www.westernclimateinitiative.org/ewebeditpro/item s/0104F19865.pdf. The WCI’s recommendations cover a range of greenhouse gases from electricity generation, industrial and commercial facilities, gasoline and diesel-based transportation, and residential, commercial, and industrial fuel (on an upstream basis). Id. at 1–2. 137. W ESTERN CLIMATE INITIATIVE , supra note 136, at 4. 138. C AL. HEALTH AND SAFETY CODE §§ 38500, 38550 (West 2007). 139. C ALIFORNIA AIR RESOURCES BOARD , CLIMATE CHANGE PROPOSED SCOPING PLAN : A FRAMEWORK FOR CHANGE 30 (2008), available at http://www.arb.ca.gov/cc/scopingplan/document/psp .pdf. 28 V ERMONT JOURNAL OF ENVIRONMENTAL LAW [Vol. 10 but the fundamental question remains whether the United States will pursue an aggressive tax or cap-and-trade regime at the federal level. If the government chooses a relatively comprehensive, market-based approach, a fundamental design issue is whether to target only carbon, all greenhouse gases, or other energy sources as well even if they do not directly produce greenhouse gases. In other words, what is the tax base for the tax, or which emissions will define the trading regime? Carbon taxes, greenhouse gas taxes, and cap-and-trade regimes all focus directly on emissions in proportion to their global warming potential. In this respect, they are quite similar. By contrast, the Clinton Btu tax included nuclear power and hydroelectricity and did not tie even the tax on fossil fuels to their global warming potential. As discussed above, this choice was driven in large part by wanting to distribute the burden more evenly around the country. It remains to be seen whether carbon tax and cap-and-trade regimes ultimately will fall prey to the arguments about regional impacts that the Clinton Administration tried to avoid with its choice of the Btu tax—or whether the political will to address climate change will be strong enough to counter those arguments and maintain the focus on greenhouse gases. 140 The fact that ten states are implementing the RGGI cap-and-trade program may not necessarily serve as a bellwether for federal assessment of the tradeoffs between targeting fossil fuels and looking more broadly, since RGGI involves only the electricity-generating sector and states within a region may have more similar interests or profiles. Taxes and emissions allowances each impose costs. The cost for the tax will be based on the tax rate; the cost of the allowances will depend upon the market. Consequently, both types of market-based regimes will have economic effects and pose regressivity issues. 141 Taxes offer the benefit of a known cost, which may make the calculation of their projected economic effects and regressivity more reliable, though perhaps at the risk that policymakers will then dilute the tax rate below environmentally sound levels to reduce economic impacts. By not starting with a price, a cap-and- trade system may potentially postpone that moment of political reckoning. 140. One could argue that it is more important to distribute the burden for reducing the federal deficit equally around the country than the burden for reducing greenhouse gas emissions, which may be more allocable to one region than another. Such an argument again illustrates how revenue use is relevant to the policies and politics governing the design of the tax. 141. See Letter from Peter Orszag, Director, Cong. Budget Office, to Senator Jeff Bingaman, Chairman, Comm. on Energy and Natural Res., U.S. Senate (June 17, 2008) and accompanying report, C ONG . BUDGET OFFICE , OPTIONS FOR OFFSETTING THE ECONOMIC IMPACT ON LOW – AND MODERATE – I NCOME HOUSEHOLDS OF A CAP-AND -TRADE PROGRAM FOR CARBON DIOXIDE EMISSIONS 1 (2008), available at http://www.cbo.gov/ftpdocs/93xx/doc9319/06-17-ClimateChangeCosts.pdf (analyzing options for offsetting the disparate economic impacts of a cap-and-trade program). 2008] Carbon Taxes in the United States 29 Nonetheless, either type of instrument will have real costs that warrant full and comparative attention at the start. Distributing allowances at no cost, without auction, may not provide a sound, easy answer to cost issues. Based on experience with the European Trading Scheme and economists’ analyses, entities that receive allowances at no cost may still pass some or all of the value of the allowances on to consumers in the price of their products, using the windfall to increase their profits. 142 Consumers will not necessarily see the savings. This counterintuitive result of free distribution means that awarding cap-and- trade allowances at no cost does not provide a simple way of mitigating the economic effect, regressivity, or regional disparity of a cap-and-trade system. In addition, a cap-and-trade program with free distribution would not create as strong an incentive to reduce aggregate emissions below the capped threshold. The revenue side of the equation is also important when putting carbon taxes and cap-and-trade regimes in context. Placing a price on emissions through taxes or auctioned allowances will produce revenue for the government. As seen in the examples of proposals above, the revenue can be used to enhance the environmental impact by financing climate change programs, to address regressivity, to assist in economic transitions, 143 or to provide for deficit reduction or tax relief. As with the Clinton Btu tax, the need for new revenue may provide political motivation for the new instrument. Thus, as Figure 3 illustrates, tax regimes and auctioned cap-and-trade regimes are fundamentally similar in their basic components—targeted fuels or emissions, cost imposed per unit, an identified party responsible for paying that cost, and revenue that can be put to use if the allowances are auctioned. Policymakers must make similar decisions for each. But the two regimes also have their known differences, often shorthanded into certain cost (the fixed tax rate) versus uncertain cost (the market price), and uncertain environmental results (based on the behavioral effect of the tax) versus relatively certain environmental results (based on the cap). Predictability of cost and efficiency lend heft to the carbon tax side, and 142. Staff of the National Commission on Energy Policy, Allocating Allowances in a Greenhouse Gas Trading System 10–11 (2007), available at http://www.energycommission.org/ht/display/ContentDetails/i/1578/pid/493. For a discussion of the European experience, see Mikael Skou Anderson, Environmental and Economic Implications of Taxing and Trading Carbon: Some European Experiences, in this volume. 143. Nevertheless, the distribution of allowances at no cost to entities required to use them for specific purposes can provide an indirect means of funding programs. Recipients can sell the allowances and use the proceeds for their programs. For examples of this approach, see supra notes 124–26 and accompanying text. 30 V ERMONT JOURNAL OF ENVIRONMENTAL LAW [Vol. 10 certainty of result weigh in on the cap-and-trade side, but the issue should not be overstated—the Intergovernmental Panel on Climate Change has found taxes to be both cost effective and environmentally effective. 144 Taxes and cap-and-trade regimes are also very different in their administration, with the Internal Revenue Service responsible for taxes and private-sector and nonprofit entities playing significant roles in the implementation of trading regimes. Importantly, they are also within different committees’ jurisdictions during the legislative process: the tax- writing committees control taxes and the environmental or energy committees control the cap-and-trade regimes. Different players will have the first voice for each, and their preferences and familiarities will influence choices. The ultimate decisions will be based on the intersection of policy and politics, as evidenced by the Btu tax proposal in 1993. CONCLUSION Climate-related taxes should receive serious attention as a new administration and Congress take shape following the November 2008 elections. The spotlight has been on cap-and-trade regimes, but tax regimes share many of the same characteristics. Although taxes seem more politically volatile, carbon taxes and cap-and-trade regimes should be subjected to the same calculations of economic impact, equity, administrative feasibility, and environmental effect, and the political calculation for each should not rest on a cursory dismissal of the viability of taxes. As detailed elsewhere in this volume, the experience in Europe demonstrates that climate-related taxes can be enacted in a variety of forms. The Clinton Administration’s experience with the Btu tax should not toll the bell for climate change taxes, but rather serve as an indicator of sensitive issues that price-based mechanisms must address as the United States considers whether climate change taxes, or cap-and-trade regimes, might be “in accordance with our national circumstances.” 145 144. See, e.g., W ORKING GROUP III CONTRIBUTION , INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE , CLIMATE CHANGE 2007: MITIGATION OF CLIMATE CHANGE 756 (Bert Metz et al. eds., 2007); see also Approaches to Reducing Carbon Dioxide Emissions, House Comm. on the Budget, 110th Cong. (2008) (statement of Peter R. Orszag, Director, Congressional Budget Office). The inflexibility of the cap that makes cap-and-trade regimes less efficient could be mitigated through a variety of means. See generally C ONG . BUDGET OFFICE , POLICY OPTIONS FOR REDUCING CO 2 EMISSIONS (2008). 145. See Hokkaido Toyako, supra note 1.
CAP AND DIVIDEND: A STATE-BY-STATE ANALYSIS James K. Boyce & Matthew E. Riddle Political Economy Research Institute University of Massachusetts, Amherst Economics for Equity and the Environment Network August 2009 This report is jointly published by the Political Economy Research Institute and the E3 Network. The Political Economy Rese arch Institute (PERI) promotes human and ecological well-being through original research. Our approach is to translate what we learn into policy proposals that are capable of improving life on our planet today and in the future. In the words of the late Robert Heilbroner, we “strive to make a workable science out of morality.” Established in 1998, PERI is an independent unit of the University of Massachusetts, Amherst, wi th close links to the Department of Economics. Economics for Equity and th e Environment Network (E3) is a national network of more than 250 economists who are developing new and applied ec onomic arguments for environmental protection with an explicit focus on social justice. E3 economists are commi tted to using their research and expertise to advance the aims of the progressive movement through dialogue and collaboration with NGOs, the public, decision makers, and the media. The views expressed in this report are the author s’ and do not necessarily reflect those of the sponsoring institutions. Acknowledgements: We are grateful to Jesse Sanes for research assist ance, Mike Sandler for preparation of maps, Jesse Jenkins for calculations of the stat e-level carbon intensity of electricity, and Peter Barnes and Kristen Sheeran for comments on an earlier draft of this paper. About the authors: James K. Boyce is a professor of economics at the Universi ty of Massachusetts, Amherst, and director of PERI’s program on development, peacebuilding and the environment. He is a member of the E3 steering committee. Matthew E. Riddle is a doctoral candidate in economics at the University of Massachusetts, Amherst, and a research analyst with the Center for Social Ep idemiology and Population Health at the University of Michigan. PERI Gordon Hall 418 N. Pleasant St. Amherst, MA 01002 www.peri.umass.edu Equity and the Environment Network 721 NW Ninth Ave Suite 200 Portland, OR 97209 www.e3network.org CAP AND DIVIDEND: A STATE-BY-STATE ANALYSIS James K. Boyce & Matthew E. Riddle Political Economy Research Institute University of Massachusetts, Amherst August 2009 ABSTRACT The impacts on consumers of a cap on carbon emissions will vary across income brackets and across the 50 states. This paper provides state- level estimates of these impacts by income decile. We then estimate the net effect of a cap-and-dividend policy in which all carbon permits are auctioned and 80% of the revenue is returned as dividends to the public. We find that inter-state differences are small compared to the differences across income brackets. Within each state, at least 60% of households receive net benefits: the dividends more than offset the impact of higher fossil fuel prices on their real incomes. Differences across states are small in cap-and-dividend compared to inter-state differences in per capita spending for defense and federal farm programs. The high visibility of dividends, coupled with the positive impact on family incomes, could enhance public support for a durable climate policy. s s Key words: Climate change; climate policy; fossil fuels; global warming; cap-and-trade; energy policy. JEL codes: H22, H23, Q48, Q52, Q54, Q58 EXECUTIVE SUMMARY A cap-and-permit system to curb carbon dioxide emissions from burning fossil fuels will raise prices to consumers. Individual carbon footprints will now carry a price tag. The money that consumers pay in higher prices will not disappear from the nation’s economy, however: it will be transferred to the owners of the carbon permits. A cap-and-dividend policy would put this ownership in the hands of the people. It would do so by auctioning the permits and returning most or all of the revenue to the public as equal per- person dividends. If 100% of the permits are auctioned, there is no need for permit trading in secondary markets, no siphoning of revenue into trader profits, and no risk that speculators will manipulate the carbon price. The cap-and- dividend policy would provide incentives for businesses and households to curtail their use of fossil fuels, while protecting consumers from the impact of higher prices on their real incomes. In this paper, we examine differences in the impact of a cap on carbon emissions across income brackets and across the 50 states. We then estimate the net effect of a cap-and- dividend policy. We find that in every state the majority of families come out ahead: the dividends they receive more than offset the impact of price increases. Differences across states are shown in Figure A. They are small compared to differences across income brackets. Because dividends are distributed equally to each person, variations in cap-and-dividend’s net impact arise solely from differences in carbon footprints. Households who consume more carbon, directly via fossil fuels and indirectly via other goods that are produced and distributed using them, will pay more; those who consume less will pay less. The differences between average carbon footprints in the top 10% and bottom 10% of the income distribution are far wider than differences across the states. FIGURE A : IMPACT OF CARBON PRICING ON MEDIAN FAMILY OF FOUR ($/YEAR , AT $25 /TON CO 2) CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / EXECUTIVE SUMMARY / PAGE ii The inter-state differences in net benefits from cap-and-dividend are also small relative to those in many other public policies. Figure B compares them to differences in per capita spending on defense and federal farm programs. The ratio between the top ten and bottom ten states is more than 11:1 in the case of defense spending, and 190:1 in the case of farm programs. In the case of cap-and-dividend, it is only 2½:1. Cap-and-dividend would return carbon revenue in equal measure to each American. In contrast, the American Clean Energy and Security (ACES) Act, passed by the U.S. House of Repre- sentatives in June 2009, would allocate revenues and free permits in a variety of ways with uneven effects across households. The Congressional Budget Office (2009) estimates that under ACES roughly two-fifths of the carbon revenue (or “allowance value”) would flow to households in the top quintile of the national income distribution. In Figure C this outcome is contrasted with cap-and-dividend, in which each quintile receives the same amount, 20%, equal to its share of the population. The visibility of the transfers of carbon revenue to the public may be even more important than the net distributional effects of climate policy. Dividends to the public in the form of checks in the mail or deposits into bank accounts will provide highly tangible benefits to families, against which they can weigh the impacts of higher fossil fuel prices. Transfers to households resulting from ACES – via myriad routes such as capital gains to corporate shareholders and rebates in electricity bills – will be less apparent. For reasons of both economic fairness and transparency, therefore, cap-and-dividend offers a way to secure durable public support for an effective policy to wean the economy from dependence on fossil fuels. A proactive U.S. policy, in turn, will be a crucial condition for reaching an effective international agreement to confront the global challenge of climate change. s $0 $500 $1,000 $1,500 $2,000 $2,500 Defense expenditure Farm programs Net impacts of cap-and- dividend Mean of top ten recipient states Mean of bottom ten recipient states FIGURE B . TOP TEN AND BOTTOM TEN STATES : DEFENSE EXPENDITURE , FARM PROGRAMS , AND CAP -AND -DIVIDEND POLICY FIGURE C . DISTRIBUTION OF CARBON REVENUES TO HOUSEHOLDS : ACES V . CAP -AND -DIVIDEND POLICIES 15% 17% 15% 16% 38% 20% 20% 20% 20% 20% 0% 10% 20% 30% 40% Bottom 20% Next 20% Middle 20% Next 20% Top 20% ACES Cap-and-dividend CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / BOYCE & RIDDLE / PAGE 1 I. INTRODUCTION This paper examines inter-state differences in the impact on households of policies that “put a price on carbon,” that is, policies that increase the price of fossil fuels to curtail emissions of carbon dioxide into the atmosphere. In particu- lar, we examine the impact of a “cap-and- dividend” policy that limits the quantity of car- bon entering the U.S. economy, auctions per- mits up to this cap to the firms that supply fossil fuels, and returns all or most of the auction revenue to households in the form of equal per capita dividends. The paper is organized as follows. Section 2 re- views the basic features of the cap-and-dividend policy, including the rationale for carbon pricing, differences between a cap-and-permit policy and a carbon tax, and how to return auction revenue to the public as dividends. Section 3 provides a brief overview of the distri- butional impact of cap-and-dividend at the na- tional level. We examine both the gross impact of higher fossil fuel prices and the net impact when revenues are returned to the public. For the latter calculation, we assume that 80% of the revenues are returned to the public as divi- dends – a percentage roughly the same as what President Barack Obama proposed in his Feb- ruary 2009 budget. An attractive feature of cap- and-dividend is that the policy delivers positive monetary benefits to low-income and middle- income households, even without counting the environmental benefits of mitigating climate change. At the same time, it rewards house- holds at any income level who reduce their car- bon footprints. Section 4 examines inter-state variations in the impact of higher fossil fuel prices. We analyze three sources of variations: (i) differences in in- come; (ii) differences in consumption patterns; and (iii) differences in the carbon intensity of electricity consumed. Because the impact varies across the income distribution, we present these results by income decile (tenths of the population ranked by per capita income) as well as for the median household in each state. We then provide a state-by-state analysis of the net impact of the cap-and-dividend policy on a dec- ile-by-decile basis. We show that inter-state variations are minor relative to variations based on income. Section 5 discusses other, non-dividend uses of carbon revenues. Specifically, we discuss (i) transitional adjustment assistance, the main aim of which is to create jobs in communities adversely impacted by reduced production and use of fossil fuels; and (ii) the mix of uses pro- posed in the American Clean Energy and Secu- rity (ACES) Act of 2009, also known as the Waxman-Markey bill. Section 6 summarizes our main findings and offers some concluding remarks. II. CAP-AND-DIVIDEND: THE BASICS Any policy that limits the supply of fossil fuels will raise their price. The economic logic binding price to scarcity holds true, regardless of the cause of scarcity. When OPEC wants to increase the price of oil, it cuts production. If lawmakers place a cap on carbon emissions from burning fossil fuels, this too will increase their price. 1 There is a crucial difference, however, between higher prices caused by a carbon cap and higher prices due to other forces. The higher prices from a carbon cap will be a cost to con- sumers, but not to the economy as a whole. In- stead they are a transfer. Every dollar paid by consumers in higher fuel prices will go to the holders of carbon permits. Unlike price rises due to market forces or OPEC supply restrictions, the price rise due to a carbon cap simply recycles dollars within the United States. A key question is: who will get these dollars? There are three possible answers: Profits to corporations: If permits are given free- of-charge to corporations, they will reap windfall profits. Consumers will pay higher prices, and CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / BOYCE & RIDDLE / PAGE 2 the firms and their shareholders will get the money. This is a “cap-and-giveaway” policy. Revenues to government: If permits are auc- tioned rather than given away, the permit value (the counterpart to the higher prices paid by consumers) will be captured by the government. If this money is used to fund public expendi- tures or cut taxes, the distribution of benefits to the public will depend on the specifics of these uses. This is a “cap-and-spend” (or “cap-and- invest”) policy. Dividends to the people: If the revenue from permit auctions is returned to the public as equal per capita dividends, consumers will be partially or fully insulated from the impact of higher prices. Households with small carbon footprints will come out ahead, receiving more in dividends than they pay in higher prices. This is a “cap-and-dividend” policy. The stakes are high. A carbon cap will bring the greatest allocation of new property rights in the United States since the Homestead Act of 1862. The value of permits under a cap that cuts emis- sions 80% by 2050 – the goal endorsed by cli- mate scientists and embodied in legislation now before Congress – will amount to trillions of dol- lars over the next forty years. The mechanics of cap-and-dividend A carbon cap will be most efficiently adminis- tered “upstream,” by requiring permits (some- times called “allowances”) to be purchased by the first sellers of fossil fuels into the economy. The cap will reduce supply and raise fuel prices; in this respect it is akin to a carbon tax (for dif- ferences between permits and taxes, see the sidebar on page 3). The resulting market signals will spur businesses and households alike to invest in energy efficiency and clean energy. In a cap-and-dividend policy, the permits are auctioned by the government and all or most of the auction revenue is returned to the public as equal payments per person. This is what economists call a “feebate” arrangement: indi- viduals pay fees based on their use of a scarce resource that they own in common, and the fees are then rebated in equal measure to all co- owners. In this case, the scarce resource is the U.S. share of the carbon storage capacity of the atmosphere; the fee is set by the carbon foot- print of the household; and the co-owners are the American people. One way to disburse dividends is via ATM cards, similar to those used today by many Americans to access Social Security payments. At the ATM, individuals can check on the auction revenue deposited into their accounts and withdraw funds at their convenience. With auctions, no need for permit trading In his budget proposal submitted to Congress in February 2009, President Barack Obama af- firmed the principle that 100% of carbon per- mits should be auctioned. With 100% auction, there is no need for permit trading. Auctions can be held monthly or quar- terly, with the number of permits on offer being reduced gradually as the carbon cap tightens over time. The permit allows its holder to bring a fixed quantity of fossil carbon into the economy in a certain time frame, say over a two-year pe- riod from the date of purchase. Firms simply buy the number of permits they want at the auction. Most permits in our society are not tradable. Driving permits, gun permits, parking permits, landfill disposal permits, and building permits cannot be traded in markets. There is no reason why carbon permits should be different. The need for tradable permits (“cap-and-trade”) is premised on the assumption that some or all of the permits are given away free-of-charge rather than sold by auction. Such giveaways must A CARBON CAP WILL BRING THE GREATEST ALLOCATION OF NEW PROPERTY RIGHTS IN THE UNITED STATES SINCE THE HOMESTEAD ACT OF 1862. CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / BOYCE & RIDDLE / PAGE 3 be based on some formula (like historic emis- sions). Some firms will get more permits than they need, while others will get fewer than they want; trading is necessary to redistribute them from the former to the latter. If 100% of the car- bon permits are auctioned, however, permit trading becomes unnecessary. 23 With non-tradable permits, trader profits do not drive a wedge between the amount paid by con- sumers in higher prices and the amount of available revenue from permit sales. None of the carbon revenue is siphoned off by specula- tors or trading firms. Non-tradable permits also safeguard the policy from the perception or real- ity of market manipulation by players seeking to game the system. 4 Dividends versus other uses of carbon revenue Rather than returning 100% of carbon revenues to the public, policymakers could dedicate a por- tion of the revenues to other uses. In his Febru- ary 2009 budget, for example, President Obama proposed using 81.4% of projected carbon reve- nues for the years 2010-2019 for lump-sum tax credits (extending the “Making Work Pay” credits that were initiated in the economic stimulus pro- gram) and devoting the remainder to investment in clean energy technologies. 5 Apart from clean energy investments, other po- tential uses for carbon revenues include offset- ting the impact of higher fossil fuel prices on the purchasing power of federal, state, and local governments; transitional adjustment assis- tance to workers, communities, or firms ad- versely affected by the transition away from fossil fuels; and other government expenditures, tax cuts, or deficit reduction. Following the contours of President Obama’s budget proposal, in the following analysis we assume that 80% of carbon permit revenues are returned to the public as dividends, and that the remaining 20% are allocated to other uses. In section 5 we further discuss some of these potential uses. PERMITS VERSUS TAXES An alternative way to put a price on carbon is by means of a tax. A carbon tax is simply a permit with a fixed price. A cap-and-permit policy sets the quantity of permits (and hence emissions), and lets demand determine the permit price; a carbon tax sets the price, and lets demand determine the quantity of emissions. In both cases, higher prices provide a market signal to encourage energy efficiency and investments in alternative energy. If policymakers could have perfect foresight as to future demand for fossil fuels – knowing what new technologies will become available, when the economy will boom and slump, and so on – then setting either the quantity of permits or the carbon price could achieve exactly the same result. In reality, there is much uncertainty about future demand, so the relationship be- tween quantity and price cannot be predicted with much precision. The fundamental aim of climate policy is to re- duce emissions to reach the 2050 target. There- fore, a compelling case can be made for “getting the quantity right” by setting the number of per- mits and letting their price vary with demand, rather than vice versa. Moreover, in the face of uncertainties as to the relation between quantity and price, there may be political pressures to set the carbon tax too low, based on optimistic pro- jections of the resulting emission reductions. On the other hand, political pressures may also undermine the efficacy of a cap-and-permit policy. This can happen in two ways: first, by set- ting the cap at a level that is inadequate to achieve the necessary emission reductions; and second, by allowing “offsets,” whereby instead of curtailing fossil fuels, firms can get credits for other actions such as planting trees, slowing deforestation, or reducing carbon emissions in other countries. 2 The case for permits rather than taxes is prem- ised, therefore, on a “tight” cap: one that reduces emissions to meet the 2050 target, without offsets that transform the cap into a porous sieve. If policymakers instead opt for a carbon tax, the question of how to distribute the revenue will remain. The analysis presented in this paper would apply equally to a “tax-and- dividend” policy. 3 CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / BOYCE & RIDDLE / PAGE 4 III. DISTRIBUTIONAL IMPACTS OF CAP-AND-DIVIDEND AT THE NATIONAL LEVEL The cap-and-dividend policy will have a progres- sive impact on income distribution nationwide. Households with smaller-than-average carbon footprints pay less in higher fuel costs than they receive as dividends; households with larger-than- average carbon footprints pay more than they re- ceive. In general, lower and middle-income house- holds will come out ahead, for the simple reason that they consume much less carbon than upper- income households. Overall, roughly three- quarters of American families will obtain positive net benefits in purely monetary terms, not count- ing the environmental benefits that are the main rationale for a carbon-pricing policy. To calculate the net impact across income brackets, we first estimate the carbon footprints of households: the carbon dioxide emissions re- sulting from not only their direct fuel consump- tion but also the production and distribution of other goods and services that they consume. 6 Data on expenditure patterns are drawn from the Consumer Expenditure Survey conducted by the U.S. Bureau of Labor Statistics. Lower-income households generally devote a larger fraction of their expenditure to direct fuel consumption than upper-income households (in economic parlance, fuels are “necessities” not “luxuries”). Carbon emissions per dollar expenditure for dif- ferent items are based on input-output data. As one might expect, this ratio varies greatly across expenditure categories. In the case of electricity and household fuels, one dollar of spending generates about 7 kg of carbon dioxide emis- sions. In the case of services, the corresponding amount is about 0.3 kg. The distribution of carbon emissions across ex- penditure categories is shown in Figure 1. Gaso- line and electricity consumption each account for about one-quarter of the average household’s carbon footprint. Natural gas and heating oil con- tribute a further 12%. Indirect uses – including consumption of food, industrial goods, services, and other transportation – account for the rest. Because low-income households consume less than high-income households, they generally have smaller carbon footprints. Differences across the income spectrum are shown in Fig- ure 2a. In the highest income decile, carbon emissions per capita are more than six times greater than in the lowest decile. As a share of their income, however, the poor consume more carbon than the rich – that is, 0 5 10 15 20 25 30 12345678910 decile heating oil 3% natural gas 9% indirect 37% electricity 25% gasoline 26% FIGURE 1 : HOUSEHOLD CARBON FOOTPRINT BY EXPENDITURE CATEGORY (NATIONAL AVERAGE ) FIGURE 2A : CARBON FOOTPRINT BY INCOME DECILE ( METRIC TONS CO 2 PER CAPITA ) more carbon per dollar of their income. This is primarily because, as noted above, direct fuel consumption accounts for a bigger fraction of their household budgets: they spend more on necessities and less on luxuries. Carbon per dol- lar of expenditure is more than twice as high in the poorest decile as in the richest, as shown in Figure 2b. Hence, a price on carbon is regres- sive in and of itself, hitting the poor harder as a fraction of their incomes than the rich. FIGURE 2B : HOUSEHOLD CARBON FOOTPRINT BY INCOME DECILE (KILOGRAMS CO 2 PER $ INCOME PER CAPITA ) 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 12345678910 decile The net impact of the policy depends, however, on who receives the money generated by the carbon price. If this money is captured by auc- tioning the carbon permits – rather than giving them away free-of-charge – and if most of the resulting revenue is returned to the public in dividends, the net impact turns progressive. To illustrate, we assume that the permit price is $25 per ton of carbon dioxide, all permits are auctioned, and 80% of the revenue is returned to the people as dividends. This price is within the range of projections based on current legis- lative proposals; for example, the Congressional Budget Office (2009) estimates that the Wax- man-Markey bill would result in a permit price of $28/tCO 2 in the year 2020. A more aggressive policy, with a more ambitious schedule for emission reductions and/or fewer “offsets,” would generate a higher price. This would in- crease the magnitude of the impacts of the cap- and-dividend policy, but it would not alter their distributional incidence. The impact of the cap-and-dividend policy is shown in Table 1. The annual carbon charge – TABLE 1 : DISTRIBUTIONAL IMPACT OF CAP -AND -DIVIDEND AT THE NATIONAL LEVEL ( $25 /T CO2 , WITH 80% OF REVENUE DISTRIBUTED AS DIVIDENDS ) $ per capita % of income Per capita income decile Per capita income (in 2003 dollars) Average household size Carbon charge Dividend Net impact Carbon charge Dividend Net impact 1 3844 4.5 135 386 251 3.5% 10.0% 6.5% 2 6538 3.6 177 386 209 2.7% 5.9% 3.2% 3 8968 3.2 209 386 177 2.3% 4.3% 2.0% 4 11544 2.9 238 386 148 2.1% 3.3% 1.3% 5 14481 2.7 267 386 119 1.8% 2.7% 0.8% 6 18034 2.4 299 386 87 1.7% 2.1% 0.5% 7 22623 2.3 337 386 49 1.5% 1.7% 0.2% 8 29120 2.1 385 386 1 1.3% 1.3% 0.0% 9 39942 2.0 457 386 -71 1.1% 1.0% -0.2% 10 67940 1.7 618 386 -232 0.9% 0.6% -0.3% Mean 23657 2.5 317 386 69 1.3% 1.6% 0.3% Median 16160 2.0 283 386 103 1.7% 2.4% 0.6% CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / BOYCE & RIDDLE / PAGE 6 the cost to consumers from higher prices for fos- sil fuels, and for other goods and services that use them in their production and distribution, ranges from $135 per person in the lowest- income decile to $618 per person in the high- est. 7 Each household receives the same per cap- ita dividend, $386. The bottom seven deciles come out ahead, receiving more in dividends than they pay as a result of higher fuel prices; the eighth decile breaks even; and the top two deciles experience a net cost. As a percentage of income, the lowest decile sees a 6.5% gain, while the top decile sees a 0.3% loss. The monetary winners outnumber the losers for two reasons. The first is that the U.S. income distribution is strongly skewed to high-income people. As shown in Appendix Table A.1, the na- tional mean (average) per capita income in 2003 was $23,657, whereas the median in- come – that of the “middle American,” 50% of the population having higher incomes and 50% lower – was $16,160. Just as mean income is pulled above the median by the high incomes at the top, per capita dividends are pulled up by the outsized carbon footprints of high-income households. The second reason is that our calculations are based on the assumption that 80% of total car- bon revenue is returned to households. House- hold consumption accounts for only 66% of total carbon emissions in the United States, however, and hence for roughly the same share of total carbon revenues. The remaining emissions come from local, state and federal government (14%), non-profit institutions (8%), and produc- tion of exports (12%). 8 While the results in Table 1 show the broad pat- tern of distributional impacts from the cap-and- dividend policy, the impact on individual house- holds will depend on their consumption choices. Upper-income households who reduce their car- bon footprints well below the norm for their in- come bracket can derive positive net benefits, too; conversely, lower and middle-income households with disproportionately large carbon footprints can come out behind. Regardless of income level, higher fuel prices provide incen- tives for energy efficiency and alternative fuels. Those who respond strongly to these market signals fare better than those who do not curtail their consumption of fossil fuels. 9 In sum, the progressive impact of per capita dividends more than offsets the regressive im- pact of higher fossil fuel prices. The majority of American families are “held harmless” by the policy: their real incomes are protected, and in many cases increased. This, in turn, protects the nation’s climate policy from the political backlash that higher fuel prices could other- wise trigger. IV. STATE-BY-STATE IMPACTS OF CAP-AND-DIVIDEND One issue that has received attention in Con- gress is the differential effects that carbon pric- ing may have across the states. In a June 2009 interview with The New York Times, President Obama alluded to this issue when he described the compromises in the Waxman-Markey bill as having been “necessary to moderate the differ- ent effects of greenhouse-gas controls on dif- ferent parts of the country” (Broder 2009). Two broad sorts of inter-state differences can be distinguished. The first is on the consump- tion side of the economy, arising from differ- ences in household use of fossil fuels (both direct and indirect) and hence in the impact of higher prices on consumers. The second is on the production side, arising from differences in how firms and workers are affected by the tran- sition away from burning fossil fuels. In this sec- tion our focus is the consumption side. REGARDLESS OF INCOME LEVEL, HIGHER FUEL PRICES PROVIDE INCENTIVES FOR ENERGY EFFICIENCY AND ALTERNATIVE FUELS. CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / BOYCE & RIDDLE / PAGE 7 Impact of higher fossil fuel prices on households The higher fossil fuel prices that result from any policy that puts a price on carbon will have dif- ferent impacts on consumers in different states for three reasons: Income differences: States vary in both average income and income distribution. Just as people in upper-income households tend to have larger carbon footprints than lower-income households (see Figure 2a), people in higher-income states tend to have bigger carbon footprints, all else equal, than their counterparts in lower-income states. Differences in consumption patterns: Energy use is affected, among other things, by public policies and the weather. In California, for ex- ample, policies to promote energy efficiency have paid off by reducing the state’s per capita electricity use considerably below the national average. Gasoline consumption varies due to differences in commuting distances, public transportation, and the level of state gasoline taxes. In the northern states, households spend more to heat their homes; in the southern states, they spend more to cool them. Differences in the carbon intensity of electricity: Some states rely mostly on coal-fired power plants, which generate higher carbon emissions per kilowatt-hour than other electricity sources. Some states rely more on hydroelectric power, nuclear power, or other low-carbon technolo- gies. Electricity accounts for roughly one-quarter of the typical household’s carbon usage (see Figure 1); differences in the carbon intensity of electricity affect this component of the impact of carbon pricing on consumers. Table 2 presents data on the extent of inter- state differences in these respects. Per capita income varies from about $11,500 in Missis- sippi to about $21,000 in Connecticut. TABLE 2 : INTER -STATE DIFFERENCES IN INCOME AND ENERGY USE Expenditure per capita of median household ($) State Median income (annual per capita) Electricity Gasoline Natural gas Fuel oil Carbon intensity of electricity supply (kg CO 2/MWh) Alabama 13,308 416 446 100 23 669 Alaska 18,806 345 481 136 22 546 Arizona 15,544 314 412 126 9 558 Arkansas 12,772 411 437 98 23 630 California 16,616 195 525 106 12 454 Colorado 18,829 332 450 134 9 913 Connecticut 20,964 219 481 107 187 412 Delaware 18,527 330 431 157 69 933 District of Columbia 17,795 453 513 110 25 734 Florida 15,925 384 441 8 6 672 Georgia 15,895 438 487 106 24 708 Hawaii 16,969 392 454 8 7 857 Idaho 14,231 317 422 124 20 459 Illinois 17,521 348 484 212 23 556 Indiana 16,350 341 468 208 23 1,041 Iowa 15,925 304 471 212 14 933 Kansas 16,138 305 473 213 14 918 Kentucky 13,417 321 425 194 21 1,002 Louisiana 12,179 405 426 97 23 745 Maine 15,398 200 418 97 172 455 CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / BOYCE & RIDDLE / PAGE 8 Per capita expenditure on electricity by the me- dian household in each state ranges from $195/year in California to $458/year in Vir- ginia. Variations in per capita gasoline expendi- ture are less pronounced, ranging from $377/year in New Mexico to $537/year in Texas. Natural gas use is highest in the upper Midwest, and heating oil use is concentrated in the northeastern states. The carbon intensity of electricity varies widely across the states. North Dakota, a state that is heavily reliant on coal-fired power plants, emits 1134 kg of carbon dioxide per megawatt hour TABLE 2 : INTER -STATE DIFFERENCES IN INCOME AND ENERGY USE , CONTINUED Expenditure per capita of median household ($) State Median income (annual per capita) Electricity Gasoline Natural gas Fuel oil Carbon intensity of electricity supply (kg CO 2/MWh) Maryland 20,192 339 448 161 71 681 Massachusetts 19,428 214 465 105 184 648 Michigan 17,297 347 481 211 23 666 Minnesota 18,534 318 505 223 14 780 Mississippi 11,531 398 414 95 22 631 Missouri 15,311 334 454 203 22 899 Montana 13,475 312 410 122 20 765 Nebraska 15,722 302 468 212 14 780 Nevada 17,276 324 433 131 9 702 New Hampshire 19,423 214 465 105 184 387 New Jersey 20,330 339 449 162 71 474 New Mexico 12,994 297 377 119 9 935 New York 16,298 212 391 114 112 442 North Carolina 15,512 435 481 105 24 618 North Dakota 14,126 293 444 204 13 1,134 Ohio 16,360 341 469 208 23 852 Oklahoma 13,407 288 432 201 13 790 Oregon 16,395 331 451 130 21 227 Pennsylvania 15,950 316 403 150 66 613 Rhode Island 16,417 203 431 99 175 550 South Carolina 14,305 425 463 102 24 442 South Dakota 13,845 291 440 203 13 631 Tennessee 14,463 426 465 103 24 645 Texas 14,492 388 537 78 8 729 Utah 14,907 322 431 126 20 1,028 Vermont 16,560 204 432 100 176 73 Virginia 18,413 458 521 111 25 645 Washington 18,049 341 472 134 21 160 West Virginia 12,219 312 405 188 21 948 Wisconsin 17,355 347 482 212 23 840 Wyoming 15,237 324 436 127 20 1,099 U.S. average 16,160 312 448 119 38 667 Note: For data sources, see Appendix. CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / BOYCE & RIDDLE / PAGE 9 (MWh). Vermont, where the main power sources are nuclear and hydro, emits only 73 kg CO 2/MWh. Taking these differences into account, Figure 3 depicts the impact of higher fossil fuel prices on the median-income household in each state, with a carbon price of $25/tCO 2. The results show that inter-state differences are not terribly large, ranging from $239 in Oregon to $349 in Indiana. The map in Figure 4 (page 11) depicts these impacts on a median-income family of four. Table 3 shows the impact on consumers by income decile across the states, with the results expressed as a percentage of income. The dollar $0 $50 $100 $150 $200 $250 $300 $350 $400 Indiana Delaware D.C Wisconsin Minnesota Virginia Ohio Colorado Maryland North Dakota Kansas Iowa Wyoming Missouri Michigan Georgi a Kentucky Utah Massach u setts Nebraska Illinois New Jersey Connecticut Haw aii North Carolina Texas Alaska West Virginia Tennessee Nevada New Hampshire Oklahoma Al ab ama Pennsylvania Louisiana Rhode Island South Dakota New Mexico Arkansas Montana Florida South Carolina Maine Arizona Mississi p pi California New York Idaho Washington Vermont Oregon Indirect Costs Heating Oil Natural Gas Electricity Gasoli ne ` FIGURE 3 : PER CAPITA CARBON EXPENDITURE OF MEDIAN HOUSEHOLD BY COMMODITY GROUP (PRICED AT $25 /TCO 2) TABLE 3 : CARBON PRICE IMPACT BY STATE AND INCOME DECILE (PERCENTAGE OF MEDIAN INCOME ) Decile State Median 1 2 3 4 5 6 7 8 9 10 Alabama 2.1% 4.5% 3.4% 2.9% 2.5% 2.2% 2.0% 1.8% 1.6% 1.3% 1.0% Alaska 1.6% 2.8% 2.3% 2.0% 1.8% 1.6% 1.5% 1.4% 1.2% 1.1% 0.9% Arizona 1.7% 3.2% 2.5% 2.2% 1.9% 1.7% 1.6% 1.4% 1.3% 1.1% 0.9% Arkansas 2.1% 4.3% 3.3% 2.8% 2.5% 2.2% 2.0% 1.8% 1.6% 1.4% 1.1% California 1.5% 2.9% 2.3% 2.0% 1.8% 1.6% 1.4% 1.3% 1.2% 1.0% 0.8% Colorado 1.7% 3.4% 2.6% 2.3% 2.0% 1.8% 1.6% 1.5% 1.3% 1.2% 0.9% Connecticut 1.4% 2.9% 2.2% 1.9% 1.7% 1.5% 1.4% 1.2% 1.1% 0.9% 0.8% Delaware 1.8% 3.6% 2.8% 2.4% 2.1% 1.9% 1.7% 1.6% 1.4% 1.2% 1.0% D.C 1.9% 4.6% 3.3% 2.7% 2.3% 2.0% 1.8% 1.5% 1.3% 1.1% 0.8% Florida 1.7% 3.4% 2.6% 2.2% 2.0% 1.8% 1.6% 1.4% 1.3% 1.1% 0.9% Georgia 2.0% 4.1% 3.1% 2.7% 2.3% 2.1% 1.9% 1.7% 1.5% 1.3% 1.0% CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / BOYCE & RIDDLE / PAGE 10 Decile State Median 1 2 3 4 5 6 7 8 9 10 Hawaii 1.8% 3.5% 2.7% 2.3% 2.1% 1.9% 1.7% 1.5% 1.4% 1.2% 1.0% Idaho 1.7% 3.2% 2.5% 2.2% 2.0% 1.8% 1.6% 1.5% 1.3% 1.2% 1.0% Illinois 1.7% 3.5% 2.7% 2.3% 2.0% 1.8% 1.7% 1.5% 1.3% 1.1% 0.9% Indiana 2.1% 4.2% 3.3% 2.8% 2.5% 2.2% 2.0% 1.8% 1.6% 1.4% 1.1% Iowa 2.0% 3.9% 3.1% 2.7% 2.4% 2.1% 1.9% 1.7% 1.6% 1.4% 1.1% Kansas 2.0% 4.0% 3.1% 2.7% 2.4% 2.1% 1.9% 1.7% 1.5% 1.3% 1.0% Kentucky 2.3% 5.0% 3.8% 3.2% 2.8% 2.5% 2.2% 2.0% 1.7% 1.5% 1.1% Louisiana 2.3% 5.0% 3.8% 3.2% 2.8% 2.4% 2.2% 1.9% 1.7% 1.4% 1.1% Maine 1.7% 3.2% 2.5% 2.2% 1.9% 1.8% 1.6% 1.5% 1.3% 1.1% 0.9% Maryland 1.6% 3.1% 2.4% 2.1% 1.9% 1.7% 1.5% 1.4% 1.2% 1.1% 0.9% Massachusetts 1.6% 3.2% 2.4% 2.1% 1.9% 1.7% 1.5% 1.3% 1.2% 1.0% 0.8% Michigan 1.8% 3.6% 2.8% 2.4% 2.1% 1.9% 1.7% 1.6% 1.4% 1.2% 1.0% Minnesota 1.8% 3.4% 2.7% 2.3% 2.1% 1.9% 1.7% 1.5% 1.4% 1.2% 1.0% Mississippi 2.2% 4.7% 3.6% 3.0% 2.7% 2.4% 2.1% 1.9% 1.7% 1.4% 1.1% Missouri 2.1% 4.3% 3.3% 2.8% 2.5% 2.2% 2.0% 1.8% 1.6% 1.4% 1.1% Montana 2.0% 3.9% 3.0% 2.6% 2.3% 2.1% 1.9% 1.7% 1.5% 1.3% 1.1% Nebraska 1.9% 3.7% 2.9% 2.5% 2.3% 2.0% 1.9% 1.7% 1.5% 1.3% 1.0% Nevada 1.7% 3.2% 2.5% 2.2% 1.9% 1.8% 1.6% 1.4% 1.3% 1.1% 0.9% New Hampshire 1.5% 2.7% 2.2% 1.9% 1.7% 1.5% 1.4% 1.3% 1.2% 1.0% 0.9% New Jersey 1.5% 2.9% 2.3% 2.0% 1.7% 1.6% 1.4% 1.3% 1.1% 1.0% 0.8% New Mexico 2.1% 4.3% 3.3% 2.8% 2.5% 2.2% 2.0% 1.8% 1.6% 1.3% 1.1% New York 1.5% 3.2% 2.4% 2.1% 1.8% 1.6% 1.5% 1.3% 1.2% 1.0% 0.8% North Carolina 1.9% 3.9% 3.0% 2.6% 2.3% 2.0% 1.8% 1.6% 1.5% 1.3% 1.0% North Dakota 2.3% 4.6% 3.5% 3.0% 2.7% 2.4% 2.2% 2.0% 1.7% 1.5% 1.2% Ohio 2.0% 4.0% 3.1% 2.7% 2.4% 2.1% 1.9% 1.7% 1.5% 1.3% 1.0% Oklahoma 2.1% 4.3% 3.3% 2.8% 2.5% 2.2% 2.0% 1.8% 1.6% 1.4% 1.1% Oregon 1.5% 2.6% 2.1% 1.9% 1.7% 1.5% 1.4% 1.3% 1.1% 1.0% 0.8% Pennsylvania 1.8% 3.5% 2.7% 2.3% 2.1% 1.9% 1.7% 1.5% 1.3% 1.2% 0.9% Rhode Island 1.7% 3.3% 2.6% 2.2% 2.0% 1.8% 1.6% 1.4% 1.3% 1.1% 0.9% South Carolina 1.8% 3.6% 2.8% 2.4% 2.1% 1.9% 1.7% 1.6% 1.4% 1.2% 1.0% South Dakota 2.0% 3.8% 3.0% 2.6% 2.3% 2.1% 1.9% 1.7% 1.5% 1.3% 1.0% Tennessee 2.0% 4.2% 3.2% 2.7% 2.4% 2.1% 1.9% 1.7% 1.5% 1.3% 1.0% Texas 2.1% 4.2% 3.2% 2.8% 2.4% 2.2% 1.9% 1.7% 1.5% 1.3% 1.0% Utah 2.1% 4.0% 3.1% 2.7% 2.4% 2.2% 2.0% 1.8% 1.6% 1.4% 1.1% Vermont 1.5% 2.6% 2.1% 1.9% 1.7% 1.5% 1.4% 1.3% 1.2% 1.0% 0.8% Virginia 1.8% 3.6% 2.8% 2.4% 2.1% 1.9% 1.7% 1.5% 1.4% 1.2% 0.9% Washington 1.4% 2.4% 1.9% 1.7% 1.6% 1.4% 1.3% 1.2% 1.1% 1.0% 0.8% West Virginia 2.4% 5.1% 3.9% 3.3% 2.9% 2.6% 2.3% 2.0% 1.8% 1.5% 1.2% Wisconsin 1.9% 3.7% 2.9% 2.5% 2.3% 2.0% 1.8% 1.7% 1.5% 1.3% 1.0% Wyoming 2.1% 4.2% 3.3% 2.8% 2.5% 2.2% 2.0% 1.8% 1.6% 1.4% 1.1% TABLE 3 : CARBON PRICE IMPACT BY STATE AND INCOME DECILE (PERCENTAGE OF MEDIAN INCOME ), CONTINUED CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / BOYCE & RIDDLE / PAGE 11 amounts from which the percentages are de- rived are reported in Appendix Tables A.1 and A.2. The impact on the median household is shown in the first column. The biggest impact is in West Virginia, where the costs from higher fossil fuel prices are equivalent to 2.4% of me- dian income. This is mainly due to the state’s relatively low incomes: West Virginia’s median carbon charge is only 4% above the national median (see Appendix Table A.2), but its median income is almost 25% below the national level (see Appendix Table A.1). The smallest impact is felt in Connecticut, the state with the highest median income, despite the fact that the me- dian Connecticut resident pays a little more in dollar terms than the median West Virginian. The regressive impact of carbon pricing is evi- dent in these inter-state comparisons. Within states, the regressive impact of higher fuel prices is even clearer. In every state, the biggest impact as a percentage of income is in the low- est-income decile, and the least impact is in the highest-income decile. The carbon charge as a fraction of income steadily declines from the bottom to the top of the income profile. Impact of recycling revenue as dividends The net impact of cap-and-dividend differs markedly from the impact of higher fossil fuel prices alone. The dividends (here assumed to be 80% of carbon revenues) have a strong pro- gressive impact on family incomes, as they rep- resent a larger fraction of income for the low- income households than for high-income house- holds. This outweighs the regressive impact of higher fossil fuel prices. Table 4 shows the net dollar impact by state and income decile. In every state, the median household (shown in the first column) sees a positive net impact: the amount it receives as dividends exceeds what it pays as a result of higher fossil fuel prices. Fig- ure 5 (page 13) depicts these effects for a family of four at the median income level in each state. The largest positive effects, as can be seen in Table 4, are consistently in the lowest-income IN EVERY STATE, THE BOTTOM SIX DECILES EXPERIENCE POSITIVE NET BENEFITS. FIGURE 4 : IMPACT OF CARBON PRICING ON MEDIAN FAMILY OF FOUR ($/YEAR , AT $25 /TON CO 2) CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / BOYCE & RIDDLE / PAGE 12 Decile medians State Median 1 2 3 4 5 6 7 8 9 10 Alabama 103 250 208 177 148 119 87 50 2 -67 -222 Alaska 91 231 190 160 133 106 76 43 0 -62 -195 Arizona 127 262 223 195 168 142 112 78 35 -30 -175 Arkansas 114 252 212 183 156 129 99 65 21 -42 -181 California 135 278 237 207 179 150 118 81 32 -40 -207 Colorado 61 220 173 139 108 77 43 4 -47 -121 -287 Connecticut 84 249 203 168 135 102 66 22 -34 -120 -321 Delaware 48 207 160 126 95 64 30 -9 -58 -131 -289 D.C 49 243 190 150 111 71 26 -27 -98 -208 -475 Florida 118 260 220 190 162 133 101 64 16 -56 -221 Georgia 71 230 184 150 119 88 54 14 -36 -111 -275 Hawaii 85 231 188 157 129 100 68 32 -15 -83 -234 Idaho 141 265 228 202 178 154 127 97 59 2 -119 Illinois 81 238 193 159 128 97 63 24 -26 -100 -266 Indiana 37 198 150 115 84 53 20 -18 -66 -135 -283 Iowa 63 214 169 136 107 78 47 11 -33 -98 -235 Kansas 62 218 172 139 108 78 45 8 -40 -109 -258 Kentucky 72 229 184 150 120 89 55 17 -32 -104 -261 Louisiana 105 251 209 178 150 121 89 52 5 -65 -218 Maine 127 258 220 192 167 141 113 81 40 -20 -152 Maryland 61 220 174 140 109 77 43 4 -47 -122 -288 Massachusetts 80 240 194 160 129 97 62 21 -32 -112 -293 Michigan 70 227 181 147 117 86 53 15 -33 -104 -259 Minnesota 54 214 166 132 101 70 37 -2 -51 -122 -276 Mississippi 128 263 224 196 169 142 112 78 35 -30 -171 Missouri 63 221 175 141 111 80 46 8 -41 -112 -266 Montana 116 249 210 182 156 130 102 70 29 -31 -160 Nebraska 80 227 183 152 123 95 64 29 -15 -78 -215 Nevada 97 241 199 169 140 112 81 45 -1 -68 -217 New Hampshire 98 239 198 168 140 113 83 48 5 -60 -200 New Jersey 83 242 197 163 132 100 65 24 -29 -110 -293 New Mexico 114 251 211 182 155 128 99 64 21 -44 -186 New York 135 278 238 208 180 150 118 79 29 -49 -231 North Carolina 88 238 195 163 133 104 72 34 -13 -83 -235 North Dakota 62 213 168 136 106 77 46 10 -35 -100 -237 Ohio 58 217 170 136 105 74 41 2 -46 -118 -272 Oklahoma 103 246 204 174 146 117 87 52 7 -58 -200 Oregon 147 275 238 211 186 160 133 100 59 -2 -138 TABLE 4 : NET IMPACT OF CAP -AND -DIVIDEND BY STATE AND INCOME DECILE ($ PER CAPITA ) CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / BOYCE & RIDDLE / PAGE 13 decile. In every state, the bottom six deciles ex- perience positive net benefits; in 45 states, the bottom seven deciles do so. Table 5 shows these net impacts as a percent- age of income. For the median household (first column), the range is from a net benefit of 0.2% of income in Indiana to 1.1% in Mississippi. In the lowest-income decile, where net benefits are greatest, the range is from 4.1% in Maryland to 10.1% in Mississippi. In the top decile, the net cost ranges from 0.2 to 0.5% of income. Scanning the variations in Table 5 horizontally across columns (by income decile) and vertically across rows (by state), it is clear that the former exceed the latter by a wide margin. Inter-state differences are modest relative to differences across income groups. 10 Decile medians State Median 1 2 3 4 5 6 7 8 9 10 TABLE 4 : NET IMPACT OF CAP -AND -DIVIDEND BY STATE AND INCOME DECILE ($ PER CAPITA ), CONTINUED Pennsylvania 105 248 207 176 148 120 89 53 7 -61 -212 Rhode Island 112 255 214 184 156 127 96 60 14 -55 -210 South Carolina 125 261 222 193 166 139 109 75 32 -32 -172 South Dakota 113 249 209 180 154 127 99 66 25 -35 -164 Tennessee 95 244 201 169 140 110 78 41 -7 -77 -233 Texas 88 243 199 166 135 104 71 32 -18 -91 -252 Utah 74 216 173 143 116 89 59 26 -16 -76 -204 Vermont 143 268 231 205 180 156 129 98 59 1 -125 Virginia 57 221 174 139 107 74 39 -2 -54 -131 -302 Washington 141 273 235 207 181 155 126 93 50 -14 -156 West Virginia 92 240 197 165 136 107 76 39 -7 -74 -221 Wisconsin 50 205 158 125 95 65 33 -3 -49 -116 -257 Wyoming 63 214 169 137 108 79 47 11 -35 -101 -243 U.S. average 103 251 209 177 148 119 87 49 1 -71 -232 FIGURE 5 : CAP -AND -DIVIDEND : NET BENEFIT FOR MEDIAN FAMILY OF FOUR ($/YEAR , AT $25 /TON CO 2) CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / BOYCE & RIDDLE / PAGE 14 TABLE 5 : NET IMPACT OF CAP -AND -DIVIDEND BY STATE AND INCOME DECILE (PERCENTAGE OF MEDIAN INCOME ) Decile medians State Median 1 2 3 4 5 6 7 8 9 10 Alabama 0.8% 8.2% 4.0% 2.4% 1.6% 1.0% 0.6% 0.3% 0.0% -0.2% -0.4% Alaska 0.5% 4.2% 2.2% 1.4% 0.9% 0.6% 0.4% 0.2% 0.0% -0.2% -0.3% Arizona 0.8% 6.8% 3.5% 2.2% 1.5% 1.0% 0.7% 0.4% 0.1% -0.1% -0.3% Arkansas 0.9% 8.2% 4.1% 2.6% 1.7% 1.1% 0.7% 0.4% 0.1% -0.1% -0.3% California 0.8% 7.3% 3.6% 2.3% 1.5% 1.0% 0.6% 0.3% 0.1% -0.1% -0.3% Colorado 0.3% 4.5% 2.2% 1.3% 0.8% 0.5% 0.2% 0.0% -0.1% -0.3% -0.4% Connecticut 0.4% 5.3% 2.5% 1.5% 0.9% 0.5% 0.3% 0.1% -0.1% -0.2% -0.3% Delaware 0.3% 4.2% 2.0% 1.2% 0.7% 0.4% 0.1% 0.0% -0.2% -0.3% -0.4% D.C 0.3% 7.9% 3.2% 1.7% 0.9% 0.5% 0.1% -0.1% -0.3% -0.4% -0.5% Florida 0.7% 7.0% 3.5% 2.2% 1.4% 0.9% 0.6% 0.3% 0.1% -0.1% -0.3% Georgia 0.4% 6.0% 2.9% 1.7% 1.0% 0.6% 0.3% 0.1% -0.1% -0.3% -0.4% Hawaii 0.5% 5.2% 2.6% 1.6% 1.0% 0.7% 0.4% 0.1% 0.0% -0.2% -0.4% Idaho 1.0% 6.9% 3.7% 2.4% 1.7% 1.2% 0.8% 0.5% 0.2% 0.0% -0.2% Illinois 0.5% 5.6% 2.7% 1.6% 1.0% 0.6% 0.3% 0.1% -0.1% -0.2% -0.4% Indiana 0.2% 4.4% 2.1% 1.2% 0.7% 0.4% 0.1% -0.1% -0.2% -0.4% -0.5% Iowa 0.4% 4.8% 2.4% 1.4% 0.9% 0.5% 0.3% 0.1% -0.1% -0.3% -0.4% Kansas 0.4% 5.2% 2.5% 1.5% 0.9% 0.5% 0.3% 0.0% -0.1% -0.3% -0.4% Kentucky 0.5% 7.3% 3.4% 2.0% 1.3% 0.7% 0.4% 0.1% -0.1% -0.3% -0.5% Louisiana 0.9% 9.3% 4.4% 2.7% 1.7% 1.1% 0.7% 0.3% 0.0% -0.2% -0.4% Maine 0.8% 6.4% 3.3% 2.2% 1.5% 1.0% 0.7% 0.4% 0.1% -0.1% -0.3% Maryland 0.3% 4.1% 2.0% 1.2% 0.7% 0.4% 0.2% 0.0% -0.1% -0.3% -0.4% Massachusetts 0.4% 5.2% 2.5% 1.5% 0.9% 0.6% 0.3% 0.1% -0.1% -0.2% -0.4% Michigan 0.4% 5.1% 2.5% 1.5% 0.9% 0.6% 0.3% 0.1% -0.1% -0.3% -0.4% Minnesota 0.3% 4.3% 2.0% 1.2% 0.7% 0.4% 0.2% 0.0% -0.2% -0.3% -0.4% Mississippi 1.1% 10.1% 5.0% 3.1% 2.1% 1.4% 0.9% 0.5% 0.2% -0.1% -0.3% Missouri 0.4% 5.8% 2.7% 1.6% 1.0% 0.6% 0.3% 0.0% -0.2% -0.3% -0.4% Montana 0.9% 7.1% 3.6% 2.3% 1.6% 1.1% 0.7% 0.4% 0.1% -0.1% -0.3% Nebraska 0.5% 5.3% 2.6% 1.6% 1.1% 0.7% 0.4% 0.1% -0.1% -0.2% -0.4% Nevada 0.6% 5.3% 2.7% 1.7% 1.1% 0.7% 0.4% 0.2% 0.0% -0.2% -0.3% New Hampshire 0.5% 4.4% 2.3% 1.5% 1.0% 0.6% 0.4% 0.2% 0.0% -0.1% -0.3% New Jersey 0.4% 5.0% 2.4% 1.4% 0.9% 0.5% 0.3% 0.1% -0.1% -0.2% -0.3% New Mexico 0.9% 8.0% 4.0% 2.5% 1.7% 1.1% 0.7% 0.4% 0.1% -0.1% -0.3% New York 0.8% 8.2% 3.9% 2.4% 1.6% 1.0% 0.6% 0.3% 0.1% -0.1% -0.3% North Carolina 0.6% 6.2% 3.0% 1.9% 1.2% 0.7% 0.4% 0.2% 0.0% -0.2% -0.4% North Dakota 0.4% 5.6% 2.7% 1.6% 1.0% 0.6% 0.3% 0.1% -0.1% -0.3% -0.4% Ohio 0.4% 5.2% 2.5% 1.5% 0.9% 0.5% 0.2% 0.0% -0.2% -0.3% -0.4% Oklahoma 0.8% 7.5% 3.7% 2.3% 1.5% 1.0% 0.6% 0.3% 0.0% -0.2% -0.4% Oregon 0.9% 6.5% 3.4% 2.2% 1.6% 1.1% 0.7% 0.4% 0.2% 0.0% -0.2% CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / BOYCE & RIDDLE / PAGE 15 To put these inter-state differences in perspec- tive, we can compare the impact of the cap-and- dividend policy to that of two major items in the federal budget: defense spending and farm pro- grams. Figure 6 depicts per capita spending un- der these two programs in the top ten states and the bottom ten states, and compares this to the net impact of the cap-and-dividend policy on median households in the top ten and bottom ten states. 11 In the case of defense spending, the ratio between the top ten and bottom ten states is more than 11:1. In the case of farm programs, it is 190:1. In the case of cap-and- dividend, it is 2½ :1. V. NON-DIVIDEND USES OF CARBON REVENUES A climate policy that incorporates cap-and- dividend is likely to dedicate some fraction of carbon revenues (20% in the preceding analy- sis) to other uses, while returning the rest to the people as equal dividends. If all the carbon permits are auctioned, then these non-dividend uses are funded by a fraction of the revenue. Alternatively (as in the Waxman-Markey bill), some fraction of the permits may be given away instead of being auctioned; this has an equiva- lent effect, transferring “allowance value” rather than cash to the recipients. 12 In this section, we briefly discuss potential non- dividend uses of carbon revenues or allowance value. First, we discuss transitional adjustment assistance to help workers, communities and firms that stand to be affected adversely by the economy’s shift away from fossil fuels. Second, TABLE 5 : NET IMPACT OF CAP -AND -DIVIDEND BY STATE AND INCOME DECILE (PERCENTAGE OF MEDIAN INCOME ), CONTINUED g Pennsylvania 0.7% 6.3% 3.1% 2.0% 1.3% 0.8% 0.5% 0.2% 0.0% -0.2% -0.3% Rhode Island 0.7% 6.4% 3.2% 2.0% 1.3% 0.9% 0.5% 0.3% 0.0% -0.1% -0.3% South Carolina 0.9% 7.4% 3.8% 2.4% 1.6% 1.1% 0.7% 0.4% 0.1% -0.1% -0.3% South Dakota 0.8% 6.8% 3.5% 2.2% 1.5% 1.0% 0.6% 0.3% 0.1% -0.1% -0.3% Tennessee 0.7% 7.1% 3.4% 2.1% 1.4% 0.9% 0.5% 0.2% 0.0% -0.2% -0.4% Texas 0.6% 7.2% 3.4% 2.1% 1.3% 0.8% 0.4% 0.2% -0.1% -0.2% -0.4% Utah 0.5% 5.1% 2.6% 1.6% 1.0% 0.7% 0.4% 0.1% -0.1% -0.2% -0.4% Vermont 0.9% 5.9% 3.2% 2.1% 1.5% 1.0% 0.7% 0.4% 0.2% 0.0% -0.2% Virginia 0.3% 4.8% 2.3% 1.3% 0.8% 0.4% 0.2% 0.0% -0.2% -0.3% -0.4% Washington 0.8% 5.8% 3.0% 2.0% 1.4% 1.0% 0.6% 0.4% 0.2% 0.0% -0.2% West Virginia 0.8% 8.4% 4.0% 2.5% 1.6% 1.0% 0.6% 0.2% 0.0% -0.2% -0.4% Wisconsin 0.3% 4.2% 2.0% 1.2% 0.7% 0.4% 0.2% 0.0% -0.2% -0.3% -0.4% Wyoming 0.4% 5.2% 2.5% 1.5% 1.0% 0.6% 0.3% 0.1% -0.1% -0.3% -0.4% U.S. average 0.6% 6.5% 3.2% 2.0% 1.3% 0.8% 0.5% 0.2% 0.0% -0.2% -0.3% Decile medians State Median 1 2 3 4 5 6 7 8 9 10 FIGURE 6: TOP TEN AND BOTTOM TEN STATES : DEFENSE EXPENDITURE , FARM PROGRAMS , AND CAP -AND -DIVIDEND POLICY (DOLLARS PER CAPITA ) $0 $500 $1, 000 $1, 500 $2, 000 $2, 500 Defense expenditure Farm programs Net impacts of cap-and-dividend Me a n o f to p te n sta te s Me a n o f bo tto m te n sta te s CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / BOYCE & RIDDLE / PAGE 16 we compare the distributional impact of cap- and-dividend to that of H.R. 2454, the American Clean Energy and Security Act passed by the U.S. House of Representatives in June 2009, which proposes a variety of non-dividend uses. Transitional adjustment assistance In addition to its impacts on consumers, a policy to curb carbon emissions will have impacts on businesses and workers. 13 In some sectors – coal mining is an important example – jobs will be lost. In others – for example, building retro- fits and the manufacture of clean energy tech- nologies – new jobs will be created. Since production of renewables and energy effi- ciency are generally more labor-intensive than production of fossil fuels, job gains are likely to exceed job losses. 14 No automatic economic mechanism ensures, however, that job creation will occur in the same communities and for the same workers who are hit by job losses. To assist their transition to new livelihoods, a fraction of the carbon revenues initially could be allocated to the states as block grants for ad- justment assistance. In the first year of the policy, for example, 10% of permit auction revenues might be dedicated to this purpose, with the per- centage gradually phased out over time. Disbursement of transitional adjustment assis- tance funds in the form of block grants would allow the states to tailor policies to their own circumstances and priorities. In coal-mining states, for example, funds could be invested in the ecological restoration of landscapes that have been severely degraded by mountaintop removal, strip mining, and disposal of mine tail- ings and coal ash. In manufacturing-intensive states, funds could be invested in job training and support to “green” industries. The American Clean Energy and Security Act of 2009 The American Clean Energy and Security Act (ACES) proposes to give away 85% of carbon permits in the initial years of the policy and to KEEPING GOVERNMENTS WHOLE Not only households will be impacted by the higher fossil fuel prices that result from a carbon cap. Government expenditure accounts for about 14% of U.S. carbon emissions. Of this to- tal, 3.6% comes from federal spending and 10.8% from state and local government spend- ing. To keep government whole – to avoid cuts in real government purchasing power – a compa- rable share of carbon revenues will need to flow to government coffers. If the dividends paid to the public from carbon revenue are non-taxable, then policymakers will need to allocate a portion of the remaining car- bon revenue to this purpose. If they are taxable, we estimate that roughly 24 cents on the divi- dend dollar will flow back to government in the form of federal and state taxes (Boyce and Riddle 2008). With 80% of the total revenue dis- tributed as dividends, this means that taxes would recycle 19% of total carbon revenue to government, enough to offset fully the impact of higher fossil fuel prices on government purchas- ing power, with about 5% of total carbon reve- nues left over for other purposes. Taxable dividends are preferable to lower, non- taxable dividends from the standpoint of distri- butional equity. Taxation claims a bigger share of the dividends in upper-income brackets than it does from lower-income and middle-income households. Directly tapping the carbon revenue to obtain the same amount of money, by con- trast, reduces dividend payments equally to all, a result equivalent to a head tax, one of the most regressive forms of taxation. Whatever approach is used to keep government whole, some formula will be necessary to allo- cate carbon revenues amongst state and local governments. One way to do this, which would be consistent with the principles of cap-and- dividend, is to divide revenue among state and local governments in proportion to their popula- tions, with equal per capita amounts to each ju- risdiction. As in the case of dividends paid to individuals, this distribution would protect the governments’ purchasing power while giving them incentives to invest in energy efficiency and clean energy. CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / BOYCE & RIDDLE / PAGE 17 auction the remaining 15%. It earmarks the al- lowance value (free permits and revenues) for a number of different uses. These include free permit allocations to electricity local distribution companies (LDCs), with the expectation that the allowance value will be “passed through” to in- dustrial, commercial and residential electricity customers; direct payments from auction reve- nues to low-income households; and allocations to oil refineries and to energy-intensive “trade vulnerable” industries. The stated rationale for free allocations to LDCs is that this will protect consumers from the im- pact of higher electricity prices. Insofar as the value of allowances is passed through to con- sumers, rather than being captured by LDCs as higher profits, this is likely to mask the price signal to economize on electricity use. 15 If so, the burden of adjustment imposed by the car- bon cap will fall more heavily on other sectors of the economy, including transportation fuels, pushing up prices in those sectors even more and raising costs to consumers overall. 16 Starting in the 2020s, an increasing share of the permits would be auctioned and the reve- nues deposited in a “Climate Change Consumer Refund Account” for return to the public on an equal per capita basis. In this sense, ACES can be described as a cap-and-dividend policy with a very slow fuse. A June 2009 analysis of the distributional im- pacts of the cap-and-trade provisions of ACES by the Congressional Budget Office (CBO) con- cludes that 79% of the allowance value would eventually find its way back to American house- holds. However, it would not flow to all house- holds in equal measure. For example, the CBO reckons (page 12) that “about 63 percent of the allowance value conveyed to businesses would ultimately flow to households in the highest in- come quintile,” as a result of higher profits paid out in proportion to corporate stock holdings. Combining the routes (in some cases rather cir- cuitous ones) by which auction revenues and the allowance value of free permits ultimately return to households, the CBO estimates that in the year 2020 nearly two-fifths of the total (37.5%) would go to the top quintile of house- holds in the nation’s income distribution. The middle quintile would receive the smallest share (14.6%), with the remaining quintiles getting 15.4-16.9% each. 17 In Figure 7, this outcome is contrasted with cap-and-dividend, in which each quintile re- ceives an amount equal to its share of the popu- lation: 20%. Visibility of costs and benefits Leaving aside their distributional effects, a drawback of non-dividend uses of carbon reve- nues (and free permit allocations) is that their impact on households is less transparent than the cash-in-hand provided by dividends. From the standpoint of public support for the climate policy over the 40-year energy transition, what matters is not only the difference between costs from higher fuel prices and benefits from permit and revenue allocations, but also the visibility of these costs and benefits. On the cost side of the scales, visibility is high indeed. Gasoline prices, for example, are per- haps the single most widely known price in FIGURE 7: DISTRIBUTION OF CARBON REVENUES TO HOUSEHOLDS : ACES V . CAP -AND -DIVIDEND (PERCENTAGE SHARE ) 15% 17% 15% 16% 38% 20% 20% 20% 20% 20% 0% 10% 20% 30% 40% Bottom 20% Next 20% Middle 20% Next 20% Top 20% ACES Cap-and-dividend CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / BOYCE & RIDDLE / PAGE 18 America: 165,000 filling stations across the country announce them in foot-high numbers. Most consumers also are fairly well aware of the size of the numbers on the monthly checks they write to their electricity companies. On the benefit side, visibility varies greatly amongst policy options. Most of the avenues by which ACES would transfer money to house- holds score low on visibility. Tax credits (al- though less visible than cash) to low-income households are perhaps the most readily visible avenue. Rebates from electricity local distribution companies (LDCs) may be gleaned from the fine print on monthly utility bills. Pay- backs via higher returns to stock ownership (in- cluding stocks held in pension plans) will be difficult, if not impossible, to distinguish from the many other economic factors that affect in- vestment returns. Apart from its simplicity and fairness, an attrac- tion of cap-and-dividend is that the return of carbon revenue to the American people is highly visible: it comes back as cash in their wallets. Cap-and-dividend clearly sends the carbon price signal, while at the same time maximizing public awareness that families can come out ahead no matter how high carbon prices rise. The policy’s underlying premise – that we are all equal co- owners of our nation’s share of the carbon stor- age capacity of the atmosphere – is likely to have wider public appeal than the premise that the air belongs to polluting corporations. The transition to a post-carbon economy cannot happen overnight. It will require decades of sus- tained policy, including steadily rising carbon prices, to drive it forward. Durable public back- ing for rising carbon prices is therefore essen- tial. The fact that dividends are highly visible, together with the fact that a majority of Ameri- can families come out ahead no matter what the carbon price, can provide the political foun- dation for long-term support for the policy. This public support will make it possible to tighten the carbon cap and further raise fossil fuel prices to higher levels, bringing billions of dollars in private investment in clean energy and energy efficiency. In this sense, returning carbon revenue directly to the public not only protects family incomes but also is a highly lev- eraged use of carbon revenue. VI. CONCLUSIONS Cap-and-dividend is a policy to manage a scarce resource: our planet’s carbon-absorptive capac- ity. A consequence of any policy to limit use of a resource – to manage scarcity – is the creation of property rights. A cap-and-permit system will raise the prices of fossil fuels and all other goods and services that use these fuels in their production and distribution. Each consumer’s carbon footprint will now come with a price. The money that is paid by consumers does not dis- appear from the nation’s economy: it is trans- ferred to owners of the newly created property. The premise of cap-and-dividend is that this property should belong equally and in common to all. By auctioning permits – rather than giving them free-of-charge to corporations or other po- litically favored entities – and by returning most of the auction revenue to the public, cap-and- dividend combines price incentives to reduce carbon emissions with protection for consumers from the impact of higher fuel prices on their real incomes. The majority of families come out ahead, receiving dividends that more than off- set the price increases. In this paper we have shown that this positive outcome holds not only at the national level but also within each of the 50 states. The differences across states in the household impacts of cap-and-dividend are small com- pared to differences across income brackets, and also compared to inter-state differences in CAP-AND-DIVIDEND CLEARLY SENDS THE CARBON PRICE SIGNAL, WHILE AT THE SAME TIME MAXIMIZING PUBLIC AWARENESS THAT FAMILIES CAN COME OUT AHEAD NO MATTER HOW HIGH CARBON PRICES RISE. CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / BOYCE & RIDDLE / PAGE 19 defense spending and federal farm programs. Because dividends are distributed equally, variations in the net impact of cap-and-dividend arise solely from differences in carbon foot- prints. Households who consume more fossil fuels (and more of the things made and distrib- uted using them) will pay more; those who con- sume less will pay less. Residents of states that have moved more aggressively to promote en- ergy efficiency, such as California, will do better than average. But the differences in carbon footprints between the top 10% and bottom 10% of the income distribution are far greater than the differences between median house- holds across the states. Whereas cap-and-dividend returns carbon reve- nue equally to each person, the American Clean Energy and Security (ACES) Act would allocate revenues and free permits in a variety of ways that would impact different households differ- ently. The Congressional Budget Office (2009) estimates that roughly two-fifths of the resulting income would flow to households in the top 20% of the nation’s income distribution – an outcome that would disproportionately benefit upper-income states as well as upper- income individuals. Perhaps even more politically salient than net distributional effects is the visibility of transfers of carbon revenue (or allowance value) to the public. Dividends in the form of checks in the mail or deposits into bank accounts will provide highly tangible benefits to consumers, against which they can weigh the impacts of higher prices. The transfers in the ACES policy mix, such as rebates in electricity bills and capital gains for corporate shareholders, would be less apparent. For reasons of both economic fairness and transparency, therefore, cap-and-dividend offers a way to secure durable public support for an effective policy to wean the economy from de- pendence on fossil fuels. A proactive U.S. policy, in turn, will be a crucial condition for an effec- tive international agreement to confront the global challenge of climate change. CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / BOYCE & RIDDLE / PAGE 20 METHODOLOGICAL APPENDIX Our state-level estimates of the distributional incidence of higher fossil fuel prices on households are based on a car- bon charge (i.e., permit price) of $25/ton CO 2 ($92/ton C). 18 We include both direct effects via household energy con- sumption (i.e., via increases in the prices of heating oil, gasoline, natural gas, and electricity) and indirect effects via impacts on the prices of other goods and services (e.g., food and manufactured goods) that use fossil fuels in their pro- duction and distribution. 19 Following the usual practice, we assume that 100% of the permit cost is passed through to the final consumer. If coal is mined in West Virginia, and used to produce steel in Ohio, that is used to manufacture an automobile in Michigan, that is sold to a consumer in Connecticut, it is the Connecticut consumer who pays the associated carbon charge. To estimate impacts at the state level, we adjust national- level estimates to account for three variables: 1. interstate differences in income; 2. interstate differences in the carbon intensity of electricity consumed by households; and 3. regional differences in consumption patterns, arising from differences in energy use for heating and cooling, driv- ing behavior, etc. The first adjustment – for interstate differences in income – is based on data from the 2000 U.S. Census that allow us to measure income inequality within states and to construct state-specific per capita income deciles. For comparability with our expenditure data, we convert these to 2003 figures by adjusting for nominal income growth. The second adjustment – for interstate differences in the carbon intensity of electricity consumption – is based on the carbon intensity of electricity generated in each state, with adjustments to account for imports of electricity across state lines within interconnected power grids. The third adjustment – for regional differences in consump- tion patterns – is based on the region-specific Consumer Expenditure Survey (CEX) measures reported by Burtraw et al. (2009) for household consumption of electricity, gaso- line, natural gas and heating oil for 11 regions (4 of which are single states: CA, TX, FL, and NY). Regional consumption patterns, adjusted for intra-regional income differences, are used because the CEX sample size does not allow state- level disaggregation. TABLE A .1: INCOME BY STATE AND DECILE (ANNUAL MEDIAN INCOME PER CAPITA ) Decile medians State State mean State median 1 2 3 4 5 6 7 8 9 10 Alabama 19933 13308 3033 5242 7257 9412 11886 14899 18816 24402 33786 58381 Alaska 24833 18806 5516 8682 11373 14109 17124 20653 25065 31097 40732 64117 Arizona 22220 15544 3870 6472 8789 11222 13977 17286 21529 27491 37331 62436 Arkansas 18525 12772 3092 5225 7139 9161 11461 14234 17807 22850 31221 52761 California 24889 16616 3788 6545 9062 11752 14841 18603 23494 30469 42186 72895 Colorado 26356 18829 4887 8048 10830 13728 16986 20873 25827 32738 44052 72553 Connecticut 31525 20964 4745 8220 11399 14802 18714 23484 29692 38554 53464 92628 Delaware 25540 18527 4959 8075 10792 13606 16753 20490 25229 31807 42508 69214 D.C 31408 17795 3082 5895 8671 11801 15564 20346 26833 36521 53716 102747 Florida 23624 15925 3695 6343 8748 11310 14243 17805 22423 28989 39980 68631 Georgia 23183 15895 3808 6460 8847 11373 14251 17729 22215 28560 39113 66357 Hawaii 23589 16969 4465 7316 9815 12411 15323 18791 23200 29337 39356 64489 Idaho 19552 14231 3835 6229 8312 10467 12874 15730 19347 24362 32510 52800 Illinois 25320 17521 4271 7200 9822 12588 15730 19516 24387 31256 42640 71871 Indiana 22353 16350 4452 7203 9591 12055 14803 18058 22175 27873 37111 60046 Iowa 21561 15925 4426 7107 9420 11798 14441 17561 21495 26922 35684 57303 Kansas 22473 16138 4232 6943 9321 11794 14569 17876 22082 27940 37510 61543 Kentucky 19828 13417 3135 5368 7392 9545 12007 14993 18861 24353 33534 57414 Louisiana 18534 12179 2698 4711 6564 8556 10855 13666 17337 22597 31485 54984 Maine 21406 15398 4052 6639 8907 11263 13905 17052 21053 26622 35714 58521 CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / BOYCE & RIDDLE / PAGE 21 We implemented these adjustments by the following steps: 1. Estimate median income by decile in each state: We obtain state-level data on mean income and the Gini index of income distribution from the US census. 20 From these data, we estimate median incomes for each decile by as- suming that income distribution has a log-normal distribu- tion – the distribution most commonly assumed in the literature (Kemp-Benedict, 2001). The means and Ginis pro- vide sufficient information to determine a unique log-normal distribution. We take estimated incomes at the 5th, 15th, 25th, etc. percentiles of this distribution as the medians for each decile. The results are shown in Table A.1. 2. Calculate national expenditure on consumption of five categories of goods: electricity, gasoline, natural gas, fuel Decile medians State State mean State median 1 2 3 4 5 6 7 8 9 10 Maryland 28071 20192 5313 8706 11679 14769 18234 22361 27607 34910 46832 76739 Massachusetts 28441 19428 4621 7860 10781 13878 17409 21681 27197 35008 48018 81678 Michigan 24294 17297 4458 7361 9920 12590 15595 19185 23763 30159 40643 67109 Minnesota 25423 18534 5012 8130 10841 13644 16772 20481 25178 31685 42250 68533 Mississippi 17373 11531 2600 4511 6261 8134 10290 12920 16345 21237 29473 51130 Missouri 21848 15311 3825 6389 8670 11064 13772 17023 21189 27041 36692 61288 Montana 18796 13475 3521 5785 7772 9840 12162 14929 18452 23362 31388 51563 Nebraska 21494 15722 4281 6926 9222 11592 14234 17364 21323 26802 35685 57738 Nevada 24098 17276 4515 7416 9964 12616 15592 19141 23657 29952 40242 66108 New Hampshire 26131 19423 5471 8742 11553 14436 17632 21397 26135 32655 43154 68952 New Jersey 29596 20330 4887 8280 11331 14558 18232 22669 28390 36476 49915 84573 New Mexico 18916 12994 3124 5292 7242 9305 11653 14489 18146 23314 31904 54055 New York 25632 16298 3407 6078 8578 11295 14461 18368 23517 30967 43700 77972 North Carolina 22255 15512 3835 6431 8746 11182 13942 17260 21521 27514 37420 62747 North Dakota 19473 14126 3781 6157 8228 10374 12773 15623 19236 24251 32411 52772 Ohio 23017 16360 4202 6947 9369 11898 14746 18150 22493 28565 38524 63692 Oklahoma 19338 13407 3280 5521 7526 9640 12039 14929 18645 23881 32554 54801 Oregon 22948 16395 4255 7008 9430 11953 14790 18175 22488 28506 38357 63173 Pennsylvania 22883 15950 3943 6612 8993 11497 14335 17747 22128 28290 38475 64517 Rhode Island 23768 16417 3988 6731 9190 11785 14735 18291 22869 29328 40042 67580 South Carolina 20598 14305 3512 5904 8042 10295 12850 15926 19879 25446 34661 58271 South Dakota 19246 13845 3643 5969 8008 10126 12502 15331 18928 23936 32110 52616 Tennessee 21253 14463 3416 5826 8003 10314 12953 16149 20281 26138 35907 61237 Texas 21498 14492 3363 5772 7961 10292 12962 16203 20406 26381 36382 62455 Utah 19929 14907 4256 6767 8916 11114 13546 16405 19995 24924 32839 52209 Vermont 22603 16560 4524 7311 9727 12220 14997 18285 22442 28192 37507 60610 Virginia 26274 18413 4600 7684 10426 13305 16562 20471 25482 32519 44125 73705 Washington 25176 18049 4717 7748 10410 13180 16290 19997 24716 31292 42042 69067 West Virginia 18057 12219 2855 4889 6732 8692 10934 13654 17176 22178 30539 52286 Wisconsin 23311 17355 4905 7828 10337 12908 15758 19114 23333 29137 38476 61401 Wyoming 20969 15237 4093 6655 8888 11198 13781 16846 20731 26121 34883 56727 U.S. average 23657 16160 3844 6538 8968 11544 14481 18034 22623 29120 39942 67940 TABLE A .1: INCOME BY STATE AND DECILE (ANNUAL MEDIAN INCOME PER CAPITA ), CONTINUED CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / BOYCE & RIDDLE / PAGE 22 oil and other: We use national consumption data from the 2003 Consumer Expenditure Survey to calculate the carbon charge for each household, using the methodology de- scribed in Boyce and Riddle (2007), with two further ad- justments: (i) we include home ownership expenses as expenditures; and (ii) we use corrected survey weights (which affects the magnitude of expenditure but has little effect on its distribution). 3. Adjust expenditures in response to price increases and dividends: We adjust consumption expenditures to respond to the new price structure, using short-run price elasticities drawn from the literature (see Boyce and Riddle 2007), and to the increase in income in response to dividend payments. 4. Estimate relationship between category-specific expendi- ture and total expenditure: We use a log-quadratic func- tional form to estimate the relationship between each category of expenditure and total expenditure for each household. 21 5. Calculate predicted expenditures in each of five catego- ries for each state and income decile: Incomes (from the Census) do not match perfectly with CEX expenditure data. There are several reasons for this: (i) expenditure differs from income due to saving (or borrowing); (ii) household expenditure does not include tax payments, whereas Cen- sus income is pre-tax; and (iii) the CEX data on expenditure may be subject to under-reporting. To apply the relationship between carbon charges and expenditures estimated from the CEX, we must first match the appropriate expenditure level to the census income level for median households in each decile. To do this, we calculate means and Gini in- dexes for the expenditures from the CEX data, and find the transformation that converts the national Census data on income into a log-normal distribution with mean and Gini that matches the CEX data. We apply this transformation to the decile median income for each state to obtain median total expenditures for each decile in each state. We then apply the relationships from step (4) to estimate the cate- gory-specific expenditures for each state. 6. Adjust for regional differences in consumption patterns: We begin with the data presented in Appendices A-D of Burtraw et al. (2009) which report region-wise data on household electricity, gasoline, natural gas, and fuel oil con- sumption in physical units (kWh, gallons, cubic feet) per household. The ratios of regional to national averages from these data are then applied to our national estimates of expenditure in dollars from step (3). These regional expendi- ture levels on the four fuels are then compared to predicted regional expenditures based on weighted averages of the results by state from step (5). This ratio gives an adjustment factor for each region, which is then applied to all states in the region. 22 Expenditures on other goods are adjusted to make the total expenditure on all five categories for each region remain the same as it was before the regional ad- justments. 7. Find carbon intensity of electricity generation by state: Carbon intensities of electricity consumption for each state were calculated by Jesse Jenkins of the Breakthrough Insti- tute. These are based on the USEPA’s e-Grid data for the year 2005, combining data on the carbon intensity of elec- tricity generated in each state with adjustments to account for imports of electricity across state lines within intercon- nected power grids. 23 8. Apply carbon loading factors to expenditures on each of the five expenditure categories: The loading factors for each fuel, in units of carbon per dollar, are calculated using Input- Output (IO) accounts. We use the 2003 IO tables, 24 with ad- justments using the 2002 benchmark IO tables which pro- vided more detailed breakdowns. 25 We assign carbon emissions from coal, oil, and natural gas using emissions data from the U.S. Energy Information Administration (EIA). 26 Using a methodology similar to that described in Metcalf (1999), we trace this carbon through the economy to de- termine the final carbon content of each commodity cate- gory from the IO accounts, including indirect uses. To assign these loading factors to the CEX expenditure categories, we first convert the commodity categories from the IO accounts into Personal Consumption Expenditure (PCE) categories using bridge tables produced by U.S. Bureau of Economic Analysis, 27 and then from PCE categories into CEX catego- ries using the documentation for the National Bureau of Economic Research (NBER) CEX family-level extracts. 28 In the case of electricity, the loading factor is adjusted in each state in proportion to the carbon intensity of electricity gen- eration from step (7). In the case of the “other goods” cate- gory of expenditure, the loading factor is derived from the loading factors of the different goods and services that make up this category, which can vary across deciles. We therefore estimate the relationship between this loading factor and total expenditure, and use this to construct load- ing factors for each decile in each state. 29 Finally, the load- ing factor for each expenditure category is multiplied by the corresponding expenditures to obtain the carbon footprint. 9. Adjust for consistency with National Accounts data: The carbon content for all categories of expenditure is scaled by a constant factor so that the total carbon content of house- hold consumption is correct in proportion to total U.S. car- bon emissions (see Boyce and Riddle 2008). 10. Calculate increased spending on each category of goods: A permit price of $25 per ton CO 2 is multiplied by the carbon content of each expenditure category from step (9) to obtain the impact of carbon pricing on expenditure in each category. The total increase in expenditure is the sum of the increases for each category. The results are shown in Table A.2. CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / BOYCE & RIDDLE / PAGE 23 Decile medians State State mean State Median 1 2 3 4 5 6 7 8 9 10 Alabama 316 283 136 178 209 238 267 299 336 384 453 608 Alaska 321 295 155 196 226 253 280 310 343 386 448 581 Arizona 289 259 124 163 191 218 244 274 308 351 416 561 Arkansas 301 272 134 174 203 230 257 287 321 365 428 567 California 288 251 108 149 179 207 236 268 305 354 426 593 Colorado 359 325 166 213 247 278 309 343 382 433 507 673 Connecticut 345 302 137 184 218 251 284 321 364 420 506 707 Delaware 370 339 179 226 260 291 322 356 395 444 517 675 D.C 397 337 143 196 236 275 315 360 413 484 594 861 Florida 304 268 126 166 196 224 253 285 322 370 442 607 Georgia 349 315 156 202 236 267 298 332 372 422 497 661 Hawaii 333 301 155 198 229 257 286 318 354 401 469 620 Idaho 270 245 121 158 184 208 232 259 289 327 384 505 Illinois 340 305 148 193 227 258 289 323 362 412 486 652 Indiana 378 349 188 236 271 302 333 366 404 452 521 669 Iowa 350 323 172 217 250 279 308 339 375 420 484 621 Kansas 354 324 168 214 247 278 308 341 378 426 495 644 Kentucky 346 314 157 202 236 266 297 331 369 418 490 647 Louisiana 314 281 135 177 208 236 265 297 334 381 451 604 Maine 286 259 128 166 194 219 245 273 305 346 406 538 Maryland 359 325 166 212 246 277 309 343 382 433 508 674 Massachusetts 344 306 146 192 226 257 289 324 365 418 498 679 Michigan 347 316 159 205 239 269 300 333 371 419 490 645 Minnesota 363 332 172 220 254 285 316 349 388 437 508 662 Mississippi 289 258 123 162 190 217 244 274 308 351 416 557 Missouri 354 323 165 211 245 276 306 340 378 427 498 652 Montana 296 270 137 176 204 230 256 284 316 357 417 546 Nebraska 333 306 159 203 234 263 291 322 357 401 464 601 Nevada 320 289 145 187 217 246 274 305 341 387 454 603 New Hampshire 316 288 147 188 218 246 273 303 338 381 446 586 New Jersey 342 303 144 189 223 254 286 321 362 415 496 679 New Mexico 302 272 135 175 204 231 258 287 322 365 430 572 New York 292 251 108 148 178 206 236 268 307 357 435 617 North Carolina 330 298 148 191 223 253 282 314 352 399 469 621 North Dakota 351 324 173 218 250 280 309 340 376 421 486 623 Ohio 359 328 169 216 250 281 312 345 384 432 504 658 Oklahoma 313 283 140 182 212 240 269 299 334 379 444 586 Oregon 268 239 111 148 175 200 226 253 286 327 388 524 Pennsylvania 313 281 138 179 210 238 266 297 333 379 447 598 TABLE A .2: CARBON PRICE IMPACT BY STATE AND INCOME DECILE ($ PER CAPITA ) CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / BOYCE & RIDDLE / PAGE 24 s TABLE A .2: CARBON PRICE IMPACT BY STATE AND INCOME DECILE ($ PER CAPITA ), CONTINUED Decile medians State State mean State Median 1 2 3 4 5 6 7 8 9 10 Pennsylvania 313 281 138 179 210 238 266 297 333 379 447 598 Rhode Island 307 274 131 172 202 230 259 290 326 372 441 596 South Carolina 291 261 125 165 193 220 247 277 311 354 418 558 South Dakota 299 273 137 177 206 232 259 287 320 361 421 550 Tennessee 324 291 142 185 217 246 276 308 345 393 463 619 Texas 332 298 143 187 220 251 282 315 354 404 477 638 Utah 337 312 170 213 243 270 298 327 360 402 462 590 Vermont 269 243 118 155 181 206 230 257 288 327 385 511 Virginia 364 329 165 212 247 279 312 347 388 440 517 688 Washington 275 245 113 151 179 205 231 260 293 336 400 542 West Virginia 325 294 146 189 221 250 279 310 347 393 460 607 Wisconsin 364 336 181 228 261 291 321 353 389 435 502 643 Wyoming 351 323 172 217 249 278 307 339 375 421 487 629 U.S. average 317 283 135 177 209 238 267 299 337 385 457 618 CAP & DIVIDEND: A STATE-BY-STATE ANALYSIS / BOYCE & RIDDLE / PAGE 25 NOTES 1 In addition to carbon pricin g, the climate policy package may include regulatory standards and public investment in energy efficiency and renewable energy (Boyce 2009a). 2 The extent to which offsets reduce atmospheric carbon is often difficult to ascertain. It is hard to say, for example, whether a forest would have been replanted (or cut down) in the absence of an offset deal, or whether a coal-burning power plant in Asia would have been built to different en- ergy-efficiency specifications. Concerns about “additionality” have already surfaced in the voluntary offset market; see, for example, Elgin (2007). 3 A tax-and-dividend policy is advocated, for example, by nsen (2009). James Ha 2 blank 3 blank 4 For discussion, see Boyce (2009b). On concerns about the potential for speculative bubble s in carbon derivatives mar- kets, see Chan (2009). 5 Office of Management and Budget (2009) “Summary Table S-2: Effect of Budget Proposals on Projected Deficits.” The budget put the amounts over the decade at $525.7 billion and $120 billion, respectively. 6 Details of our methods are given in the Appendix. 7 The ratio between the carbon charges to the highest and lowest deciles is somewhat lo wer than the ratio of the car- bon footprints shown in Figure 2, because the figures in Table 1 incorporate changes in demand due to higher fossil fuel prices (with demand for necessities being less price- elastic than demand for luxuries) and after receipt of the dividend. 8 For details on the data sour ces used to calculate these shares, see Boyce and Riddle (2008). 9 We assume in our calculations that the price elasticity of demand is constant across inco me deciles. There is some evidence, however, that demand elasticity is greater in the lower-income deciles, in which case the progressivity of the cap and dividend policy would be somewhat stronger than shown in these results. For di scussion on this point, see Boyce and Riddle (2007, p. 13). 10 For this reason, low-income states tend to fare somewhat better under the cap-and-divide nd policy than high-income states. In West Virginia, for example, the effect of lower- than-average income outweighs the effect of the state’s more carbon-intensive electricity supply: the median house- hold sees a net benefit equivalent to 0.8% of its income, above the national median of 0.6%. 11 The data for these calculations on military expenditure are from www.statemaster.com/graph/mil_def_con_exp_ percap-defense-contracts-expenditures-per-capita. The data on farm programs are from the Environmental Working Group’s database, farm.ewg.org/farm/progdetail.php?fips =00000&yr=2006&progcode=total&page=states. We are grateful to Elizabeth Stanton et al. (2009) for suggesting these comparisons. 12 Apart from being less transparent, a drawback of free allocations is that they make permit trading a necessary element of the policy, since those who get the free permits are not identical to those who need them. 13 A carbon pricing policy will also have impacts on the pur- chasing power of local, state, and federal governments. For discussion, see the si debar on page 17. 14 For discussion of these employment effect s, see Pollin et al. (2008). 15 Provisions to separate allo wance-value rebates from kilo- watt hour-based charges in electricity bills, so as to maintain incentives for electricity use reduction at the margin, will dampen this effect only insofar as consumers read and are able to make sense of the fine print in their monthly bills. 16 For discussion of these and other problems associated with provision of free allowances to LDCs, see Sweeney et al. (2009) and Stone and Shaw (2009). 17 Calculated from Table 2 in CBO (2009, p. 16). The CBO’s results hinge, among other things, on the possibly optimistic assumption that the state public utility commissions will ensure that the full value of free allocations to LDCs is passed to their customers. If no t, the distributional impact of ACES could be more inequitable. 18 The assumed carbon price affects the magnitude of the dollar amounts reported, but not the distributional pattern. The incidence of higher (or lower) carbon prices can be cal- culated simply by multiplying our numbers by the ratio of the assumed price to ours. For example, a more ambitious tar- get resulting in a permit price of $50/ton CO 2 would double the dollar values we report. 19 For details, see Boyce & Riddle (2007) where we report estimates by expenditure decile at the national level. 20 These census data are av ailable at: www.census.gov/ hhes/www/income/histinc /state/statetoc.html. 21 We obtain the following estimates: ln(electricity expenditure) = 2.297 + 0.333*ln(expenditure) + 0.003*ln(expenditure-squared). ln(gasoline expenditure) = -11.786 + 3.265*ln(expenditure) – 0.145*ln(expenditure-squared). ln(natural gas expenditure) = -5.097 + 1.752*ln(expenditure) – 0.073*ln(expenditure-squared). ln(fuel oil expenditure) = -3.117 + 1.156*ln(expenditure) – 0.043*ln(expenditure-squared). ln(other goods expenditure) = 3.123 + 0.323*ln(expenditure) + 0.036*ln(expenditure-squared). 22 We assigned the seven states that are not in any of the regions in Burtraw et al. (2009) as follows: Northeast for Vermont, Northwest for Wyomin g and Alaska, Mountains for New Mexico, Plains for Iowa and North Dakota, and Florida for Hawaii. 23 Stanton et al. (2009) report a similar state-level measure of the carbon intensity of electr icity, using the national aver- age instead of regional power grids to estimate the carbon content of electricity imported across state lines. The corre- lation between their state measure and ours is 0.98. 24 US Bureau of Economic Analysis, “1998-2007 Supple- mentary Make and Use Tables after redefinitions at the summary level,” available at www.bea.gov/industry/io_ an- nual.htm. 25 US Bureau of Economic Analysis, “2002 Standard Make and Use Tables at the Summary Level,” available at www.bea.gov/industry/io_benchmark.htm. 26 EIA, “International Energy Annual 2006”, available at www.eia.doe.gov/iea/carbon.htm l. Additional data on the small amount of crude oil that does not go to refineries are taken from: EIA, “Petroleum Na vigator, US Crude Oil Supply and Deposition” (available at tonto.eia.doe.gov/ dnav/pet/pet_sum_crdsnd_adc_mbbl_a.htm), and EIA, “Pe- troleum Navigator; Refining & Processing; Weekly Inputs, Utilization & Production” (available at tonto.eia.doe.gov/ dnav/pet/pet_pnp_wiup_dcu_nus_w.htm). 27 US Bureau of Economic Analysis, “PCEBridge_2002- 2007,” available at www.bea.gov/industry/more.htm. 28 NBER, Documentation for “Consumer Expenditure Survey Family Level Extracts,” available at www.nber.org/data/ ces_cbo.html. 29 We again use a log-quadratic function, and obtain the following estimate: ln(carbon intensity of other goods expenditure) = -6.665 – 0.541*ln(expenditure) + 0.030*ln(expenditure-squared). REFERENCES Boyce, James K. (2009a) ‘Smart Climate Policy,’ E3: Eco- nomics for Equity and the Environment, Policy Brief No. 1, April. Online at www.e3network.org/briefs/Boyce_Smart _Climate_Policy.pdf. Boyce, James K. (2009b) ‘Cap and No Trade,’ Commentary posted on capanddividend.org, January. Online at http://www.capanddividend.org/?q=node/233. Boyce, James K. and Matthew E. Riddle (2007) ‘Cap and Dividend: How to Cur b Global Warming While Protecting the Incomes of American Families,’ Amherst, MA: Political Econ- omy Research Institute, Working Paper No. 150, November. Online at www.peri.umass.edu/fileadmin/pdf/working_pa- pers/working_paper s_101-150/WP150.pdf. Boyce, James K. and Matthew E. Riddle (2008) ‘Keeping the Government Whole: The Impact of a Cap-and-Dividend Policy for Curbing Global Warming on Government Revenue and Expenditure,’ Amherst, MA: Political Economy Research In- stitute, Working Paper No. 188, November. Online at http://www.peri.umass.edu/fileadmin/pdf/working_papers/ working_papers_151-200/WP188.pdf. Boyce, James K. and Matthew E. Riddle (2009) ‘Cap and Dividend: How to Curb Global Warming While Promoting Income Equity,’ in Jonathan Harris and Neva Goodwin, eds., Twenty-First Century Macroeconomics: Responding to the Climate Challenge. Cheltenham and Northampton: Ed- ward Elgar. Broder, John (2009) ‘Adding Something for Everyone, House Leaders Won Climate Bill,’ The New York Times, 1 July, pp. A1, A17. Burtraw, Dallas, Richard Sw eeney and Margaret Walls (2009) ‘The Incidence of U.S. Climate Policy: Alternative Uses of Revenues from Cap-and-Trade Auctions,’ Washing- ton, DC: Resources for the Futu re, Discussion Paper, April. Online at www.rff.org/RFF/Documents/RFF-DP-09-17.pdf. Chan, Michelle (2009) ‘Subprime Carbon? Re-thinking the World’s Largest New Derivative s Market,’ Washington, DC: Friends of the Earth, Marc h. Online at www.foe.org /pdf/SubprimeCarbonReport.pdf. Congressional Budget Office (CBO) (2009) ‘The Estimated Costs to Households From the Cap-and-Trade Provisions of H.R. 2454,’ June 19. Online at www.cbo.gov/ftpdocs/ 103xx/doc10327/06-19-CapAndTradeCosts.pdf. Elgin, Ben (2007) ‘Another Inconvenient Truth,’ Business Week, 26 March. Online at www.businessweek.com/maga- zine/content/07_13/b4027057.htm. Hansen, James E. (2009) ‘Carbon Tax & 100% Dividend vs. Tax & Trade.’ Testimony submitted to the Committee on Ways and Means, U.S. House of Representative, 25 Febru- ary. Online at www.columb ia.edu/~jeh1/mailings/2009/ 20090226_WaysAndMeans.pdf. Kemp-Benedict, Eric (2001) “Income Distribution and Pov- erty: Methods for Using Available Data in Global Analysis,” Polestar Technical Note #4 Metcalf, Gilbert E. (1999) “A Di stributional Analysis of an Environmental Tax Shift,” National Bureau of Economic Re- search Working Paper #6546. Office of Management and Bu dget (2009) A New Era of Re- sponsibility: Renewing Amer ica’s Promise. Online at www.whitehouse.gov/omb/assets/fy2010_new_era/a_new _era_of_responsibility2.pdf. Pollin, Robert, Heidi Garrett-Peltier, James Heintz and Helen Scharber (2008) Green Recovery: A Program to Create Good Jobs & Start Building a Low-Carbon Economy. Amherst, MA: Political Economy Research In stitute, and Washington, DC: Center for American Progre ss, September. Online at www.peri.umass.edu/fileadmin/ pdf/other_publication_type s/peri_report.pdf. Stanton, Elizabeth A., Frank Ackerman and Kristen Sheeran (2009) ‘Greenhouse Gases and the American Lifestyle: Un- derstanding Interstate Differences in Emissions,’ Portland, OR: Economics for Equity and the Environment, May. Online at www.e3network.org/pape rs/NRDC_state_emissions_ report.pdf. Stone, Chad and Hannah Shaw (2009) ‘Senate Can Strengthen Climate Legislatio n by Reducing Corporate Wel- fare and Boosting True Consumer Relief,’ Washington, DC: Center for Budget and Policy Priorities, July 10. Online at http://www.cbpp.org/file s/7-10-09climate.pdf. Sweeney, Rich, Josh Blonz an d Dallas Burtraw (2009) ‘The Effects on Households of Alloca tions to Electricity Local Dis- tribution Companies,’ Washin gton, DC: Resources for the Future, June 5. Online at www.rff.org/wv/Documents/LDC_ Allocation_090605.pdf.
WORKING PAPER | April 2015 | 1 PUTTING A PRICE ON CARBON: A HANDBOOK FOR U.S. POLICYMAKERS KEVIN KENNEDY, MICHAEL OBEITER, AND NOAH KAUFMAN CONTENTS Executive Summar y………………………………………………. 1 1. Introduction…………………………………………………… … 6 2. Basics of Pricing Carbon…………………………………….7 3. A Brief Histor y of Carbon Pricing……………………….12 4. Key Design Features………………………………………….17 5. Commonly Proposed Uses of Carbon Pricing Revenues…………………………………..24 6. Economic Effects of a Carbon Price…………………….34 7. Conclusion…………………………………………………….. 40 Appendix………………………………………………………. ……42 Bibliography………………………………………………………..45 Endnotes………………………………………………………. ….. .48 Working Papers contain preliminary research, analysis, findings, and recommendations. They are circulated to stimulate timely discussion and critical feedback and to influence ongoing debate on emerging issues. Most working papers are eventually published in another form and their content may be revised. Suggested Citation: Kennedy, K., M. Obeiter, and N. Kaufman. 2015. “Putting a Price on Carbon: A Handbook for U.S. Policymakers.” Working Paper. Washington, DC: World Resources Institute. Available online at http://wri.org/carbonpricing. EXECUTIVE SUMMARY Putting a Price on Carbon: A Handbook for U.S. Policymakers is the first in a series of papers that the World Resources Institute will produce with the aim of providing a clear and comprehensive understanding of the key issues that will need to be addressed if the United States ultimately imposes a national price on carbon. The Handbook lays out what is already known about the design and effects of different approaches to pricing carbon, with a focus on carbon taxes and cap-and-trade programs. We believe that pricing carbon should be a core element of the United States’ long-term strategy for achieving significant reductions in greenhouse gas emissions in the coming decades. However, in writing the Handbook, we recognize that many who are, or could become, interested in carbon pricing might be motivated by the potential for benefits that are unrelated to climate change. Carbon price programs can be designed with an eye toward other possible policy goals, such as reforming the tax code to be more efficient. Even when carbon pricing is approached with non-climate priorities in mind, the emission reduc – tion potential provides an insurance policy against the risk of significant climate impacts. The Handbook provides an overview of carbon pricing— the types of decisions that need to be made in designing a program (including the political decisions about the use of revenue) and the expected economic impacts of alternative approaches. We conducted a thorough review of the literature, selecting a broad array of well-regarded and highly cited studies that represent a range of viewpoints. We expect this Handbook to be useful in the public debate in the United States on whether, how, and when to implement a national carbon price. WORKING PAPER 2 | The Basics of Pricing Carbon Greenhouse gas emissions impose costs on the global community via climate change. A carbon price shifts the burden of these costs from society as a whole to the enti- ties responsible for the emissions, providing an incentive to decrease carbon emissions. Pricing carbon increases the prices of goods across the economy in proportion to their carbon content, and thus in proportion to their effect on climate change. By raising the relative price of carbon-intensive goods (for example, fossil fuels), a carbon price encourages individuals and businesses to purchase less carbon-intensive alternatives. A carbon price would lead to reductions in U.S. green – house gas emissions and create leverage to encourage other countries to reduce their emissions, both of which are necessary to prevent the more severe effects of climate change. In addition, reduced fossil fuel usage will provide “co-benefits” in the form of reduced emissions of other harmful air pollutants. While pricing carbon implies higher prices for certain goods, the additional costs to individuals and businesses become an additional source of revenue that can either be returned to households or spent in other productive ways. Among other possibilities, carbon-pricing revenues can be used to promote economic growth, advance low- carbon technologies and other activities that help respond to climate change, and reduce adverse economic effects of the carbon price. The following are some of the specific potential uses of carbon pricing revenues: ▪TAX CUTS. The revenues from carbon pricing could be used to fund cuts in other tax rates. Taxes on labor and capital can reduce the income of individuals and businesses and decrease incentives to engage in productive activities such as work and investment. Such taxes differ from a carbon tax, which corrects for a market failure and reduces the incentive to emit harmful greenhouse gases. ▪RETURNING MONEY TO HOUSEHOLDS OR ELECTRICITY CONSUMERS. Revenue from carbon pricing could be returned to households by sending them “lump sum” payments, which could be divided equally or by some alternative metric. This “tax-and-dividend” approach has gained popularity largely because of its perceived fairness and simplicity. Households could be provided with tax refunds or sent quarterly or annual checks. In California, some money from the cap-and-trade allowance auctions is returned to electricity custom – ers in the form of rebates on their bills. These types of approaches could also ensure that low-income house – holds receive at least as much in income as they spend on the tax. ▪DEFICIT REDUCTION. Large national deficits can reduce economic growth rates by increasing interest rates, inhibiting (or “crowding out”) private sector invest – ments, and increasing future tax burdens to pay off the principal or interest on the debt. Carbon pricing revenues could be used to reduce annual deficits and thereby help to avoid such adverse economic effects. ▪INVESTING IN COMBATING CLIMATE CHANGE. In addition to its potential to stimulate innovation in low-carbon technologies (for example, renewable energy), a carbon price can provide revenue to help promote the development and deployment of breakthrough tech – nologies. In addition, carbon-pricing revenues can be used to invest in infrastructure that helps communi – ties adapt to the effects of climate change that are now unavoidable (extreme weather, sea level rise, etc.). ▪TRANSITIONAL ASSISTANCE. A portion of the revenues can be used to assist those likely to be most adversely affected by a carbon price. Job training can be provided to workers in industries with anticipated job losses (for example, coal mining). In addition, revenues can be disproportionately allocated to households and business in regions of the country that are most heav – ily dependent on the production or consumption of fossil fuels in order to smooth the transition to a lower carbon economy. Revenues can also be used to pro – vide assistance to industries that might face increased competition from foreign competitors. Many other ways are available to make use of carbon- pricing revenue. While many advocates strongly favor one or another particular approach to the use of revenue, existing or proposed carbon-pricing policies often include a mixture of approaches in accordance with the compro – mises and trade-offs required to pass such far-reaching legislation. Carbon Taxes versus Cap-and-Trade This Handbook focuses on the two main approaches to pricing carbon: carbon taxes and cap-and-trade programs. A carbon tax is a fee added to the price of goods in propor – tion to their carbon content. A cap-and-trade program WORKING PAPER | April 2015 | 3 entails setting a maximum level of carbon emissions, with emissions allowances issued by regulators up to this cap that can be bought or sold. Under a cap-and-trade pro- gram, the carbon price is equal to the market price of the emissions allowances. If properly designed and implemented, both carbon taxes and cap-and-trade programs provide incentives to under – take the lowest cost abatement opportunities (those less expensive than paying the carbon price). In addition, car – bon taxes and cap-and-trade programs require a number of similar decisions to be made in the design process. While the effects of comparably stringent carbon taxes and cap-and-trade programs are virtually identical in theory, a number of practical differences exist between the two policy instruments. A carbon tax is in some ways simpler than a cap-and-trade program. A tax does not require the government to allocate or conduct auctions for emissions allowances, or monitor the trading of allowances, and regulated entities do not need to participate in auctions or secondary markets for allowance trading. The major advantage of a cap-and-trade program is that the policy sets a firm limit on the quantity of emissions that will be allowed. Therefore, when climate change goals are stated in terms of emissions levels, the emissions cap can ensure the goal will be achieved. A carbon tax can – not guarantee a certain emissions path, but it will lead to a certain price pathway. Regulated entities might prefer that approach to the less stable prices of a cap-and-trade program, which can make business planning more dif – ficult. To that end, cap-and-trade programs may include “ceilings” and/or “floors” on allowances prices to reduce price volatility. Carbon-Pricing Policies and Proposals While the concept of carbon pricing dates back to eco – nomic theory from the early 20 th century, in practice, carbon-pricing programs were first developed in the early 1990s when four Scandinavian countries implemented taxes on carbon dioxide (CO 2) emissions. In the United States, the Clinton administration proposed a tax on the energy content of fuels that would have been similar to a carbon tax, but the proposal was controversial and with – drawn in 1993. 1 Also in the 1990s, the United States implemented the Acid Rain Program, which put in place a cap-and-trade program for sulfur dioxide emissions in the United States. 2 While not focused on carbon emissions, the Acid Rain Program provided proof of concept for cap and trade, which has since been used for pricing carbon. The European Union established its Emissions Trading Scheme in 2005, which is the world’s largest CO 2 cap-and- trade program. 3 The EU-ETS went through a rocky initial phase, which saw prices collapse due, in part, to the over- allocation of allowances. However, the program has since achieved a stable market for allowances and meaningful emissions reductions, and has provided useful lessons for other cap-and-trade programs developed elsewhere. Back in the United States, starting with the Climate Stewardship Act of 2003, Congress has seen numerous carbon pricing proposals, many with bipartisan sponsor – ship and support. The 111th Congress (2009 and 2010) was the high-water mark for these proposals, when the American Clean Energy and Security Act (ACES) cap- and-trade program (also known as “Waxman-Markey” after its two principal co-sponsors) was approved by the House of Representatives. While several companion bills were introduced in the Senate during that Congress, none moved to a floor vote. Additional carbon-pricing bills have been introduced in Congress since 2010, but none has been given serious consideration. With little prospect of comprehensive federal action on climate change in the mid-2000s, many U.S. states began to plan their own state or regional cap-and-trade pro – grams. The first was the Regional Greenhouse Gas Initia – tive (RGGI), a cap-and-trade program for CO 2 emissions from power plants, launched in 2009 by ten northeastern states (New Jersey has since withdrawn). Various western U.S. states and Canadian provinces created the Western Climate Initiative (WCI) in 2007 and jointly agreed on design principles for a regional cap-and-trade program. While the WCI was never able to implement the regional program, California and Quebec currently operate a linked cap-and-trade program that covers 85 percent of the emis – sions in each jurisdiction. Ontario recently announced its intent to establish a cap-and-trade program and link it with California and Quebec as part of the WCI. 4 In addi- tion, WCI member British Columbia established a carbon tax in 2008 that is currently C$30 per ton of CO 2 across sectors representing 70 percent of total emissions. Nearly 40 countries and over 26 sub-national jurisdictions have implemented either a carbon tax or a greenhouse- gas cap-and-trade program; these include seven pilot programs in China. Together, these programs cover approximately 12 percent of global greenhouse gas (GHG) Putting a Price on Carbon: A Handbook for U.S. Policymakers 4 | emissions. In contrast to the situation a decade ago, if the United States were to establish a national carbon price it would no longer be a lone actor; instead, it would be join- ing a growing community of nations committed to reduc – ing global greenhouse gas emissions with cost-effective climate-change policies. Carbon Pricing Design Features Establishing a carbon pricing program requires many decisions on policy structure and design. Some of the main design elements of a carbon-pricing policy are highlighted below. Each element is relevant to both a carbon tax and a cap-and-trade program. ▪SCOPE. Scope refers to the portion of overall green – house gas emissions covered by the program. Deter – mining a program’s scope requires policymakers to decide: (1) whether the program covers only CO 2 or other greenhouse gases as well; (2) which economic sectors are covered by the program; and (3) whether all emitters or only those above a certain threshold of emissions are regulated. The broader the scope, the greater the emissions reductions that will be expected from a given carbon price. A broader scope also im – plies that a given quantity of emissions reductions will be achieved at a lower cost. ▪POINT OF REGULATION. Carbon pricing can be applied at different points in the economy. Under an “upstream” approach, the carbon price is applied where the ma – terials that will result in the emissions first enter the economy (for example, at the coal mine, the oil or gas drilling site, or the entry point of fuel imports). Such an approach enables a large fraction of energy CO 2 emissions to be covered while regulating relatively few entities. A “downstream” approach applies the carbon price at the point where the emissions actually occur. This is straightforward to implement for power plants and manufacturing facilities, but far more difficult for individual buildings, cars, and trucks. A program may also include a mixture of upstream and downstream approaches, or “midstream” approaches (for example, oil refineries and natural gas processing plants). ▪REPORTING AND VERIFICATION. A key prerequisite for a successful carbon pricing policy is a robust emissions reporting and verification system. Reliable reporting systems are often already in place for other purposes. Because the addition of a carbon price creates direct economic consequences for both the covered entity— which wants to minimize its tax burden—and the government, verification of the emissions reports is essential. Different approaches to that verification are possible—from independent third party verification to self-certification with strong penalties. ▪SETTING THE PRICE OR CAP. Carbon tax and cap-and- trade programs require setting pathways of prices or emissions caps. Setting the level of the tax or cap will likely require balancing a variety of political, economic, and environmental considerations. From a climate perspective, one can start from either consid – eration of emission targets or from estimates of the damages caused by GHG emissions. For non-climate policy priorities (for example, tax reform), setting the price might have more to do with the amount of revenue needed to serve those priorities. It is common to increase the stringency of a program gradually over time to allow businesses and consumers to adjust, and to maintain some flexibility to adjust the price or cap in the event that conditions change. Various additional factors must also be considered. For example, allowing “offsets” (emissions reductions from entities that are not directly covered by the policy, for example, enhanced carbon sinks achieved by tree plant – ing) can reduce the costs of a policy, but can also make the emissions reductions more difficult to verify. Policymakers should also consider the broader policy con – text in which carbon pricing is introduced, including any complementary policies that might be needed to further reduce emissions or costs. Economics of Carbon Pricing The body of literature on the economic effects of carbon pricing programs is wide and deep. Economists have con – ducted both benefit-cost and economic-impact analyses to assess the effects of carbon taxes on society as a whole and on individual sectors, regions, and income levels. While there are serious limitations to economic models (see Section 6 for detail), economic theory and empirical results can nonetheless offer important lessons to policy – makers as they design carbon-pricing programs. Benefit-Cost Analysis The most important finding of economic theory related to carbon pricing is also the most basic: when an activity such as emitting greenhouse gases causes harm that is not reflected in the prices of goods and services (what econo – mists call a “negative externality”), pricing that activity leads to reductions in the activity and to overall gains WORKING PAPER | April 2015 | 5 in welfare. The price corrects for the market failure (the harm caused is internalized in the costs of the goods and services). Indeed, economic studies show that the optimal carbon price is potentially very large. 5 Climate change is a challenging economic problem, in part because benefits are global in nature while policy costs are local. This dilemma has caused some to question the benefits achievable from a carbon price established by any single country. On the other hand, many nations and sub-national jurisdictions have already put a carbon price in place. The United States is responsible for a significant portion of global greenhouse-gas emissions, and U.S. adoption of a carbon price could help spur broader multi- national action to combat climate change. Comparisons of the benefits and costs of carbon pric – ing should take account of benefits unrelated to climate change. For example, reduced fossil fuel usage provides substantial “co-benefits” in the form of reduced emissions of other harmful air pollutants. In addition, the carbon pricing revenues can be used in a variety of ways to benefit the economy and boost economic growth. For all these reasons, economists overwhelmingly support a well-designed national carbon tax. In 2012, a University of Chicago survey asked 40 prominent economists from across the political spectrum whether they would prefer the government to raise revenue through traditional income taxes or via a national carbon tax. Not one chose the income tax approach. 6 Economic Impacts While economists largely agree that many uses of carbon- pricing revenues can promote long-term prosperity, determining whether a carbon price will be beneficial to the U.S. economy in the short run is a more difficult ques – tion. A significant portion of the welfare gains will accrue outside the economy (if these gains are measured tradi – tionally, using metrics such as national GDP) and will not be realized until far into the future. Nevertheless, because of the various non-climate policy objectives that can be achieved with the revenue from a carbon price, economists have found that at least some of the potential adverse economic consequences for specific sectors, regions, or groups can be offset. In fact, some economists have found that a properly designed carbon price can achieve net economic benefits, even before consideration of the climate benefits, which economists refer to as a “double dividend.” 7 The economic impacts of a carbon price (in terms of economic growth, employment, etc.) are highly contingent on how the revenue is spent. Economists have found that maximizing economic growth requires using the revenue to remove pre-existing “distortions” in the economy that serve to hinder growth. 8 For example, economic stud – ies have shown that lower income tax rates (corporate and personal) would cause individuals to work more and corporations to create more jobs. Revenue can also be used to achieve many other objectives, such as investing in technologies that spur low carbon innovation and climate change adaptation, or providing transitional assistance to sectors, regions, and individuals that are most vulnerable to the higher prices and lower demand for carbon- intensive goods. Recent studies have shown that neither the distributional consequences, 9 the regional disparities, 10 nor the effects on the competitiveness of U.S. industry11 are as large as some have feared. Still, using a portion of the revenues to address either the actual or perceived “losers” from a car – bon price may increase the fairness and political viability of the policy. Next Steps While we can’t predict what the future may hold, con – versations with policymakers, stakeholders, and others highlight several factors that could combine to increase the appeal of carbon pricing policies across the political spectrum in coming years. While views differ sharply on some of these, factors that might interest people of differ – ent political views include: ▪Bipartisan support for tax reform; ▪Successful carbon-pricing programs at the state and regional levels, including the potential for more pro – grams spurred by compliance with the new EPA power plant standards; ▪Increased awareness of the current and impending impacts of climate change; ▪Stated goals for deeper greenhouse-gas emissions cuts; and ▪Desire by some for an alternative approach to regulating carbon. Cap-and-trade programs are already in place in the north – eastern United States and California. However, following the failure of the U.S. Senate to pass climate legislation in Putting a Price on Carbon: A Handbook for U.S. Policymakers 6 | 2010, talk in Washington D.C. about pricing carbon has shifted from cap-and-trade to carbon taxes. These dis- cussions have involved a wide range of players, but have remained quiet and behind the scenes. A key question in coming years will be whether, and when, these discus – sions will again be considered part of mainstream political discussion. We believe that pricing carbon should be a core element of the United States’ response to climate change because of the massive environmental and economic benefits it can offer. Any such policy will result in winners and losers; it is therefore critical that any program be designed to recognize and address the potential for uneven distribu – tion of benefits and costs. This paper highlights the major tools available for dealing with these concerns. These tools also provide the opportunity to satisfy a variety of politi – cal goals beyond emissions reductions. We hope that this working paper—and future issue briefs that will dive more deeply into many of the topics discussed here—will play a helpful role in the coming national conversation on these issues. 1. INTRODUCTION Putting a Price on Carbon: A Handbook for U.S. Policymakers is offered in the expectation of continued debate in the United States over how to address climate change. While current policy actions focus on regulatory approaches, we believe that putting a price on carbon needs to be a core element of the United States climate policy in the long term. The Handbook is the first in a series of papers that the World Resources Institute will produce in coming years with the aim of providing a clear and comprehensive understanding of the key issues that will need to be addressed if the United States ultimately chooses to impose a national price on carbon. The Hand- book sets out what is already known about the design and effects of different approaches to pricing carbon, with the main focus being on carbon fees or taxes and cap-and- trade programs. The starting point for most discussions of a carbon price is its role in addressing greenhouse gas emissions and reducing the future effects of climate change. However, in writing the Handbook, we recognize that not all those who are or might become interested in carbon pricing are motivated by climate science and the need to reduce greenhouse gas (GHG) emissions in order to avoid the worst impacts of climate change. Carbon-pricing pro -grams can be designed with an eye toward other policy goals, such as reforming the tax code to be more efficient. Viewed in this way, the potential for emissions reduc – tion can be seen simply as a side benefit or an insurance policy against uncertain but potentially significant climate change impacts. Because carbon pricing can aim at a variety of policy objectives, support for some form of pricing carbon comes from divergent points on the political spectrum. Though they disagree on the details, supporters include former Secretary of State George Schultz, 12 former Treasury Secretary Henry Paulson, 13 and former Republican Con – gressman Bob Inglis; 14 conservative economists such as Gregory Mankiw 15 and Art Laffer; 16 scholars at the Ameri – can Enterprise Institute, 17 Resources for the Future, 18 and the Brookings Institution; 19 and organizations such as the Center for American Progress, 20 the Citizens’ Climate Lobby, 21 and the Niskanen Institute. 22 The Handbook provides an overview of carbon pricing— the types of decisions that need to be made in designing a program (including the political decisions about the use of revenue) and the expected economic impacts. This overview provides basic information aimed at improving understanding of important trade-offs inherent in pricing carbon (for example, between ease of implementation and comprehensiveness of coverage), though it is beyond the scope of the paper to attempt to resolve them. For those new to thinking about pricing carbon, the Handbook can serve as a basic primer. For those who have been deeply involved in prior legislative debates on climate legislation or in research and discussions of cap-and-trade programs or carbon fees and taxes, this Handbook provides a broad refresher and reference work. We expect that this type of reference work will be useful when public debate in the United States turns toward whether, how, and when to implement a national carbon price. In writing this paper, the authors conducted a thor – ough literature review, selecting a broad array of well- regarded and highly cited studies that represent a range of viewpoints. Our exploration of carbon pricing was also informed by a number of conversations—many off the record—with carbon-pricing proponents from across the political spectrum. Future research by the World Resources Institute will explore in more detail some of the economic opportunities presented by carbon pricing, such as encouraging innovation, and how to evaluate and address some of the potential downsides, for example, WORKING PAPER | April 2015 | 7 Box 1 | What is a “Carbon Price?” In this Handbook , the term “carbon price” is being applied both broadly–to include all greenhouse gases—and narrowly— limited to two mechanisms that explicitly result in a price on carbon emissions. A “carbon price” is sometimes understood to apply to carbon dioxide (CO 2) emissions only. In the context of this paper, we will refer generically to greenhouse gases as “carbon” so a car- bon price can apply beyond CO 2. See section 3 for a discussion of policy design issues related to including greenhouse gases other than CO 2 in a carbon pricing system. This Handbook focuses specifically on carbon taxes (or fees) and cap-and-trade programs. Both focus on greenhouse gas emissions, and result either directly or indirectly in an explicit price on carbon emissions. A carbon tax or fee would directly establish a price on carbon emissions in dollars per ton of emissions. While this price could be applied at the point of emissions, many proposals focus on applying the price “upstream”—at “chokepoints” where fossil fuels enter the broader economy—and are based on the carbon content of the fuels. A cap-and-trade program establishes the price indirectly by placing a limit on the total quantity of emissions that will be allowed. This limit is enforced based on tradable emission permits, typically called “allowances,” that any emissions source must use to cover its emissions. Like a carbon tax, the cap could be applied downstream at the point of emissions, upstream where fuels enter the economy, or at points in the distribution system in between. The market for these allow- ances creates the carbon price in a cap-and-trade program. Other types of programs can be used to place a price on carbon, including programs that are based on emission intensity (rather than actual emissions) such as the Specified Gas Emitters Regulation (SGER) program in Alberta, Canada. a In addition, a program such as a clean energy standard that includes trading provisions based on carbon intensity could also result in an effective price on carbon. Some discussions of carbon pricing also include consideration of fossil fuel and other energy subsidies, which can have an important effect on the relative cost of different fuels. Note:a. World Bank, State and Trends of Carbon Pricing 2014. the potential for regional or income disparities that could arise from a carbon price. This work is intended to seed an ongoing productive discussion and debate on the pros and cons of different approaches to pricing carbon. While the World Resources Institute sees reducing greenhouse gas emissions to reduce the impacts of climate change as a critical prior – ity, the views and input of those interested in exploring a carbon price based on other priorities are welcome and needed to move the debate forward. We look forward to a wide-ranging and productive set of discussions in the coming years. This paper explores how various design decisions and possible uses of carbon revenues can address other policy priorities in addition to climate change. The paper begins with an overview of carbon pricing (Section 2), followed by a brief history of experience with carbon pricing programs in the United States and elsewhere (Section 3). Section 4 then walks through the main decisions that must be made to design and implement a carbon-pricing program. Section 5 explores the various uses of revenue that have been tried or considered as part of different carbon pricing programs and proposals, and Section 6 provides a sum – mary of the literature on the main economic impacts from carbon pricing. Conclusions are presented in Section 7. By providing clear analysis of what can be achieved through different approaches to pricing carbon, this paper hopes to guide thinking on how to design a proposal for pricing carbon to achieve multiple objectives. 2. THE BASICS OF PRICING CARBON 2.1. Why Price Carbon? Pricing carbon can provide an economically efficient means of reducing greenhouse gas emissions and mini – mizing the disruptive risks of climate change. A carbon price provides a relatively simple and direct way to ensure that more of the costs of climate change are brought into the economic calculus behind investments and consump – tion, including resource and fuel use. It sends a price signal that could influence widely dispersed economic decisions, help guide future economic growth toward a lower carbon economy, and reduce the impacts of climate change over time. Support for carbon pricing also comes from parties who might be motivated by policy priorities other than the need for action on GHG emissions, but who see the value of an insurance policy against climate risks. Policy priori – ties that can be addressed through some form of carbon pricing include: ▪REDUCING GREENHOUSE GAS EMISSIONS. A carbon price can help reduce GHG emissions by internalizing the costs of climate change in economic decisions throughout the economy. Putting a Price on Carbon: A Handbook for U.S. Policymakers 8 | ▪SPURRING INNOVATION IN CLEAN ENERGY. By reflecting the cost of carbon in the prices for fuels and goods, a carbon price can send an economic signal that helps spur investment and innovation in energy sources and new technologies that are less carbon intensive. ▪REDUCING OTHER TAXES. Revenue from pricing carbon can be used to reduce other taxes. This can be done in a revenue-neutral way that moves from taxing things we want more of (for example, employment or income) to taxing those we want less of (for example, GHG emissions). Options include reductions in pay – roll, personal income, or corporate income taxes in aid of broader tax reform. ▪RAISING REVENUE FOR OTHER PRIORITIES. Carbon rev – enues can also help to address other policy priorities. For example, revenues could be directed to supporting research and development, adapting to climate change impacts, investing in infrastructure maintenance and improvements, or providing job training or other targeted support for industries or regions that are disproportionately affected by the carbon price. In addition to these priorities, reducing GHG emissions can improve energy security, reduce direct energy costs, and help reduce other forms of pollution. 23 While vari- ous tools are available to address other forms of pollu – tion directly, the reductions that result from a carbon price have the potential to provide meaningful local and regional public health and environmental benefits. 24 2.2. Uses of Revenue While pricing carbon implies higher prices for certain goods, the additional costs to individuals and businesses become an additional source of revenue that can either be returned to households or spent in other productive ways. Among other possibilities, carbon-pricing revenues can be used to promote economic growth or employment, to advance low-carbon technologies and other activities that help combat and prepare for climate change, or to reduce any potential adverse effects of the carbon price on specific groups. The following summarizes some of the specific potential uses of carbon-pricing revenues: ▪TAX CUTS. The revenues from carbon pricing can be used to fund cuts in income taxes, which increase incentives to work and invest, and therefore boost eco – nomic growth as a result. Taxes on labor and capital not only take money away from individuals and busi – ness, but also decrease incentives to engage in produc – tive activities such as work and investment. Such taxes differ from a carbon price, which reduces the incen – tive to emit harmful greenhouse gases. The decision on which taxes to cut (for example, payroll, personal income, or corporate income taxes) may involve trade- offs between cost-effectiveness and distributional concerns. ▪RETURNING MONEY TO HOUSEHOLDS OR ELECTRICITY CONSUMERS. Revenue from carbon pricing could be returned to households by sending them “lump sum” payments, which could be divided equally or by some alternative metric. This “fee-and-dividend” approach has gained popularity largely because of its perceived fairness and simplicity. Households could be provided with tax refunds or sent quarterly or annual checks. This approach could also ensure that low-income households receive as much in income as they spend on the tax. However, such payments are unlikely to boost economic growth as much as cutting tax rates, because they do not enhance incentives to work or invest. ▪DEFICIT REDUCTION. Large national deficits can slow economic growth by increasing interest rates, reduc – ing (or “crowding out”) private sector investments, and increasing future tax burdens because of the need to pay off the principal or interest on the debt. Carbon-pricing revenues could be used to pay down the debt and therefore avoid such adverse economic effects. Just as reducing current tax rates can increase incentives to work and invest, reducing future tax rates through deficit reduction could have similar pro- growth effects. ▪ENCOURAGING INNOVATION IN LOW-CARBON TECHNOLO- GIES. While a carbon price can help stimulate innova – tion in low-carbon technologies (for example, energy efficiency or renewable fuels), additional support for innovation might be needed to mitigate the effects of climate change. Moreover, to the extent that the private sector “underinvests” in research and develop – ment because it cannot capture the public benefits of R&D, further government support might be required to promote the development of breakthrough tech – nologies. Carbon-pricing revenues could be a source of such funding. WORKING PAPER | April 2015 | 9 Box 2 | How a Carbon Price Works The impacts of climate change resulting from greenhouse gas emissions impose costs on society as a whole. Pricing carbon shifts these costs away from the broader society to those responsible for the emissions, while providing an incentive to reduce emissions. Putting a price on carbon across the economy will increase the prices of goods and ser vices in proportion to their carbon content, and so in proportion to their effect on climate change. The higher prices for carbon-intensive goods and ser vices will encourage businesses and consumers to look for alternatives that meet their needs but have lower carbon-emission footprints. As a simplified illustration of this type of shift, Figure 1 shows the impact of a carbon tax of $25 per ton of CO 2 on the levelized cost of electricity (LCOE). LCOE is a standard measure for comparing the lifetime costs of building and operating different electricity generation options, though it does not reflect the dynamics of wholesale electricity markets that drive electricity rates. The carbon tax reflects the relative impact of each fuel on CO 2 emissions, so the tax has a larger effect on carbon-intensive coal (the fuel that creates the highest carbon emissions per unit of energy when burned) than on less carbon-intensive natural gas, and no effect on non-carbon nuclear and renewable sources. The increased fuel prices—which now reflect the adverse effects of climate change—would then be passed on in full or in part in any products for which the fuels are an input. These shifts increase the competitiveness of less carbon-intensive sources (see Figure 1). In addition, less efficient generation methods (such as the natural gas turbine) see a greater price increase than more efficient options (such as natural gas combined cycle). FIGURE 1 | EFFECT OF CARBON TAX ON AVERAGE COST OF NEW U.S. ELECTRICITY GENERATION FOR PLANTS ENTERING SERVICE IN 2019 (2012 $/MWH) Sources: “Levelized Cost and Levelized Avoided Cost of New Generation Resources in the Annual Energy Outlook 2014,” U.S. Energy Information Administration, April 17, 2014, http://www.eia.gov/forecasts/aeo/electricity_generation.cfm. The tax increment is based on heat rates from EIA (“Table 8.2. Average Tested Heat Rates by Prime Mover and Energy Source, 2007-2013,” U.S. Energy Information Administration, accessed April 13, 2015, http://www.eia.gov/electricity/annual/html/epa_08_02.html) and the emissions per Btu from EIA (“How Much Carbon Dioxide is Produced When Different Fuels Are Burned?,” U.S. Energy Information Administration, accessed April 13, 2015, http://www.eia.gov/tools/faqs/faq.cfm?id=73&t=11). Note: Levelized cost of electricity data in the figure are based on U.S. average levelized costs for plants entering ser vice in 2019 from the 2014 Annual Energy Outlook. Conventional Coal Conventional Natural Gas Combined Cycle Conventional Natural Gas Turbine Advanced Nuclear Wind Solar Photovoltaic tax ($/MWh) $0 $150 $120 $90 $60 $30 LCOE w/o tax ($/MWh) Putting a Price on Carbon: A Handbook for U.S. Policymakers 10 | ▪CLIMATE CHANGE ADAPTATION. While carbon pricing can help to mitigate the adverse effects of climate change, some impacts—according to the IPCC—are now unavoidable. For that reason, some proponents of carbon pricing support the use of revenues to invest in infrastructure that helps communities adapt to the impacts of climate change. Such investments could in – clude increasing the resiliency of water, transport, and energy systems, as well as other infrastructure that is vulnerable to extreme weather, sea-level rise, and the other effects of a changing climate. ▪TRANSITIONAL ASSISTANCE FOR AFFECTED SECTORS, INDIVIDUALS, AND REGIONS. By inducing changes in behavior and purchasing patterns, pricing carbon is likely to benefit certain industries and regions more than others. A portion of the revenues is often used to assist those who are likely to be adversely affected by a carbon price. Job training can be provided to workers in industries that experience job losses (for example, coal mining), and revenues can be disproportionately allocated to households and business in regions of the country that are most dependent on the production or consumption of fossil fuels. Revenues can also be used to provide assistance to industries that face increased competition from competitors in foreign countries without (or with lower) carbon prices. CARBON TAX CAP-AND-TRADE PROGRAM What is the scope? Both involve similar decisions regarding the choice of gases to regulate, which sectors to regulate, whether to al- low relatively small emitters to remain unregulated, and where the regulation occurs (upstream, downstream, etc.). Such decisions often involve trade-offs between emissions reductions and feasibility and administrative burdens How is a carbon price established? The price is the tax level The price is the market price of emissions allowances (which can be estimated via modeling) What emissions reductions can be achieved? Depends on the response to the change in prices (which can be estimated via modeling) Maximum emissions established by setting the trajector y of emissions caps Table 1 | Impor tant Design Features of a Carbon Tax Versus a Cap-and-Trade Program Many other options are available. While many of those who support pricing carbon are champions of particular uses of carbon-pricing revenues, many carbon-pricing policies and proposals reflect a mix of approaches. 2.3. The Basics of Cap-and-Trade and Carbon-Tax Programs Carbon taxes and cap-and-trade programs require a num – ber of similar decisions to be made in the design process. These decisions often involve trade-offs: increasing the scope of a program beyond a certain level usually implies increasing the burden of administering it; programs with more stringent emissions targets will cause larger impacts on the economy; implementing mechanisms to “smooth” these economic impacts will generally increase either compliance costs or emissions. A carbon tax is in some ways simpler than a cap-and-trade program, especially for the companies that would have to operate under the system. An emissions cap can ensure that emissions targets are met, while a carbon tax can ensure a stable trajectory of prices. Table 1 provides an overview of the main similarities and differences between the two systems, 25 while Section 4 provides a short primer on designing a carbon-price system. WORKING PAPER | April 2015 | 11 CARBON TAXCAP-AND-TRADE PROGRAM How do regulated entities comply?Must report emissions (or a proxy for emis- sions such as fuel quantities) and pay the tax based on those emissions ▪Must report emissions (or a proxy) and surrender allowances based on those emissions ▪Obtain allowances by direct allocation, through purchase at auction, or in the secondar y market ▪Participate in secondar y market as buyer and/or seller of allowances ▪Bank allowances for future use or borrow for current use (if permitted under the regulation) How much will it cost regulated entities to comply? Future compliance costs based on emissions and established tax rates ▪Future compliance costs based on emissions and estimated allowances prices ▪Costs also depend on the degree to which allowances are allocated at no charge, versus bought at auction or on the secondar y market Can offsets lower compliance costs? In theor y, either policy could allow regulated entities to purchase emissions offsets (that is, verified emissions reductions from non-covered sources) in lieu of direct compliance, which will lower compliance costs. Offsets are more commonly seen as part of cap-and-trade programs Where will regulated entities reduce their emissions? Where the cost of emissions reductions is less than the cost of paying the tax, taking into account the trajector y of future taxes Where the cost of emissions reductions is less than the cost of buying (or the opportunity cost of not selling) allowances, taking into account the trajector y of expected future allowance prices What is the role of markets, and which market protections are needed? A carbon tax would not create a market that needs to be regulated ▪A mechanism for auctioning allowances (unless all are distributed at no charge) ▪A secondar y market with proper oversight and regulation (a liquid secondar y market that sends a transparent price signal to regulated entities is needed for an efficient program) What happens to the revenue? Both a carbon tax and a cap-and-trade program (assuming some degree of auctioning of permits) will generate revenue, and the government can stipulate how the revenue is to be spent (for example, reduced taxes, deficit reduction, spending on other programs). While the same alternatives will be available under either policy type, revenue amounts are likely to be more predictable under a carbon tax How does the system interact with complementar y policies (for example, a Renewable Por tfolio Standard)? ▪Complementar y policies can achieve emis- sions reductions beyond those achieved by a carbon tax, for example, if a renewable portfolio standard requires more renewable power than would be deployed with the carbon tax alone ▪Complementar y policies may be desirable, even within covered sectors, for example, to encourage innovation or deployment of new technologies in certain sectors ▪Complementar y policies shift the location of emissions in the economy, but the cap establishes the maximum overall level of emissions for covered sectors ▪Complementar y policies may be desirable even within covered sectors, for example to encourage innovation or deployment of new technologies in certain sectors Table 1 | Impor tant Design Features of a Carbon Tax Versus a Cap-and-Trade Program (continued) Putting a Price on Carbon: A Handbook for U.S. Policymakers 12 | 3. A BRIEF HISTORY OF CARBON PRICING “Taxing carbon dioxide emissions may be an idea whose time is at hand in the United States, now that reducing greenhouse gas emissions has become an international imperative.” These hopeful—but premature—words opened Gus Speth’s foreword to The Right Climate for Carbon Taxes , 26 published by the World Resources Institute in August 1992, in the wake of the climate treaty signed by more than 150 nations in Rio de Janeiro that April. While the Clinton administration, as part of its first budget, proposed a tax on the energy content of fuels that would have had similarities to a carbon tax on energy, 27 Figure 2 | Timeline of Carbon Pricing Programs from Around the World Cap-and-Trade Programs Carbon Taxes 2009 RGGI (NE U.S.) U.S. sub-national programs 1990 Finland 1992 Denmark Norway British Columbia New Zealand Switzerland 1991 Sweden 2005 European UnionSwitzerland 2008 WORKING PAPER | April 2015 | 13 that proposal was highly controversial and withdrawn by the end of 1993. 28 No serious proposals for a carbon tax or greenhouse gas cap-and-trade program were put before Congress for another ten years, though the 1990s did see the successful implementation of the acid rain cap-and- trade program (see Box 3). In the years since the Rio Earth Summit, however, many countries and sub-national jurisdictions have instituted carbon taxes or cap-and-trade programs. Figure 2 lists the carbon-tax and greenhouse gas cap-and-trade programs that since have been insti – tuted around the world. Figure 2 | Timeline of Carbon Pricing Programs from Around the World (continued) 2010 Ireland (extended to solid fuels in 2013) 2012 Japan 2016 South Africa (planned) 2018 Chile (planned) 2014 France Iceland Mexico Chongqing Hubei Australia 2012; repealed 2014 2015 South Korea Kazakhstan California Quebec Tianjin Beijing Shanghai Guangdong Shenzhen 2013 United Kingdom U.S. sub-national program Canada sub-national program China sub-national pilots China sub-national pilots Australia Initiated July 2012; repealed in 2014 Putting a Price on Carbon: A Handbook for U.S. Policymakers 14 | Box 3 | Acid Rain Program: The Origin of Cap and Trade A cap-and-trade program, limiting total emissions and enabling regulated entities to buy and sell emissions permits, is among the most prominent tools used to price carbon. The first major cap-and-trade system was the Acid Rain Program, passed by Congress in 1990 to reduce acid rain by regulating sulfur dioxide (SO 2) emissions from power plants. The majority of previous environmental regulations were “command-and-control,” in that they designated emissions rates or equipment standards for regulated entities. In fact, many environmentalists were hostile to the concept of allowing polluters to pay for the right to pollute. The cap-and-trade system at the heart of the Acid Rain Program arose from collaboration between the Environmental Defense Fund (EDF) and the Administration of George H.W. Bush. a Regulated power plants were allocated a fixed number of tradable allowances and had to surrender one allowance per ton of SO 2 emitted (and were heavily penalized if they did not). Power plants could buy allow- ances, sell allowances, or “bank” allowances for use in future years, but could not borrow allowances from future years’ allocations. The emissions cap declined over time toward a long-term national goal of 7.6 million tons of SO 2 emissions, which was achieved three years ahead of schedule in 2007. The great advantage of a cap-and-trade system is that it facilitates cost-effective emissions reductions. In theor y, the plants with relatively low-cost opportunities to reduce emissions will do so and sell their unneeded permits (for a profit) to plants with higher cost opportunities, which will then avoid expensive emissions reductions. The Acid Rain Program was the first major test of this theor y, and it was highly successful. The best estimates of actual program costs ($1.17 to $2 billion annually) were less than the projected costs of command and-control alternatives ($3.4 billion to $11.5 billion) and also less than EPA’s initial projection for the Acid Rain Program ($1.9 to $5.5 billion). b Still, some people have argued that costs could have been even lower, were it not for informational barriers and other state and federal regulations that constrained power plants’ abilities to select the low-cost abate- ment opportunities. c Overall, the Acid Rain Program is widely seen as a success at many levels. Not only did it provide large environmental benefits at a relatively low cost, d it also paved the way for future cap-and-trade systems that have focused on carbon emissions. In 2005, the European Union’s Emissions Trading Scheme became the first major cap-and-trade program for greenhouse gas emissions, and greenhouse gas cap-and-trade systems have since been established in the northeastern United States (the RGGI program) and in California. 3.1. Carbon Pricing in the United States and Canada Starting with the Climate Stewardship Act, introduced by Senators John McCain and Joseph Lieberman in 2003, Congress has seen numerous proposals to cap or tax carbon emissions, many of them with bipartisan sponsor – ship and support. 29 The 111th Congress (2009 and 2010) was the high-water mark for these proposals, with the passage in the House of Representatives of the American Clean Energy and Security Act (ACES), often referred to as “Waxman-Markey” for the names of its chief sponsors— then Representatives Henry Waxman and Ed Markey. This bill benefited from the many precursors in earlier Congresses. While several companion bills were intro – duced in the Senate during that Congress, none moved to a floor vote. The debate and compromises that led to the passage of ACES in the House provide a useful set of lessons to consider in the context of future proposals to price carbon at the national level in the United States. Putting in place a significant carbon price will result in both winners and losers even if the policy provides net benefits overall. For the policy to succeed politically and work economically, it is critical that the program be designed to recognize and address, to the extent needed, the uneven distribution of benefits and costs that it could impose. Much of the Notes:a. Conniff, R. August 2009. “The Political Histor y of Cap and Trade.” Smithsonian Magazine.[1-3] See: http://www.smithsonianmag.com/air/the-political-histor y-of-cap-and- trade-34711212/?page=2 b. Siikamäki J., D. Burtraw, J. Maher, and C. Munnings. March, 2012. “The U.S. Environmental Protection Agency’s Acid Rain Program.” Washington, D.C.: Resources for the Future. Working Paper. c. Schmalensee R. and R. Stavins. August, 2012. “The SO2 Allowance Trading System: The Ironic Histor y of a Grand Policy Experiment.” Cambridge, MA: MIT Center for Energy and Environmental Policy Research. d. Cost-benefit analyses have shown that the Acid Rain Program contributed benefits roughly 40 times the costs of the program. Interestingly, nearly 95 percent of the estimated benefits were related to the health impacts of sulfate particulates, which were not well understood until after the implementation of the program (Schmalensee and Stavins, 2012). WORKING PAPER | April 2015 | 15 Box 4 | Carbon Pricing and the Clean Power Plan In June 2014, EPA proposed the Clean Power Plan (CPP) to satisfy its obligation to regulate greenhouse gas emissions from existing power plants. a EPA proposed emissions rate standards, but provided states with significant flexibility to design their own implementa- tion plans. After the CPP is finalized by EPA in the summer of 2015, states can propose implementation plans to EPA by 2016, with extensions available to 2017 (for single state plans) or 2018 (for multi-state plans). b EPA will also issue a final federal plan in 2016 for areas that do not submit a state plan. Within one year of a state plan being proposed, EPA will either approve the plan or institute its own plan before the compliance period begins in 2020. States are likely to adopt a variety of ap- proaches to implementing the CPP, including pricing carbon. In its proposal, EPA describes both “rate-based” and “mass-based” (that is, cap-and-trade) performance standards as alternative compliance mechanisms. Under either approach, a system of tradable emis- sions allowances could reduce the total costs of compliance by incentivizing those with high-cost abatement opportunities to purchase allowances from those with low-cost abate- ment opportunities. States and regions with pre-existing cap-and-trade programs are likely to continue these programs to comply with the standard (namely, California, and RGGI in nine northeastern states), and additional states may take an interest in carbon pricing as an implementation option. c While not explicitly mentioned by EPA, vari- ous commentators have called for the use of carbon taxes as an additional CPP compliance alternative. d By increasing the relative price of carbon-intensive electricity generation, a carbon tax would lead to an increase in low- carbon generation or investments in energy efficiency, and thus a reduction in overall emis- sions rates. Using economic modeling (just as it would for other compliance strategies), a state could show that its planned carbon tax would likely achieve the required emissions rate standard. Carbon taxes are relatively easy to administer because they do not require states to allocate emissions allowances, conduct auctions, or monitor allowance trad- ing. Carbon taxes also provide predictable and stable price signals to regulated entities, and a large source of government revenue that could be used to counteract the cost of the tax to constituents. Perhaps most importantly, carbon taxes (as well as cap-and-trade programs) are more cost-effective than emissions rate stan- dards (even with multi-state trading programs), so enabling states to utilize carbon taxes could significantly lower the compliance costs of the CPP. e Notes:a. “Clean Power Plan Proposed Rule,” U.S. Environmental Protection Agency, accessed April 13, 2015, http://www2.epa.gov/carbon-pollution-standards/clean-power-plan- proposed-rule. b. “Fact Sheet: Clean Power Plan & Carbon Pollution Standards Key Dates,” U.S. Environmental Protection Agency, accessed April 13, 2015, http://www2.epa.gov/carbon- pollution-standards/fact-sheet-clean-power-plan-carbon-pollution-standards-key-dates. c. See “Power Plan Hub,” E&E Publishing, accessed April 13, 2015, http://www.eenews.net/interactive/clean_power_plan. d. Wara, M, A. Morris, and M. Darby. October, 2014. “How the EPA Should Modify Its Proposed 111(d) Regulations to Allow States to Comply By Taxing Pollution.” Washington, D.C.: Brookings Institution. e. Fischer, C. 2001. “Rebating Environmental Policy Revenues: Output-Based Allocations and Tradable Performance Standards,” Washington, D.C.: Resources for the Future. Discussion Paper 01-22. negotiation and compromise that went into the House passage of ACES related to finding ways of addressing real or perceived costs of the program or finding benefits that could bring additional people into the coalition support – ing the bill. This type of major policy initiative can only be put in place in the U.S. political system by finding ways to satisfy a wide variety of interests. While additional bills have been introduced in Congress since then—including the American Opportunity Carbon Fee Act, by Senators Whitehouse and Schatz in November 2014, 30 and the Healthy Climate and Family Security Act of 2015 by Representative Van Hollen in February 2015 31— as of this writing, none have been given serious consider – ation or a committee hearing. With little prospect of comprehensive federal action on climate change in the mid-2000s, many states began working together, including several regional efforts to create multi-state cap-and-trade programs. The first of these was the Regional Greenhouse Gas Initiative (RGGI), a multi-state cap-and-trade program for CO 2 emissions from power plants. The discussions that led to RGGI were initiated in 2003, and the program was launched in 2009 by ten northeastern states (New Jersey withdrew in 2012, but New York, Delaware, Maryland, and the New England states remain in RGGI). RGGI covers approximately 20 percent of total GHG emissions in the participating states. In February 2013, the RGGI states completed a program review that lowered the 2014 emissions cap by 45 percent and made additional changes to the cap through 2020. Putting a Price on Carbon: A Handbook for U.S. Policymakers 16 | The revisions recommended through the program review are intended to strengthen the program in the years ahead. 32 In 2006, California passed the Global Warming Solutions Act (AB 32), which required it to reduce emissions to 1990 levels by 2020. The following year, western states (including California) and Canadian provinces created the Western Climate Initiative (WCI) and began a regional discussion on the design and implementation of a multi- sector cap-and-trade program. WCI grew to include seven states and four Canadian provinces, who jointly agreed on design principles for a regional cap-and-trade program. 33 However, California and Quebec are the only jurisdic – tions that have implemented the program to date. They now operate a linked cap-and-trade program that covers 85 percent of the emissions in each jurisdiction. Ontario recently announced its intent to establish a cap-and-trade program and link it with California and Quebec as part of the WCI. 34 British Columbia (BC) remains a member of WCI but does not have a firm plan for joining the linked cap-and-trade program. BC did establish its own econ – omy-wide carbon tax in 2008 that is currently set at C$30 per ton of CO 2 across sectors representing 70 percent of total GHG emissions in the province. Similar discussions among states and provinces in the Midwest to form a regional cap-and-trade program were initiated in 2007, but did not progress far and were sus – pended in 2010. (See Box 4 for discussion of the potential for carbon pricing as a state implementation measure under EPA’s Clean Power Plan, which is establishing carbon dioxide standards for existing power plants.) Since the failure of the Senate to pass climate legislation in 2010, talk in Washington about pricing carbon has shifted from cap-and-trade—now considered a politi – cal non-starter–to carbon taxes. These discussions have involved a wide range of players, but have remained quiet and behind the scenes. A key question in coming years will be whether, and when, these discussions will again be considered part of mainstream political discussion. 3.2. Carbon Pricing Systems Around the World While no national carbon price has been established in the United States, almost 40 other countries and over 26 sub- national jurisdictions have implemented carbon-pricing programs. Total GHG emissions in the jurisdictions with these programs represent more than 22 percent of global GHG emissions, with the programs themselves covering approximately 12 percent of global emissions. 35 The longest-running programs are the carbon taxes estab – lished by Denmark, Finland, Norway, and Sweden in the early 1990s. National carbon taxes have also been estab – lished in recent years in France, Iceland, India, Ireland, Japan, Mexico, Switzerland, and the United Kingdom, while South Africa and Chile have approved carbon taxes that have not yet taken effect. In addition, British Colum – bia has enacted a carbon tax at the sub-national level. The largest greenhouse gas cap-and-trade program is the European Union’s Emissions Trading System (or EU ETS), initially established in 2005. Other national programs are operating in New Zealand, Switzerland, and Kazakh – stan, and one began operation in the Republic of Korea in 2015. Sub-national cap-and-trade programs are also operating, with an electric sector program in nine states in the northeastern United States, linked multi-sector programs in California and Quebec, and seven municipal and provincial pilot programs under way in China. China has begun planning 36 a national-level emissions-trading system that is expected to be phased in starting in 2016. 37 While significant work remains to be completed, once fully operational the Chinese program could be the largest GHG trading program in the world. Figure 3 shows the current and planned carbon tax and cap-and-trade programs from around the world, and Appendix A provides summary information about those programs. Not included in this summary are systems based on carbon intensity, such as the program in Alberta, Canada, or offset programs such as the Clean Develop – ment Mechanism (CDM). In addition to these government programs, many busi – nesses in the private sector are already accounting for sub – stantial future carbon prices in their planning decisions. As shown in a recent report by CDP (formerly known as the Carbon Disclosure Project), a growing number of multi-national corporations representing a diverse set of industries and interest have disclosed using an internal carbon price, including BP, Duke Energy, Google, Royal Dutch Shell, Wal-Mart, Walt Disney, and Wells Fargo, among many others. 38 WORKING PAPER | April 2015 | 17 4. KEY DESIGN FEATURES Establishing a carbon-pricing program requires many design decisions, including which gases and sectors are covered, which entities within the relevant sectors are required to comply, and the overall stringency of the program. While these elements are described separately below, design decisions require consideration of the inter- actions among these elements. The policymakers involved with these decisions will also need to balance various criteria that can sometimes con – flict. These range from comprehensive coverage of emis – sions, administrative ease in implementation, minimizing the economic costs and maximizing benefits, addressing differing impacts across population groups and regions, and achieving other goals, possibly unrelated to climate. This section highlights some of the main choices facing policymakers who are considering either a carbon tax or a cap-and-trade program. Two of the most critical choices are the scope of the program and setting the price or cap levels. This section also discusses the importance of reporting and verification, and concludes with an examination of the possible interaction between a carbon- pricing program and complementary policies. 4.1. Scope Scope refers to the share of total greenhouse gas emissions covered by the program. One element of scope involves the greenhouse gases to be included—just CO 2, or other gases such as methane and hydrofluorocarbons (HFCs) as well? The second element is which sectors of the economy are covered. Several existing programs only cover one sec – tor, such as the RGGI program in the northeastern United States that only includes electricity generation, while oth – ers are multi-sector, such as California and the EU ETS. The third element is the point of regulation—where and how emissions from different sectors are covered. This might be “upstream,” using fuels as a proxy for the emis – CARBON TAX implemented or scMheduled for implementation CAP & TRADE implemented or scMheduled for implementation BOTH Chile Mefico California British Columbia Quebec bouth Africa Japan bouth Korea Kazakhstan Iceland Finland Norway bweden Denmark U.K. Ireland France bwitzerland European Union Chinese bubnationalM Pilots New Zealand Northeast United btates Tianjin Beijing bhanghai Guangdong bhenzhen Chongqing Hubei Figure 3 | Carbon Pricing Programs Around the World Putting a Price on Carbon: A Handbook for U.S. Policymakers 18 | sions that result from fuel combustion, “downstream” at point sources of emissions, or somewhere in between. The final element is whether and how to address imports and exports in the program. For any carbon-pricing program, the broader the scope, the greater the emission reductions that will be expected from a given carbon price, since more emissions will be covered. A broader scope for a cap-and-trade program also means that a greater variety of sources will fall under the cap, leading to lower overall compliance costs because there will be more low-cost emission reduction opportuni- ties covered by the program. 4.1.1. Which Gases to Include Decisions over which greenhouse gases to include in a carbon pricing program involve trade-offs between the comprehensiveness of the program (that is, the fraction of total GHGs covered) and the ease of implementation (the ability to quantify the emissions being taxed or capped through direct measurement or accurate estimation). For each gas, two key factors to consider are (1) the contribu – tion of the gas to total greenhouse gas emissions; and (2) how difficult it would be to measure and regulate the gas. CO 2 is the most important greenhouse gas (GHG), repre – senting over 70 percent of total GHG emissions globally and over 80 percent in the United States. 39 Other key greenhouse gases include methane, nitrous oxide, hydro – fluorocarbons, perfluorocarbons, sulfur hexafluoride, and nitrogen trifluoride. Because CO 2 is the primary GHG, some carbon-pricing systems focus only on this gas. Many of the most important sources of CO 2, especially those based on fossil fuel combustion, are also generally easy to measure or estimate, making them well suited for inclusion in a carbon pricing system. As seen in Figure 4, a program that included only energy-related CO 2 would have covered 77 percent of total U.S. emissions in 2012. Other gases can be included in the system, allowing coverage of a larger portion of an economy’s GHG emis – sions. Including these gases requires careful consideration of their relative contributions to climate change. These contributions are typically based on the “global warming potential” (GWP), which compares gases in terms of CO 2- equivalent (CO 2e) units. 40 These estimates can be made based on considerations of the heat-trapping properties of the gases and the time the gas remains in the atmosphere. GWPs have been regularly updated in recent decades, which can complicate the design of a pricing program. The ease of implementing the program is in large part contingent upon the extent to which the emissions can be readily quantified or accurately estimated. In some cases, proxy measures, such as the carbon content of fossil fuels, provide a solid basis for quantifying the ultimate CO 2 emissions. On the other hand, methane and N 2O are second and third in terms of greenhouse gases emissions in the United States, but quantifying or accurately estimat – ing methane and N 2O emissions from agricultural sources is difficult, so those sources are less likely to be included in a carbon-pricing program. Carbon Dioxide (C0 2) – Energy 78% Carbon Dioxide (C0 2) – Non-Energy 5% Methane (CH 4) 9% Nitrous Oxide (N 20) 6% Fluorinated Gases (HFCs, PFCs, SF6) 3% Figure 4 | Greenhouse Gas Emissions by Gas in the United States, 2012 Source: Inventor y of U.S. Greenhouse Gas Emissions and Sinks: 1990–2012. U.S. Environmental Protection Agency, April 2014. Accessible at: http://epa.gov/climatechange/ghgemissions/usinventor yreport.html Figure 5 | Greenhouse Gas Emissions by Sector in the United States, 2012 Source: Inventor y of U.S. Greenhouse Gas Emissions and Sinks: 1990–2012. U.S. Environmental Protection Agency, April 2014. Accessible at: http://epa.gov/climatechange/ghgemissions/usinventor yreport.html Transportation 28% Industr y 20% Commercial & Residential 10% Agriculture 10% Electricity 32% WORKING PAPER | April 2015 | 19 For each gas, policymakers must determine whether the benefits of the incremental emissions reductions are worth the difficulties associated with including the gas in the program. 4.1.2. Choice of Sectors A key determinant of the portion of an economy’s green- house gases that is covered by a carbon-pricing system is the choice of economic sectors to be included. One trade- off is between the ability to quantify emissions—whether directly or through proxy measures such as the carbon content of fossil fuels—and comprehensiveness. For example, the electricity-generating sector already reports its GHG emissions. 41 As shown in Figure 5, the electric sec – tor in the United States is responsible for about one third of total GHG emissions. 42 Limiting a system to this sector would miss a significant portion of overall emissions. An alternative approach, included in many proposals, is to limit the program’s scope to energy-related CO 2 emissions, which can readily be covered through assigning responsi – bility for emissions to the point in the supply chain where the fuels that will result in the emissions first enter the economy. There will be different advantages and disadvantages to inclusion of other sectors in a carbon-pricing system, and political considerations will also come into play in decid – ing which sectors to include. A carbon-pricing program could also begin with a limited scope and expand to include a more comprehensive set of sectors or gases after the program is initially established. Table 2 summarizes the key aspects of different sectors that affect their inclu – sion in a carbon-pricing system. Transportation 28% Industr y 20% Commercial & Residential 10% Agriculture 10% Electricity 32% Table 2 | Characteristics Relevant for Decisions on Inclusion in a Carbon Price System SECTOR Energy CO 2 ▪Readily addressed based on carbon content of fuels and applying the program upstream, where fuels enter the economy ▪Would not require direct emissions reporting from individual sources in different sectors ▪Would cover 78 percent of total emissions in the United States Electricity Generation ▪Easily identified emission sources that are already subject to environmental regulations and GHG reporting Industr y ▪Many emission sources are large facilities that already report GHG combustion and process emissions ▪Numerous smaller industrial sources may be difficult to track and monitor, so might be better addressed through more upstream approaches Transpor tation ▪Significant emissions from many small and difficult-to-measure sourc es so program might be better directed upstream where transportation fuels are produced or distributed Residential/ commercial ▪Significant emissions from many small and difficult-to-measure sourc es so program might be better directed upstream where relevant fuels are produced or distributed (or through complementar y policies) Forestr y/ agriculture ▪Significant source of emissions and potential source of sequestration ▪Many emission sources and carbon sinks are dispersed and difficult to monitor, so proxy measures might be needed to estimate net emissions Non-CO 2 gases ▪Some non-CO 2 GHGs are significant source of emissions in some industries ▪Many emissions result from a large number of sources that may be difficult to monitor, so might be better directed up- stream (that is, where the gas first enters the economy) Putting a Price on Carbon: A Handbook for U.S. Policymakers 20 | 4.1.3. Point of Regulation Different approaches can be taken to allocating respon- sibility for paying the tax or surrendering allowances. At one end of the spectrum is an upstream approach in which responsibility for the emissions is applied when the materials that will result in the emissions first enter the economy. In the case of energy-related CO 2 emissions, this means that responsibility is applied to energy producers: the entities that mine coal, produce gas and oil, or import fuels. CO 2 emissions from each ton of coal, barrel of oil, or cubic foot of natural gas can be readily estimated because one molecule of CO 2 results from every atom of carbon in the fuel (generally speaking). The cost added to the fossil fuel will generally be passed along to the end users of the energy and, for manufacturers, will be incorporated into production costs. This approach allows a very large fraction of energy-related CO 2 emissions to be covered in a system that requires relatively few responsible parties to play a direct role. At the other end of the spectrum, a downstream approach would apply responsibility at the point where the emis – sions actually occur. Large point sources like power plants and steel manufacturing plants are major emit – ters of CO 2 because they burn large quantities of fossil fuels. Tapping them as the point of regulation captures the major emitters who are responsible for a very large fraction of energy-related CO 2 emissions. This approach may provide a useful point of regulation for a program like RGGI, which is limited to the electricity-generating sector. However, following this path is more difficult for distributed sources such as residential and commercial building heating systems or cars and trucks. In these cases, an intermediate point may be more appropriate. For example, emissions from combustion of natural gas in household and small-scale commercial use can be cap – tured by making gas utilities responsible for the emissions embedded in their product. A system can include a mix of these approaches. For example, California’s cap-and-trade program initially covered large industrial sources directly (downstream), but has since expanded to include distrib – uted use of natural gas by homes and smaller businesses through the utility distribution companies (midstream). In a downstream program, it might be simpler to estab – lish an emissions threshold below which sources are not included. Policymakers must decide whether the expected emissions reductions from sources with emissions below the threshold are sufficient to make the costs associated with regulating these smaller sources worthwhile. The decisions of whether and how to set thresholds are generally based on what proportion of total emissions are associated with “large” emitters, and these decisions will differ by sector. In many sectors, such as electricity generation or cement manufacturing, the most significant emitters will also be responsible for the great majority of emissions and will already be reporting emissions. In this case, including all facilities in a carbon-pricing program would greatly increase the number of facilities covered— including many that are below emission thresholds for reporting requirements—without significantly increasing the amount of emissions included in the program. Other industries, like food processing or pulp and paper, have more small- and medium-sized facilities and companies, indicating that lower emissions thresholds for inclusion (or no thresholds) might be appropriate. Regulating fuels as they enter the economy is one way to address emissions from smaller sources without attempt – ing to regulate them directly. However, even an upstream system will require consideration of whether and how to apply thresholds. 4.1.4. Imports and Exports A pricing program might also attempt to address emis – sions associated with imports from countries that do not have a carbon price in place (or have a lower carbon price) to avoid putting U.S. producers and manufacturers at an unfair disadvantage. The benefits and controversy sur – rounding such “border tax adjustments” are discussed in more detail in Section 6.2.3. For energy imports in an upstream carbon price system, applying a border tax adjustment is relatively straightfor – ward, because the carbon price can be applied at the point of import and a credit can be applied at the point of export of domestically produced energy. Addressing emissions associated with imported goods outside the energy sector is more complicated. “Embed – ded emissions,” that is, the emissions generated during manufacture and transport, are a significant concern for energy-intensive, trade-exposed industries. The industries that might potentially be affected are an important part of the U.S. manufacturing base, but represent a relatively small portion of the U.S. economy. 43 See Section 6.2.3 for a discussion of the impact of carbon pricing on industrial competitiveness. WORKING PAPER | April 2015 | 21 As more carbon-pricing programs are established around the world, this issue may recede in importance, but for now it remains one of the potential political concerns that must be understood when designing any carbon-pricing program in the United States. 4.2. Setting the Price or Cap Different approaches can be taken to setting the level of a carbon tax or emissions cap. From a climate perspective, one can start from either consideration of emission targets or estimates of the damages caused by GHG emissions. For those whose primary interests lie in non-climate policy priorities, such as tax reform, setting the price might have more to do with the amount of revenue needed to serve those priorities. In designing a pricing program, it is also important to recognize that the price or cap is normally not going to be a single number but rather a trajectory—an increasing tax rate or declining cap over a period of years or decades. In any case, setting the level of the tax or cap will likely require balancing a variety of political and economic considerations, such as attempting to ease the economic transition by starting at a relatively low price but allowing the price to increase over time to ensure significant emission reductions. The United States has put forward emissions targets for 2020 (17 percent reduction from 2005 levels) and 2025 (26 to 28 percent reductions from 2005). These goals could provide the basis for the trajectory of emissions caps, and modeling could be used to estimate the result- ing carbon price or to suggest an appropriate carbon tax trajectory. Longer-term targets, for example for 2030 or 2050, could be used as well. However, translating between carbon prices and emissions levels over the long term— whether determining the emissions effects over time of a given carbon-tax system or the prices that would result from a given carbon cap—is complicated by the uncer – tainties involved in modeling long-term developments in economic and energy systems. (See text box “The Limits of Economic Modeling” in Section 6.) In theory, setting a carbon price based on damages caused by climate change aims to ensure that the full costs of climate change are incorporated into the prices of carbon- intensive goods and services. The United States and other countries have estimated the “social cost of carbon” (SCC) to gain insight into a key economic question–what dam – age does an incremental ton of emissions create? 44 The SCC attempts to identify and quantify the major impacts of climate change from around the globe and for centuries into the future. These impacts, which affect public health, the environment, and infrastructure, must be translated into monetary terms and discounted to present values in order to determine the “cost” of the incremental ton of emissions in today’s dollars. In the United States, the Office of Management and Budget has directed agencies to use a range of SCC estimates in quantifying the benefits of reducing carbon emissions as part of their regulatory impact analyses. However, the resulting SCC estimates are highly imprecise, due to the major uncertainties surround – ing the impact estimates, and also incomplete, because sufficient information to translate certain damages into monetary values is lacking. 45 For policymakers who are not motivated primarily by the need to address climate change, the amount of revenue needed for particular policy purposes, such as paying for reductions in payroll or corporate tax rates or provid – ing funding for infrastructure, provides an alternative approach for determining the level of the carbon price. Getting the level of the price and its trajectory over time right would still require modeling; while the price could be set with certainty for a carbon tax, the effect of the price on future emissions, and thus on future revenues, would need to be modeled. In addition, if the emissions levels were to fall more quickly than the price were to rise over time, the result would be declining revenues. Net govern – ment revenue would also be affected in either type of program by the extent to which tax payments or allowance purchases were deductible business expenses. 4.2.1. Changes in the Carbon Price over Time Typically, the program will include an increasing price or declining cap that changes over time. With a price that starts at a relatively low level and increases in a predict – able way over time, the immediate economic effects of the policy on existing activities are muted, because industries and consumers can adjust gradually to the carbon price. The signal sent throughout the economy—continued emissions will be increasingly costly in future years—is clear and can shift investment and other economic activity that need to take into account future costs and revenue streams. For example, when British Columbia introduced its carbon tax, it established the tax at C$10 per ton CO 2e for the first year (2008), increasing at C$5 per year until it reached C$30 in 2012. 46 A decreasing cap works in the same way, though with uncertainty over the future prices that companies and consumers will face. Putting a Price on Carbon: A Handbook for U.S. Policymakers 22 | In establishing a carbon-price trajectory, policymakers will need to balance the competing objectives of maximiz- ing emissions reductions (accomplished with a faster rise in prices) and tempering the near-term economic effects of the program (accomplished with a more gradually increasing price). In addition, emission reductions may prove either more or less expensive than anticipated, with the result that the economic and environmental outcomes differ from predictions. For example, in the case of both the EU ETS (after its initial phase) and RGGI, shifting levels of eco – nomic activity and (in the case of RGGI) reduced natural gas prices meant that the emission levels have been below the caps. The EU ETS and RGGI have since moved either to lower their caps in future phases or delay the auction – ing of allowances to address the unanticipated low level of emissions. 47 Conversely, if emission reductions are more expensive or otherwise more difficult to achieve, a tax might result in fewer emission reductions than expected or a cap-and-trade program might experience higher allow – ance prices. Unanticipated circumstances can also lead to very high prices in a cap-and-trade program or minimal emission reductions resulting from a carbon tax. 48 Anticipating such circumstances argues for including an adjustment mechanism in the original program design to minimize the potential for disruptive, unplanned changes or a cost-containment mechanism (see below). In terms of an adjustment mechanism, for example, the program rules might call for monitoring progress and determining whether the price/cap trajectory needs to be adjusted at established points along the way. 4.2.2. Cost-Containment Mechanisms Price stability provides an important measure of con – fidence for those investing in emission reductions and clean technology. In the case of a carbon tax, this is an inherent aspect of the program—the design establishes the price of carbon emissions over time. Cost-containment mechanisms can address concerns regarding severe price fluctuations in a cap-and-trade program. If prices rise too high or too quickly, they could result in significant eco – nomic harm; if they drop too low, they will not provide the desired price signal for low-carbon investment. As with most program design choices, the decisions as to whether to include cost containment mechanisms typically involve trade-offs, which are discussed below for offsets and price ceilings/floor. OFFSETS Offsets are documented emissions reductions that occur outside the regulated sectors, and can be used by regu – lated entities in lieu of reducing emissions covered by the system. Offsets can reduce program costs (because a regu – lated entity will utilize offsets when they are less expensive than covered emissions reductions) while achieving the same level of emissions reductions. Offsets can also provide a way to bring into the program sources that are difficult to address directly. For example, overall emissions from agricultural are often difficult to quantify, but it might be easier to quantify (and verify) the emissions reductions from specific actions, such as improved manure management. Offsets have been included in most cap-and-trade programs, but they have often been controversial because of concerns about whether the offsets really represent emissions reduc – tions that would not have happened anyway. 49 Accurately measuring, reporting, and ensuring the quality of offsets is essential. They must result from actions that would not have been taken without the ability to sell the offset cred – its, and the emissions reductions must be real, permanent, quantifiable, and verified. 50 The decision as to whether to include offsets typically involves weighing the trade- off between lower compliance costs and the certainty of achieving the environmental objectives. Including offsets undermines certainty when there are concerns over the validity of the associated emissions reductions. Offsets are more often associated with cap-and-trade programs than with carbon taxes, but they can be incor – porated into either type of program. Under cap-and-trade, the offset credits can be used to cover emissions in the same way as allowances. Under a carbon tax, regulated entities can be allowed to use offsets to reduce the quan – tity of emissions (or amount of fuel or other proxy for emissions) on which the tax is assessed. In either case, the system would need to include rules for establishing defini – tions of valid offsets and limits, if any, on their use. PRICE CEILINGS AND FLOORS A price ceiling limits how high (or how fast) allowance prices can rise, and a price floor limits how low they can fall. Used together, they form a price collar. These mecha – nisms are relevant only for cap-and-trade programs, and make those programs more like a carbon tax by increasing certainty about future prices. For example, the Califor – nia cap-and-trade program includes a price floor that is WORKING PAPER | April 2015 | 23 implemented as a minimum price on the auction of its allowances. The floor was initially set at $10 per ton of CO 2e, increasing annually at the rate of inflation plus five percent. A program might include a ceiling, a floor, or both. The purpose of the ceiling is to prevent economic disruption from very high carbon prices or from prices that rise too quickly. In general, a price ceiling will result in higher emissions over time, since the primary response to hitting the ceiling is likely to be an increase in the supply of allow – ances. A price floor can be used to prevent the collapse of the carbon price, ensuring that clean energy investments will at least be supported by a known minimum carbon price. The drawback of price ceilings and floors is that they cre – ate inefficiencies in the markets for emissions allowances. Buyers and sellers might both wish to trade at a price higher than the ceiling or lower than the floor, but they are prohibited from doing so. Policymakers must determine whether the benefits noted above are worth the costs of these market inefficiencies. 4.3. Repor ting and Verification A key prerequisite for a successful system is a robust reporting and verification system. Such a system needs to be appropriate to the point of implementation; it is critical to have accurate and verified reporting of the emissions tied to the entity in the system that is responsible for them. An upstream approach involves reporting the pro – duction and imports of fossil fuels (often already done for other purposes) and translating the fuel report data into equivalent emissions. Similarly, downstream or interme – diate approaches mean that reporting must accurately tie the emissions to the responsible entity. Because the addition of a carbon price creates direct economic consequences, verification of entities’ emission reports is essential. Different approaches to verification are possible, from independent third party verification to self-certification with strong penalties. To provide con – fidence that those covered by the program are providing consistent and accurate information, the reporting must be complete, accurate, consistent, transparent, and with – out material misstatement. 51 Piggy-backing on existing reporting systems to the fullest extent possible simplifies implementation for both business and the government. In designing a carbon-pricing program, policymakers must determine how to develop a system for reporting and verification that is accurate and reliable while also minimizing administrative and regulatory burdens to the extent possible. 4.4. Complementar y Policies A price on carbon can be a key element of a broader climate policy because it provides significant signals throughout the economy that encourage a shift to lower carbon energy and products. However, additional pro – grams and policies will likely be needed to help provide a cost-effective path to deep greenhouse gas emissions reduction in the coming decades. 4.4.1. Addressing Emissions and Sources Outside the Program Scope A carbon-pricing program is unlikely to address all sources of greenhouse gas emissions, because some emissions are too dispersed or hard to measure to be included in a program without overburdening administra – tion. To reduce greenhouse gas emissions throughout the economy, additional approaches can encourage or require emission reductions from sources not covered by the car – bon price. Such approaches might include offset programs allowing crediting of emission reduction activities, direct regulation, investments in R&D, or incentive programs. 4.4.2. Energy Efficiency Energy efficiency has many well documented market bar – riers, such as split incentives between building owners and tenants, up-front costs, and lack of information, which hamper the achievement of the full range of cost-effective opportunities. 52 Applying a carbon price will strengthen the market signals and provide incentives for additional energy efficiency, but will not eliminate market barriers. For this reason, many programs that currently provide incentives to efficiency might still be needed, even with a carbon-pricing system in place. Carbon revenues, how – ever, could provide significant additional funding to help support or expand such programs over time; this has been the case with the RGGI program. The Analysis Group has shown that, in the first three years of RGGI’s operation, RGGI added $1.6 billion in net present value to the econo – mies of the participating states, in large measure thanks to spending auction revenues on energy efficiency programs. 53 4.4.3. Regulations and Standards Market mechanisms such as a carbon tax or cap-and- trade program are often considered more cost effective in achieving emission reductions than more traditional Putting a Price on Carbon: A Handbook for U.S. Policymakers 24 | regulations and standards, assuming that relevant mar- kets (especially for energy efficiency and innovation) are functioning close to the competitive ideal. 54 For policy – makers who view a carbon price as a means to other policy goals, avoiding these types of regulations and standards might be seen as a goal of implementing a carbon price. However, in certain circumstances, a carbon price might be less effective at reducing greenhouse gas emissions than alternative policies; markets are not perfect, and in some cases prices will not be effective. For example, even a low carbon price applied uniformly across the U.S. economy would likely achieve significant power sector reductions, where significant low-cost opportunities are available, but a higher carbon price would be required to have meaningful effects in the transportation sector. The relatively low rate of fleet turnover slows the rate at which changes in vehicle technology lead to emission reductions, and shifting from gasoline and diesel to lower carbon fuels will require both vehicle and fueling infrastructure changes. Given that vehicle technology, fueling infrastruc – ture and purchase patterns have little near-term response to a carbon price, pairing a carbon price with continued strong vehicle and alternative fuel standards is likely to prove a more effective approach to achieving deeper medium-term emission reductions, with the added benefit of reducing reliance on oil imports. Similarly, a major near-term response to a carbon price in the electricity sector in the United States would likely be the increased use of natural gas. This could provide significant emission reductions for the next decade, but if deeper reductions are desired in the medium to long term, a continued shift to use of zero- and near-zero emissions sources, for example, renewables, nuclear power, and coal plus carbon capture and sequestration, is likely to be needed. Continued support through standards and other policies for these technologies might be a means to achiev – ing such medium- to long-term emission reductions. 4.4.4. Investing in Enabling Technologies Many emission reduction opportunities depend on other technologies that are not likely to be stimulated by a car – bon price because of the same market barriers that ham – per energy efficiency investments. For example, technical upgrades to the national grid would enable an increased contribution of power from distributed electricity generat – ing sources, including renewables. A carbon price by itself is unlikely to provide sufficient incentive for investment in the grid, because any benefit from increased distributed power generation does not tend to accrue to parties invest – ing in the grid. Public investment in infrastructure and enabling technologies might be able to unlock significant emission reduction opportunities across the economy. 4.4.5. Research and Development Achieving the deep emission reductions needed by mid- century will require significant technological innovation and advancement. Increased support for research and development is likely to speed the development and deployment of new and improved technologies that may significantly reduce the cost of achieving the long-term emission goals. See Section 5.3.2, below, for further discussion on using revenues from a carbon-pricing program to support innovation in emissions-reduction technologies. 5. COMMONLY PROPOSED USES OF CARBON PRICING REVENUES According to the Environmental Protection Agency, U.S. greenhouse gas emissions in 2012 were more than 6.5 bil – lion metric tons of carbon dioxide equivalents. 55 A carbon tax, or a cap-and-trade program with allowance auctions, therefore has the potential to raise well over $100 billion per year at a moderate price of about $15 per ton, depend – ing on its initial level and scope (for reference, in 2013 the corporate income tax brought in roughly $273 billion of revenue). 56 In an economy with a gross domestic product of nearly $17 trillion, this is a relatively small but far from negligible sum. 57 For a Congress looking for new sources of revenue to finance tax reform or avoid cutting politically popular tax expenditures, a carbon price could receive some unlikely support—potentially even from those who are not focused on reducing GHG emissions, but who see a carbon tax as more palatable than other taxes or as a potential substitute for regulations. How any revenue gets spent will, of course, be decided by the legislative process. Yet, because it is one of the most critical and politically contentious elements of carbon- pricing policy design, with implications for individuals, companies, and the economy, this paper examines some of the most commonly proposed uses of revenue. Policymakers have no shortage of competing priorities from which to choose, and each presents a wide range of WORKING PAPER | April 2015 | 25 advantages and disadvantages. Many revenue uses could potentially provide a “double dividend” of reduced green- house gas emissions and improved economic efficiency. Indeed, previous analysis by WRI and others indicates that well-designed policies to combat climate change can enhance economic growth. 58 While the prospect of significant new revenue can bring many people to the table for a conversation, disagree – ments over how to slice the pie can make the resulting discussions difficult. For example, some proponents 59 of a carbon tax insist on a revenue-neutral offsetting of the carbon tax with an attendant reduction in other taxes, while others 60 advocate for returning revenues to house – holds, reducing the deficit, or spending the money on other priorities. Different stakeholders have differing views of revenue neutrality. Many conservatives would consider a carbon tax to be revenue neutral only if all revenues were used to reduce other taxes, with the federal government seeing no net increase in tax revenues, and no new spending. 61 Pro- ponents of a fee-and-dividend policy, on the other hand, view their approach as revenue neutral as well, in that all carbon-tax revenues are returned to households rather than used by the government for other purposes. 62 In this section, we’ll review many of the most commonly suggested uses of revenues from a carbon tax or allowance auctions under cap-and-trade, including: ▪Reducing “distortionary” taxes such as payroll, corporate and personal income taxes; ▪Reducing government deficits; ▪Investing in job training; ▪Returning the revenue to households or electricity consumers; ▪ Addressing regional disparities; ▪Investing in economic competitiveness; ▪Investing in technologies that enable communities to adapt to climate change; and ▪Investing in clean technology innovation. For each alternative, we provide an overview of the economic and political strengths and weaknesses, and real world examples, where available. We have grouped these revenue uses by their primary intended effect but, as illustrated in Table 3 below, spending revenue can have a wide array of economic impacts. 5.1. Encourage Economic Growth 5.1.1. Reduce Distortionar y Taxes Economists typically single out several categories of taxes —such as those on labor, investment, and capital—as being “distortionary;” that is, they serve to discourage things like work and investment, which are encouraged elsewhere in the tax code and by other policies. Using some or all of the revenue from a carbon tax to reduce these distortion – ary taxes, including payroll and corporate and personal income taxes, can result in increased economic growth and output. Economists from across the political spectrum are among those most keen to use carbon tax revenue to offset dis – tortionary taxes elsewhere. 63 Doing so, they argue, would make the tax code more efficient, and would reduce disin – centives to work and invest. Among the taxes most cited as ripe for reduction are payroll taxes and those on corporate income. The former are more regressive than the tax code as a whole—in 2014, only the first $117,000 of income was subject to Social Security payroll taxes—and they increase the cost of labor, discouraging employers from additional hiring and reducing the incentive to work. Taxes on corpo – rate income are passed through to customers, employees, or shareholders, and are an inefficient means of taxing any of these groups. They can also discourage companies from investing and establishing or keeping their operations in the United States, which nominally has the highest mar – ginal corporate income tax rate in the developed world. 64 However, the effective tax rate—what companies actually pay—is typically far less than this statutory rate, for a variety of reasons. 65 Using carbon-tax revenue to reduce either, or both, of these taxes can pay dividends through – out the economy, including greater economic growth and increases in overall employment. Such a “revenue-neutral tax swap” is among the most common policy proposals from advocates of carbon taxes. Typically, in these proposals, most or all of the revenue from the carbon tax goes toward reducing other taxes, so there is no increase or decrease of revenue to the govern – ment. Generally speaking, most studies on the topic have found that, while reducing taxes on either labor or capital can offset at least some of the negative effects on economic output from a carbon tax, reducing the top tax rate on Putting a Price on Carbon: A Handbook for U.S. Policymakers 26 | capital would be most effective at reducing the inefficiency caused by the tax system. For example, McKibbin et al. (2012) found that implementing a tax on carbon and reducing the marginal tax rates on capital would result in greater economic growth in the coming decades than would be the case in a business-as-usual scenario. 66 But the authors found that cutting marginal tax rates on labor instead would result in a small net negative effect on total economic output. And Carbone et al. (2012) found that cutting taxes on capital was more beneficial than cutting taxes on labor or consumption from an economic growth standpoint (though with no provision for issues of distri – butional equity), and this finding applied to both present and future generations. 67 While reducing capital tax rates might be the most effi – cient use of revenue, studies have found that reducing tax rates on labor can offset at least a significant portion, and perhaps all, of the potential adverse economic impacts of the carbon tax. For example, a 2011 OECD study found that when “revenues [from allowance auctions of an emissions-trading program] are used to reduce taxation on labor, the pace of employment growth would acceler – ate…without any loss of purchasing power for workers.” 68 According to Lawrence Goulder, an economics professor at Stanford University, the greater the inefficiency in the current tax system, the more likely it is that using carbon- tax revenues to cut labor taxes will lead to an increase in overall employment and economic growth. 69 See Section 6 for more details on the economic effects of reducing distortionary taxes. 5.1.2. Reduce Deficits Interest payments on the national debt can potentially crowd out other investments, dampening economic growth and output. Some economists argue that future tax rates will need to increase in order to make interest payments and pay down the debt, and that the expectation of future tax increases will discourage work and reduce savings. 70 Some carbon-tax advocates therefore argue that policymakers have good incentive to use revenues from the tax to reduce annual deficits and pay down the debt, leading to long-term economic growth. 71 (For more discus – sion of the economic impacts of using carbon-tax revenue to reduce the national debt, see Section 6). Much like reducing distortionary taxes, proponents of using carbon-tax revenue to address the national debt are trading one tax for another—in this case, offsetting a potential future tax increase, or allowing for a potential future tax reduction (government deficits can be rolled over forever, so whether to raise taxes to pay down the debt can be as much a policy question as an economic one). Although the issue of the rising national debt has faded somewhat after the deficit peaked in fiscal year 2011, many policymakers are still weighing the available options for long-term solutions to a potentially destabilizing fiscal problem. 72 Ireland implemented a carbon tax in 2010, covering most of the carbon dioxide emissions from sectors not already included in the European Emissions Trading Scheme. Following the 2008 fiscal crisis, the decision was made to institute a carbon tax in lieu of other austerity measures and tax increases, and use much of the revenue to reduce annual budget deficits. In the years since its implementa – tion, the carbon tax has contributed to a dramatic slow – down in the growth rate of the Irish national debt and has led to a reduction in emissions from covered sectors. 73, 74 While the circumstances under which the carbon tax was first implemented were extraordinary, this case neverthe – less illustrates the way in which a carbon tax can help address national debt. 5.2. Ease Transition Costs for Individuals, Sectors, and Regions 5.2.1. Invest in Job Training By inducing changes in behavior and purchasing patterns, a carbon price will, over time, benefit some industries (renewable energy, energy efficiency, clean vehicles, etc.) at the expense of others, especially coal and oil production. While such structural shifts in the economy may not significantly affect overall employment, and are a regular part of growth and economic shifts, policymakers may nonetheless decide to enact measures to ensure those that are adversely affected by a carbon tax are able to transition quickly and find new jobs. Federal support for job training programs, 75 spending on education, and other uses of carbon tax revenues can limit the impact of a carbon tax on employment in particular industries, or accelerate a transition to clean energy jobs. 76 In some cases, new initiatives for displaced workers can build upon existing federal programs. 77 Some studies have found benefits to both short-term and long-term job training programs. Low-cost, short-term programs—those designed to get a person back to work as quickly as possible—have been found to reduce the time spent unemployed and increase job stability, and they are cost effective in the near term. Participants in long-term WORKING PAPER | April 2015 | 27 training programs, which are aimed at giving workers the skills they need to succeed in a new field, benefit from even more job stability and higher lifetime earnings. 78 On- the-job training programs have also proven cost effective. A study of 16 trades across the Canadian economy found that employers received C$1.47 in benefits for every C$1 invested in apprenticeship programs. 79 There are few examples of existing carbon-pricing policies that re-invest revenues into job-training programs, but the recently enacted carbon tax in Chile may prove instruc – tive as it is implemented. In September 2014, as part of a broader tax reform, Chile enacted a $5-per-ton tax on carbon emissions from power plants in order to reduce its fossil fuel imports and encourage renewable energy devel – opment. It has been proposed that, when it goes into effect in 2018, most of the revenues from the carbon tax, and other tax increases, will go toward education initiatives. While this policy will not likely pay immediate economic dividends, Chile views it as a long-term investment in the economy and a way to reduce economic inequality. It will be a case study to follow in the years to come. 80 5.2.2. Return Money to Households or Electricity Consumers The notion of sending a quarterly or annual check to households to offset the increase in commodity prices resulting from a carbon tax—known as “fee-and-divi – dend”—has grown in popularity in recent years, largely because of its perceived fairness and simplicity. By divid – ing carbon-tax revenues equally amongst all consumers, programs ensure that lower income households receive as much or more in revenue as they spend on the tax, and a sizeable fraction of households would be net winners on a monetary basis. 81 Unlike proposals to reduce other taxes, fee-and-dividend programs do not have to contend with the problem of declining carbon-pricing revenues that must still fund permanent tax cuts. Also, by giv – ing revenues to individuals or groups, policymakers can potentially increase public support for continued carbon pricing and make such a policy more “sticky,” because any reduction in price or repeal of the policy would reduce or eliminate those dividends. 82 However, some commentators do not agree that imple – mentation would be so straightforward. Many also dis – agree with the characterization of this as a revenue-neutral option. Providing dividend checks would likely involve at least a small amount of new spending and growth of gov – ernment to determine and distribute the dividends. Fur – Box 5 | British Columbia’s Carbon Tax—Proving Emissions Reductions and Economic Growth Can Co-Exist The Canadian province of British Columbia provides a real- world example of a carbon tax that reduces other taxes and is intended to be revenue neutral. British Columbia implemented a carbon tax of C$10 per metric ton of CO 2 equivalent in July 2008, which increased by C$5 per year to C$30 per metric ton in 2012; the tax will remain at C$30 per metric ton through 2017. The tax was designed to be revenue neutral, as the province anticipated using the revenues from the carbon tax to reduce a range of personal and business taxes. Those measures include providing a tax credit for low-income households, reducing the two lowest personal income tax bracket rates by five percentage points, and cutting the general and small business corporate income tax rates by two percentage points. a In its first few years, however, the tax was actually revenue negative, in part because the price on carbon reduced demand more than anticipated, leading to carbon-tax revenues that were lower than the province had projected. British Columbia therefore took in less money from its carbon tax than it cut from other taxes. A 2013 analysis of British Columbia’s carbon tax found that it has been successful in reducing greenhouse gas emissions without adversely affecting economic growth. In the five years following implementation, per capita greenhouse gas emis- sions fell 18.8 percent relative to the rest of Canada, while GDP growth kept pace with the rest of Canada. Moreover, the province’s personal income tax rates are now the lowest in the countr y, and its corporate tax rates are among the lowest in North America. b British Columbia therefore provides an ex- ample of one way in which governments can reduce distortion- ar y taxes, address regressivity, and reduce emissions–all while ensuring that no income group is made worse off. We should note, however, that some obser vers question British Colum- bia’s suitability as an example for a carbon tax in the United States, especially given the differences in sources of electricity generation between the two regions. c Notes:a. British Columbia Ministr y of Finance. Februar y, 2012. “Budget and Fiscal Plan, 2012/13-2014/15.” Available at http://www.bcbudget.gov. bc.ca/2012/bfp/2012_Budget_Fiscal_Plan.pdf b. Elgie, S., and J. McClay. 2013. “BC’s Carbon Tax Shift After Five Years: Results.” Sustainable Prosperity. July. Available at: http://www. sustainableprosperity.ca/dl1026&display c. See, for example, Marlo Lewis, “Why British Columbia’s Carbon Tax is Not Applicable to America,” OnPOINT, September 16, 2014, https://cei. org/sites/default/files/Marlo%20Lewis%20-%20Why%20British%20 Columbia’s%20Carbon%20Tax%20Is%20Not%20Applicable%20to%20 America_0.pdf. Putting a Price on Carbon: A Handbook for U.S. Policymakers 28 | thermore, a policy that provides equal dividends to every individual could support the perception that a carbon tax would affect some states and regions more than others, though these regional disparities may be overstated (see additional discussion in Sections 5.2.3 and 6.2.2). Various methods can be used to administer rebate checks in a fee-and-dividend program. Existing federal pro- grams that disburse money, such as Social Security or the Temporary Assistance for Needy Families program, can supplement households’ monthly checks with carbon-tax revenues. For non-participants in those programs, the government can send a monthly check, or give annual tax refunds. All of these means of returning revenues carry various administrative burdens and costs. Several examples of redistributing revenues to households may be instructive to policymakers. In 2008, Switzerland implemented a carbon tax on hydrocarbon fuels, which applies to all individuals and those companies that do not participate in the national cap-and-trade program. Revenues are redistributed to taxpayers in the form of lower health insurance premiums for individuals, and are returned to companies based on their total payroll. While few studies have analyzed the economic impacts of Switzerland’s carbon tax, since its implementation in 2008 Switzerland has kept pace with, or exceeded, other developed countries in a variety of economic indicators. 83 In the United States, there is precedent for recycling revenues to households, though as part of very different programs. The Alaska Permanent Fund returns a portion of that state’s oil revenues to its citizens every year. And California is recycling some of the revenue from its allowance auctions back to households in the form of semi-annual rebates on electricity bills, administered by the investor-owned utilities (IOUs) in the state, as directed by the California Public Utilities Commission. The revenue for the rebates comes from a reverse auction of allowances that were distributed to investor-owned utilities under the cap-and-trade program rules. 5.2.3. Address Regional Disparities Some regions in the United States are more heavily dependent on the production or consumption of fossil fuels than others, and so will be differently affected by the implementation of a carbon price. A reduction in demand for coal, for example, could have adverse impacts on the coal-producing regions of Wyoming, West Virginia, and Kentucky, among other states. 84 Residents of states that get most of their electricity from coal would likely see their monthly electric bills increase in the near term. Many households in the Northeast, heavily reliant on heating oil, would see wintertime energy costs increase. 85 However, recent analysis suggests that regional dispari – ties in the consumption of carbon-intensive goods are not as great as once feared. 86 Regions that are more heavily dependent on one fossil fuel tend to be relatively less dependent on others—for example, while the Northeastern states burn more oil for home heating, their electricity mix is relatively less dependent on coal (see Figures 6 and 7). 87 Figure 6 | Primar y Home Heating Fuel, by Census Division 0% 100% 2005 20132005 20132005 20132005 20132005 2013 Midwest South West Othef/none Fueb Oib & Kefosene LPG Natufab Gas Ebectficity United States Noftheast Source: “Ever ywhere but Northeast, Fewer Homes Choose Natural Gas as Heating Fuel,” U.S. Energy Information Administration, September 25, 2014, http://www.eia.gov/todayinenergy/detail.cfm?id=18131. WORKING PAPER | April 2015 | 29 *Includes generation by agricultural waste, landfill gas recover y, municipal solid waste, wood, geothermal, nonwood waste, wind, and solar. Source: “Different Regions of the Countr y Use Different Fuel Mixes to Generate Electricity,” Edison Electric Institute, August 2014, http://www.eei.org/issuesandpolicy/generation/fueldiversity/Documents/map_fuel_diversity.pdf. PACIFIC CONTIGUOUS 38% 3% 7% 36% 14% < 1% 1 % MOUNTAIN 5 4% 22% 8% 8% 7%< 1% < 1% WEST NORTH CENTRAL 67% 12% 5% 14% < 1% 3% < 1% WEST SOUTH CENTRAL 35% 45% 10% 8% 1 % 1 % 1 % EAST NORTH CENTRAL 60% 9% 25% 4% 1 % < 1% < 1% EAST SOUTH CENTRAL 46% 23% 22% 7% < 1% 2% <1% SOUTH ATLANTIC 36% 33% 26% 1 % 2% 2% 1% MIDDLE ATLANTIC 23% 30% 37% 6% < 1% 3% 1 % NEW ENGLAND 45% 32% 7% 7% 5% 3% 1 % PACIFIC NONf CONTIGUOUS 2 1% 12% 9% 7% 48% 3% Coal Nabural Gas Nuclear Hydro Obher Renewables* Fuel Oil Obher Figure 7 | Electricity Generation Fuel Mix, by Region Putting a Price on Carbon: A Handbook for U.S. Policymakers 30 | As Tufts University Economics Professor Gilbert Metcalf has found, returning carbon-pricing revenues to house- holds via payroll tax reductions and Social Security can all but eliminate regional disparities while making all regions better off. 88 Nevertheless, such concerns were a major sticking point in the debate surrounding how to apportion allowance revenue under the American Clean Energy and Security Act (ACES). To mitigate against increases in energy prices that would affect some regions more than others, the bill’s authors devoted some allowance revenue to electricity and natural gas local distribution companies, as well as state programs that support home heating. The notion that some regions would be more adversely affected than others will likely be a contentious issue in any political debate surrounding a carbon price. This issue is discussed in more detail in Section 6, below. 5.2.4. Invest in Economic Competitiveness Many industries, especially manufacturing, rely heavily on energy derived from fossil fuels as a primary input. There is concern that, if a price on carbon results in the prices of those fuels increasing to the point that it is cheaper for companies to relocate their operations elsewhere, some manufacturing jobs could be lost. While recent studies suggest that this may be less of a problem than previously thought (see Section 6.4), many advocates of a national climate policy call for measures to ensure that American industry remains competitive in the global marketplace. In a cap-and-trade program, this can be achieved by distrib - uting free allowances to industries identified as vulner - able to competitive pressures because of the carbon price (often called energy-intensive trade-exposed industries). Under a carbon tax, the most frequently discussed cor - responding policy tool is a border adjustment, whereby imports from countries without equivalent policies are assessed a tariff based on the carbon content of their goods, and exports given a rebate of the tax paid in the manufacture of the good. If the trading partner has a climate policy in place that implicitly or explicitly prices carbon emissions equivalently to the U.S. domestic carbon tax, the border adjustment can be waived. If the trading partner has a climate policy that is less stringent than that of the United States, the border adjustment can be reduced accordingly. This creates difficult questions for regulators, such as how to quantify the effect of regula - tions that reduce emissions and how to determine the stringency of a suite of climate policies in other countries. Further discussion on border adjustments can be found in Section 6.2.3. We should also note that many of the United States’ largest trading partners already have carbon-pric - ing policies in place. See Appendix A for more details. 89 Of course, some portion of carbon-tax revenues can be returned to energy-intensive trade-exposed industries, as a means of sustaining international competitiveness (and if the corporate income tax rate is cut as part of a carbon- tax swap, many of these companies will already receive a tax break). As long as the revenue is not returned to these industries on the basis of their emissions, the price signal to encourage companies to reduce their emissions will remain. However, returning revenues to energy- intensive trade-exposed industries does not provide a way to address the fact that some other jurisdictions already apply a carbon price. Denmark instituted a carbon tax in 1992 and, since 1995, has been returning a portion of revenues to various indus - tries. In order to advance the goal of changing industrial behavior in order to reduce greenhouse gas emissions, the Danish government also provides a 25 percent reduction in a company’s tax burden if it signs an agreement to take steps to reduce its energy use. The Danish carbon tax has proven effective at reducing emissions, especially from industry. Industrial emissions fell 23 percent in the decade following the implementation of the carbon tax, and per capita emissions in Denmark declined 15 percent between 1990 and 2005. 90 Wind projects in Denmark also receive revenues from the country’s carbon tax, which has helped the country become a global leader in wind power. Denmark is home to the wind turbine manufacturing operations of Vestas and Siemens, which together have nearly 20 percent of global market share, 91 and nearly 40 percent of Danish electricity consumption in 2014 came from wind power, the highest figure in the world. 92 5.3. Suppor t Related Goals 5.3.1. Respond to Climate Change Some proponents of carbon pricing believe that revenue would be best spent on infrastructure that helps make communities more resilient to the impacts of climate change. 93 Such investments can serve a variety of pur - poses, including: WORKING PAPER | April 2015 | 31 ▪Increasing the resiliency of water, transport, energy, and other forms of infrastructure that are vulnerable to extreme weather and other effects of a changing climate ▪Reducing emissions and improving the resiliency of the electric grid by building out renewable energy and distributed generation infrastructure, and expanding smart grids ▪Creating jobs through the spending of public money on needed investments in adaptation and resilience Spending some carbon-tax revenues on adaptation allows for a carbon tax to address both the causes and effects of greenhouse gas emissions simultaneously. 94 The World Bank estimates that global investments to adapt to a changing climate will need to reach $70-100 billion per year through 2050—and even more if warming exceeds two degrees Celsius. 95 Estimates of adaptation costs in the United States vary widely, but could reach tens of billions of dollars per year by the middle of the century. 96 Governments can also choose to spend revenues from a carbon tax on clean-energy initiatives designed to achieve additional emissions reductions, and possibly reduce the costs of complying with the carbon price. These initiatives can take the form of investments in renewable energy, demand-side or supply-side energy efficiency, building retrofits, or other measures designed to reduce the carbon intensity of energy use. There are precedents for governments investing carbon- pricing revenues to help spur additional emissions reductions, though on a smaller scale. Germany currently devotes all revenues from its allowance auctions to domes - tic and international climate initiatives. These include “innovative projects” in Germany’s industrial sector, other energy-saving domestic initiatives, and international climate finance to help spur emissions reductions in other countries. 97 In the United States, RGGI states devoted over 70 percent of allowance auction revenues to energy efficiency and renewable energy projects between 2009 and 2012—measures that RGGI estimates will avoid eight million tons of CO 2 emissions and save consumers more than $2 billion in energy savings. 98 5.3.2. Encourage Investment in Clean Technology Innovation By changing the relative prices of goods, and creating financial incentives to reduce emissions, a price on carbon can stimulate innovation. Alone or in conjunction with complementary policies (as discussed in Section 4.4), a carbon price encourages companies to develop new, cleaner, more cost-effective technologies and processes. As the Organisation for Economic Co-operation and Develop - ment has written: “…environmentally related taxes can provide signifi - cant incentives for innovation, as firms and consum - ers seek new, cleaner solutions in response to the price put on pollution. These incentives also make it commercially attractive to invest in R&D activities to develop technologies and consumer products with a lighter environmental footprint, either by the polluter or by a third-party innovator… Even for firms that do not have the resources or inclination to undertake for - malised R&D activities, the presence of environmen - tally related taxation provides increased incentives to bring in the latest technologies that have already been developed elsewhere.” 99 It is highly unlikely that a low to moderate carbon tax would achieve the level of emissions reductions the Intergovernmental Panel on Climate Change (IPCC) recommends in order to prevent the worst impacts of climate change. 100 Therefore, some supporters of a carbon tax propose using some revenue to encourage innovation in technologies or practices that could help reduce green - house gas emissions. 101 The federal government already invests in research and development—the Department of Energy supports renewable energy, fossil energy, nuclear energy, and energy efficiency—and those programs have paid dividends in the form of technological advancement and lower costs to businesses and consumers. 102 But, while we can make significant emissions reductions with tech - nology available today, in order to achieve much deeper emissions reductions by mid-century we will need either innovative breakthroughs or continuous improvements in the existing suite of technologies, or both. Devoting some carbon-tax revenue to R&D can potentially help to reduce the long-term costs of complying with the tax and reducing emissions, in several ways. First, as reaffirmed in a pair of 2014 reports, both the public and private sectors often underinvest in innovation: 103 “Financing for research and development in the power sector does not match the scale of the challenge [of reducing emissions]. Power company funds spent on research and development were only $280 million in 2011, or approximately 0.05 percent of power sec- Putting a Price on Carbon: A Handbook for U.S. Policymakers 32 | Notes:a. If payroll or other labor taxes are cut, there could be a small improvement in the overall progressivity of the tax code, which could address income inequality in a modest way. If carbon tax revenues are used to reduce corporate income taxes, any such effect would be muted. b. Depending on whether and how additional revenue is raised from alternative sources. c. Proponents of a fee-and-dividend approach claim that it will foster economic growth, but the economic literature is divided on this. See Section 6 for more detail. d. The revenue neutrality of returning all carbon-tax revenues to households in the form of dividends is in the eye of the beholder. Some proponents, such as Citizens Climate Lobby, believe fee-and-dividend to be revenue neutral (see https://citizensclimatelobby.org/carbon-fee-and-dividend/). Others disagree, pointing to the need to devote some revenues to the administration of the program, and the belief that dividends are a form of government spending and not tax reduction. e. The evidence is mixed as to whether these revenue uses achieve the stated policy goals. Table 3 | Revenue Options, and the Policy Goals they are Designed to Achieve POLICY GOAL Correct for Regressivity Foster Economic Growth Cut Taxes Preser ve or Create Jobs Additional Emissions Reductions Reduce Costs of Compliance Revenue Neutrality REVENUE OPTION Reduce Distor tionar y Taxes ? a Reduce Deficits ? b Invest in Job Training Return Money to Households ? c ? e ? d Address Regional Disparities Invest in Eco- nomic Competi- tiveness Respond to Climate Change Impacts ? e Encourage Investment in Innovation WORKING PAPER | April 2015 | 33 tor sales. By comparison, company funds spent on research and development were 11 percent of sales for pharmaceuticals, eight percent for computers and electronics, five percent for professional services, and three percent for general manufacturing.” 104 Government support of research, development, and dem - onstration of measures to reduce emissions from energy, transportation, agriculture, or other sectors can fill the gap created by private sector underinvestment, and help bring down the costs of breakthrough technologies. This, in turn, could help to drive more cost-effective emissions reductions and reduce the cost of complying with the car - bon tax. 105 Polls suggest that public support for a carbon tax grows when revenue is used for R&D (though many polls do not ask respondents what level of tax they would be comfortable with). 106 5.4. Mixing and Matching Of course, policymakers will likely choose several options for using carbon-price revenues, and divide the money between them. In this way, a carbon-pricing policy can achieve (or contribute to achieving) a number of the goals outlined in this section. For example, in its analysis of a federal cap-and-trade program, the Center for Budget and Policy Priorities found that only 14 percent of allowance Figure 8 | Cumulative Distribution of Allowances Under ACES, 2012-2050 Source: “Distribution of Allowances Under the American Clean Energy and Security Act (Waxman-Markey),” Pew Center on Global Climate Change, August 2009, http://www.c2es.org/ docUploads/policy-memo-allowance-distribution-under-waxman-markey.pdf. Consumers (Electricity, natural gas, home heating, low-income, etc.) 58% Technology (Renewables, Efficiency, CCS, Autos, etc.) 15% Energy-Intensive, Trade-Vulnerable Industries 8% Adaptation (Domestic & International) 7% Prevention of Tropical Deforestation 4% Merchant Coal Generators & Long-term Power 3% Other (Early actors, worker transition, deficit reduction) 2% Strategic Reser ve 2% Domestic Fuel Production 1% auction revenue was needed to ensure that the bottom quintile of the income distribution was not adversely affected by higher energy prices. 107 The 2009 ACES Act followed this guidance and devoted about 15 percent of allowance revenue to lower income households. To achieve a variety of policy goals, the bill’s authors also proposed giving free allowances (or devoting allowance revenue) to electricity and natural gas distribution com - panies to protect consumers from higher energy prices, to energy-intensive and trade-exposed industries, to innova - tion and R&D, and for adaptation investments (see Figure 8). 108 California is currently putting many of those principles into practice. 109 In addition to the semi-annual rebates on electricity bills mentioned above, the state is devoting some of its allowance revenue to transportation infrastruc- ture (including high-speed rail and other mass transit), affordable housing, energy- and water-efficiency projects, support for low-income and minority communities, and several other smaller programs. 110 While distributing revenues across a variety of end-uses can diminish the effectiveness in achieving certain policy goals, it may allow a federal carbon-pricing program to address multiple pri - orities. See Table 3 for a summary of how various revenue options can satisfy one or more policy goals. Putting a Price on Carbon: A Handbook for U.S. Policymakers 34 | 6. ECONOMIC EFFECTS OF A CARBON PRICE Like other climate and tax policies, pricing carbon will necessarily have economic impacts. The economic litera - ture on a carbon tax’s effects on economic growth and output, jobs, income, regional disparities, and industrial competitiveness is both deep and wide. These studies can tell us much about how a carbon tax can change an economy as it transitions from being highly dependent on fossil fuels toward a lower carbon future. The design choices discussed in Section 4 help to deter - mine the economic effects of a given carbon-pricing policy, among the most consequential decisions for policymakers in this regard is how to spend the revenues. 6.1. Macroeconomic Impacts 6.1.1. Effects of a Carbon Tax on Economic Growth The effect of a carbon tax on economic growth depends greatly on the details of how the tax is designed, and espe - cially on what is done with the resulting revenues. Studies have found that while some uses of carbon tax revenues would produce a net drag on economic growth, other uses would provide a net stimulus to the economy. Of course, as with all economic modeling, much depends on the modelers’ assumptions (see Box 6 for further discussion on the limits of economic modeling). Here, we review the economic literature to see how the choices made by poli - cymakers regarding the structure of the tax and the use of revenues will affect economic growth. CARBON TAX POLICY PROPOSALS AND THEIR EFFECTS ON ECONOMIC GROWTH Economists have undertaken considerable modeling and research on the economic impacts of various policy proposals and uses of revenues; those most commonly suggested are discussed in Section 5. Here, we’ll review some of the economic literature to see how these revenue uses will impact growth. REDUCING DISTORTIONARY TAXES. Using carbon tax revenue to “pay for” reductions in taxes on capital or labor can partially or fully offset the adverse effects of a carbon tax on economic growth, though there is disagreement among economists as to which of these uses of carbon tax revenue would lead to greater economic growth. Economists refer to taxes on capital and labor as distortionary, because they reduce the incentives to work and invest—generally, things that policymakers want to encourage in a healthy economy. By using carbon tax revenue to reduce existing tax rates on corporate income, personal income, or payroll taxes, policymakers can increase the incentives to work and invest while reducing the incentive to over-consume fossil fuels. For example, Parry et al. (2011) find that “if revenues are used to substitute for distortionary income taxes (either directly or indirectly through deficit reduc - tion), economy-wide carbon taxes…may have (slightly) negative costs.” 111 PROVIDING DIVIDENDS. Carbon-tax revenue can also be recycled to households on a monthly, quarterly, or annual basis, either via a new federal program or through any of a number of existing programs; these programs include, but are not limited to, Social Security, Supplemental Nutritional Assistance Program (SNAP, also called food stamps), or via annual tax returns (further discussion of federal programs that could be used to return revenues to households can be found in Section 5.2.2). Most economists believe such a policy would reduce economic efficiency, at least in the near- to medium-term. For example, Lawrence Goulder and Marc Hafstead find that a lump-sum rebate is worse for economic growth than using revenues to reduce either personal or corporate income tax rates. 112 And, while a 2014 study by Regional Economic Models, Inc. (REMI) found that a “fee-and- dividend” approach would yield small net positive impacts on economic growth, this study was not peer-reviewed and some experts have taken issue with its assumptions and findings. 113 FEDERAL DEFICIT REDUCTION. Large deficits are thought to act as a drag on the economy, because they crowd out pri - vate sector investment, and interest payments on the debt reduce the amount of money that the federal government can spend on more constructive purposes. And if inter - est payments rise (or are expected to rise) in the future, Congress may be forced to raise taxes to help defray those costs, further limiting output. Economists have mod - eled the potential economic effects of carbon taxes with revenues used for federal deficit reduction by assuming, for example, that tax increases to reduce the debt are inevitable, and carbon taxes can reduce the need for some of these future tax increases. Carbone et al. (2013) find that a CO 2 tax of $30 per ton, with all revenue used as a “down payment” to bring the debt down to a sustainable level, would lead to very minor GDP reductions in the near term, and either minor increases or decreases following 2030, depending on the choice of debt reduction measures for which carbon taxes WORKING PAPER | April 2015 | 35 are substituted. 114 Similarly, McKibbin et al. (2012) find that, to achieve a given level of deficit reduction, a carbon tax reduces GDP slightly less than an equivalent tax on labor and slightly more than an equivalent tax on capital. They conclude that a carbon tax “offers a way to help reduce the deficit and improve the environment, and do so with minimal disturbance to overall economic activity.” 115 The potential advantages of reducing deficits are not pres - ent only at the federal level. Eisenberg et al. (2014) see similar benefits for states that use a carbon tax to comply with federal carbon-pollution standards for power plants, using that revenue to reduce state deficits and lower other tax rates. 116 6.1.2. Effects of a Carbon Price on Employment From an environmental standpoint, the primary goal of a carbon tax is to reduce greenhouse gas emissions; a well-designed tax will entail some restructuring of the economy as a result of reductions in the use of carbon- intensive fuels and the consumption of carbon-intensive goods. There is no consensus among economists on the effects of carbon pricing on overall employment levels in the near term, although it is well recognized that there will be “winners” and “losers” from different economic sectors, and most economists agree that any economic impacts will be limited in the long term. The non-partisan Congres - sional Budget Office (CBO) found that “[w]orkers and investors in fossil-fuel industries (such as coal mining and oil extraction) and in energy-intensive industries (such as chemicals, metals, and transportation) would tend to experience comparatively large losses in income under a carbon tax because demand for their products would decline.” 117 However, the same analysis found that job losses would be offset over time by job gains in low-emit - ting energy industries (such as wind, solar, and nuclear) as well as the service sector and other industries that are comparatively less emissions-intensive. Further discus - sion on how a carbon tax affects employment in different regions and sectors can be found in Section 6.2, below. In the aggregate, because a carbon tax would affect prices throughout the economy, there would likely be shifts in employment levels within industries, though the impact on overall employment levels depends on the size of the tax and what is done with revenue, and is likely to be small. In a 2010 review of the literature, CBO found that a “gradually increasing tax on greenhouse gas emissions or a cap-and-trade program … would probably have only a small effect on total employment during the next few decades.” 118 In addition, CBO found that initially “job Box 6 | Limits of Economic Modeling Economists build models that aim to simulate the conditions, operation, and behavior of real world economies. These models can be powerful tools to help economists understand and predict the behavior of economic actors, but they are necessarily simplifications, and have different strengths and weaknesses. They have some explanator y power, but they cannot predict the future. Some of the discrepancy between predicted and actual costs of new rules is the result of changes made by affected entities to mitigate costs once those rules are implemented. Like models from other disciplines designed to mimic real-world conditions, economic models are premised upon the theories, assumptions, and policy design choices of their creators, and those theories and assumptions may be flawed, incomplete, or unproven. Moreover, given the wide range of views in the economics profession, there is likely to be another economist—and another model—with contrasting assumptions and vastly different results. In this paper, we strive to present an unbiased view of different modeling results, noting when those results are largely in agreement with each other and when they are not. According to previous analysis by WRI and others, economic models also have a histor y of overstating the costs of environ- mental measures while under valuing the benefits of action to address climate change. a We encourage readers to keep in mind that all the economic modeling results discussed in this section are estimates, and that changes to policy design that depart from what researchers have modeled, can have an impact on model- ing results. Economic models are also limited in their ability to reflect the benefits of preser ving “natural capital,” which includes resources such as forests, clean air, and clean water. When economic impacts are measured in terms of gross domestic product (that is, the total value of the goods and ser vices in an economy), any degradation of natural capital will generally be unaccounted for. Economic models also typically fail to reflect the benefits of preser ving other valuable resources (for example, minerals and fuels) or a stable climate. Thus the business-as- usual or reference scenarios may be more optimistic than reality, once the impacts of climate change are reflected. Notes:a. On the tendency of industr y and EPA models to overstate the costs of environmental regulations, see http://pdf.wri.org/factsheets/factsheet_for_ epa_regulations_cost_predictions_are_overstated.pdf. On the tendency for economic modeling to under value the benefits of acting on climate, see http://static.newclimateeconomy.report/wp-content/uploads/2014/08/ NCE_Chapter5_EconomicsOfChange.pdf. Putting a Price on Carbon: A Handbook for U.S. Policymakers 36 | losses from the industries that shrink would lower overall employment in the economy and raise the unemployment rate,” but over time most of these displaced workers would find jobs in less emissions-intensive industries and the economy would eventually return to full employment. 119 As discussed in Section 5, the OECD found that using carbon-tax revenue to reduce labor taxes would lead to faster growth in total employment than would be the case in the absence of such a tax swap. 120 In the long run, carbon taxes are expected to improve economic growth significantly by mitigating adverse effects of climate change, and overall employment tends to grow with the economy as a whole. Rausch and Reilly (2012) argue for using tax revenue to offset either capital or labor taxes, to avoid spending cuts on social welfare programs, to pay down the deficit, or a combination thereof. They find that any of these suggested uses would lead to improvements throughout the economy, including greater private spending and employment. 121 There is some agreement in the economic literature that a well-designed carbon tax will not have a significant, adverse effect on employment, if revenues are directed in ways that can partially or fully offset any job losses. Fossil fuel extraction, heavy manufacturing, and other emis - sions-intensive industries would be affected the most, and the transition could be difficult for many communities. 122 Job training programs and a steady and predictable rate of increase in the carbon tax rate could help mitigate any job losses, but those will likely take some time for their impact to be felt. Further discussion on how to mitigate negative impacts on heavy industry can be found in Section 6.2.3. 6.2. Distributional Impacts 6.2.1. Effects of a Carbon Tax on Income A carbon tax increases the price of carbon-intensive fuels and, in the absence of any offsetting use of revenue, lower income households would bear a proportionally greater burden than higher income households because they tend to spend a higher proportion of their income on energy. 123 For example, CBO has found that a carbon tax of $28 per metric ton of CO 2 emissions would increase after-tax costs for the average household in the lowest quintile of the income distribution by 2.5 percent; for households in the top quintile, the carbon tax would increase after-tax costs by only one percent. 124 Marron and Toder (2013) found similar regressivity from a $20 per ton carbon tax—a 1.8 percent burden on the pre-tax income of the lowest quin -tile, but only a 0.7 percent burden on the top quintile. 125 At the extreme ends of the income distribution, the regres - sivity of a carbon tax is even more pronounced—Mathur and Morris (2012) found that an illustrative carbon tax of $15 per ton would account for 3.5 percent of income for households in the bottom decile, but only 0.6 percent in the top decile. 126 Several studies—including Mathur and Morris (2012), Dower and Zimmerman (1992), and Hassett et al. (2007) —find that a carbon tax is comparatively less regres - sive when looking at impacts on consumption instead of income. For example, when measuring the effect of a carbon tax on consumption, Mathur and Morris estimate that the same $15 per ton tax would reduce consumption in the bottom decile by 2.1 percent, and in the top decile by 1.3 percent. Due to this greater proportional burden on the poor than the rich, a carbon tax is considered a regressive tax, but this regressivity can be addressed through a variety of ways of returning revenues to lower income households. Williams et al. (2014) find that, while using carbon-price revenue to cut capital taxes improves economic efficiency, it exacerbates the regressivity of a carbon tax. 127 The authors found that using the revenue to provide dividends to households, however, would mean that the lower three quintiles of the income distribution would see a net benefit from the policy. Using revenues to reduce taxes on labor falls in between these two options, doing more to help lower income households than cutting capital taxes, but doing less than providing lump-sum dividends. Eisenberg et al. (2014) suggest that, to offset regressivity, tax revenues could go toward safety net programs that benefit the poor. 128 While this study analyzed state-level carbon taxes as a means for complying with carbon pollu - tion standards for power plants, the same approach could be used at the federal level. Existing federal programs that assist lower income families and individuals, and could be vehicles for distributing tax revenues to various constituencies, include Social Security, the Earned Income Tax Credit, Temporary Assistance for Needy Families, the Low Income Home Energy Assistance Program, and the Supplemental Nutritional Assistance Program (also called food stamps), among others. Other approaches include targeted tax cuts, such as the “environmental earned income tax credit” as proposed by Metcalf (2008), or including Social Security recipients in any payroll tax reduction (see Table 4) (Metcalf 2009). 129 Metcalf pro - WORKING PAPER | April 2015 | 37 Table 4 | Income Effects of a Carbon Tax, and Various Proposals to Reduce Regressivity Source: Metcalf, G. 2009. “Designing a Carbon Tax to Reduce U.S. Greenhouse Gas Emissions.” Review of Environmental Economics and Policy, Vol. 3, Iss. 1, Winter. Available at: http://reep. oxfordjournals.org/content/3/1/63.full.pdf+html Note: Illustrative example using a carbon tax of $15 per metric ton (in 2005 dollars). Positive numbers represent an increase in income, and negative numbers represent a decrease in income. “Tax credit” refers to a proposal to use carbon tax revenues to reduce payroll taxes, up to the first $560 in taxes owed. “Earned income and Social Security” is a proposal whereby Social Security recipients also receive a $560 rebate. And “Lump sum” is the effects of a proposal to return all revenues to households in the form of per capita lump-sum rebates of $274. Change in Disposable Income ($) Change as a Percentage of Income Income Group (decile) Carbon tax Tax credit NetCarbon tax Tax credit Net 1 (lowest) -276208 -68 -3.42.7-0.7 2 -404284 -120 -3.12.1-1 3 -485428 -57 -2.42.2-0.2 4 -551557 6 -22.1 0.1 5 -642668 26 -220.127.116.11 6 -691805 115 -18.104.22.168 7 -781915 135 -22.214.171.124 8 -883982 99 -126.96.36.199 9 -9651035 70 -1.11.1 0 10 (highest) -12241093 -130 -0.80.8 0 Earned Income Earned Income and Social Security Lump Sum Income Group (decile) Net ($) Net (%) Net ($) Net (%)Net ($)Net (%) 1 (lowest) -68-0.7 112 1.4166 2.1 2 -120 -1125 1128 1 3 -57-0.2 114 0.6120 0.6 4 60.1 70 0.3103 0.4 5 260.1 54 0.1108 0.3 6 1150.3 66 0.1260.1 7 1350.2 35 0.1-32-0.1 8 990.2 -61 -0.1-52-0.1 9 700 -95 -0.1-171 -0.2 10 (highest) -1300-332 -0.2-355 -0.2 Putting a Price on Carbon: A Handbook for U.S. Policymakers 38 | poses reducing payroll taxes for individuals up to a certain level of income, while ensuring that workers with low income tax liability receive enough support to ensure they are not adversely affected. Estimates of how much revenue is needed to offset much of this regressivity are more or less consistent across studies. Morris and Mathur (2014) find that ensuring the bottom 20 percent of households (those with incomes less than 150 percent of the poverty line) are not made worse off by a carbon tax would require about 15 percent of the revenue from the tax. 130 The analysis in Rosenbaum et al. (2009) of the Waxman-Markey cap-and-trade bill from 2009 found that the bill’s provision that 15 percent of auc - tion revenue be returned to low-income households would ensure that households in the bottom income quintile were made slightly better off, on average. A cap-and-trade program that auctions off all allowances functions in many ways like a carbon tax, so the findings are relevant to a carbon tax as well. For reference, CBO’s analysis of the Waxman-Markey bill found that, in 2020, the bill’s provi- sions for returning revenue to consumers meant that the average household in the bottom income quintile would see a net benefit of $125 per year. The other four quintiles would see a net annual cost, on average, as follows: second quintile $150, third quintile $310, fourth quintile $375, and top quintile $165. 131 6.2.2. Regional Implications of a Carbon Tax Gasoline, coal-fired electricity, and oil for home heating will all get more expensive under a carbon tax. Differing consumption patterns and fuel mixes in the electric grid between states and regions mean that a carbon tax will affect consumers differently depending on where they live. For example, the average driver in Wyoming drives nearly 22,000 miles per year—more than twice as far as drivers in Alaska and the District of Columbia. 132 In 2012, 92 percent of the electricity generated in Kentucky came from coal, while in Idaho that figure was less than one percent. 133 And carbon-heavy heating oil is a significant source of space heating in the Northeast, while much of the rest of the country relies much more heavily on less carbon-intensive fuels like natural gas, propane, or grid electricity to heat homes in wintertime (however, in states that are most heavily dependent on coal for electricity production, heating oil can be a less emissions-intensive method of home heating than grid electricity). 134 Neverthe - less, as discussed below, some policy options for returning revenues to households can make all regions better off. The Congressional Budget Office states that “[p]eople in regions of the country that rely on emission- intensive industries for their livelihood or that use the most emis - sion-intensive fuels to produce power” are likely to bear a larger burden from the imposition of a carbon tax than others, and “[p]arts of the country that rely on fossil fuels or energy-intensive production for income would experi - ence larger losses than other regions.” 135 Policymakers concerned with such effects have tools at their disposal to offset any increases in energy prices. For example, ACES devoted 23 percent of revenue in the early years to local electricity and natural gas distribution companies, to combat higher prices for those commodities. 136 Yet it is important not to focus just on electricity use, transportation costs, or any other single aspect of con - sumption, but rather to look at regional energy use and spending patterns more holistically. Morris and Mathur (2014) find that “regional analyses show that the burdens of a carbon tax as a share of income would not vary nearly as much as many fear,” because different regions have different consumption patterns for carbon-intensive goods and fuels, but relatively similar consumption patterns for non-energy goods and services. 137 That said, they find that Wisconsin, Illinois, Ohio, Indiana, and Michigan could see a slightly higher burden from a carbon tax due to their high gasoline consumption and greater total energy consumption as a share of income. Morris and Mathur are not alone in their conclusions, though the details do vary between studies. Metcalf also finds that a gradually increasing tax of $15 per ton CO 2 equivalent “does not appear to disproportionately burden one region of the country” after revenue is returned to households (Metcalf 2009). In analyzing the regional dis - tribution effects of a carbon tax, Metcalf finds that, when revenues are returned via a payroll tax credit, there is a mere 0.6 percent difference in earned income between the hardest hit region (Alabama, Kentucky, Mississippi, Ten - nessee) and the regions least affected by the tax (the upper Midwest and the Mountain West). And when revenues are returned to households via a combination of payroll tax reductions and Social Security rebates, this income discrepancy drops to 0.4 percent, with all regions better off (see Table 5). Hassett et al. found less in the way of regional effects in a 2009 study analyzing the impacts of a tax of $15 per ton of carbon dioxide emissions from fossil fuels when measured on a lifetime basis. The authors found that regional varia - tion in the burden from the carbon tax was modest even WORKING PAPER | April 2015 | 39 though their analysis did not look at uses of revenue, and that “variation across regions is sufficiently small that one could argue that a carbon tax is distributionally neutral across regions.” 138 Williams et al. (2014) found that, while a carbon tax would have a regionally diverse impact on electricity prices due to differing fuel mixes, those regional variations could be minimized through revenue recycling. 139 Using carbon-tax revenues to reduce taxes on capital would reduce the bur -den of the carbon tax, but do little to correct for regional disparities. A lump-sum rebate would be more beneficial for evening out the incidence of the carbon tax across regions but would lower overall welfare compared to a capital tax reduction. Reducing taxes on labor, however, nearly eliminated regional disparities in the incidence of the carbon tax, while providing much of the same eco - nomic benefit as reducing taxes on capital. Source: Metcalf (2009). Notes: Illustrative example using a carbon tax of $15 per metric ton (in 2005 dollars). Positive numbers represent an increase in income, and negative numbers represent a decrease in income. “Earned income and Social Security” is a proposal whereby Social Security recipients also receive a $560 rebate. And “Lump sum” is the effects of a proposal to return all revenues to households in the form of per capita lump sum rebates of $274. Regions are defined as follows: New England (Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont); Middle Atlantic (New Jersey, New York, Pennsylvania); East North Central (Illinois, Indiana, Michigan, Ohio, Wisconsin); West Nor th Central (Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota); South Atlantic (Florida, Georgia, Mar yland, North Carolina, South Carolina, Virginia, West Virginia); East South Central (Alabama, Kentucky, Mississippi, Tennessee); West South Central (Arkansas, Louisiana, Oklahoma, Texas); Mountain (Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah, Wyoming); and Pacific (Alaska, California, Hawaii, Oregon, Washington). Table 5 | Regional Distribution Effects of a Carbon Tax, With Two Proposals for Revenue Use Earned Income and Social Security Lump Sum Region Net ($)Net (%)Net ($)Net (%) New England -360.2-65-0.1 Middle Atlantic -130.2-18-0.2 East North Central -140.1-37-0.1 West North Central 520.5-26-0.2 South Atlantic 170.320.3 East South Central -60.3-75-0.2 West South Central -420.290.4 Mountain 460.5340.4 Pacific -40.2590.6 10 (highest) -332-0.2-355 -0.2 Putting a Price on Carbon: A Handbook for U.S. Policymakers 40 | 6.2.3. Impact of a Carbon Price on Industrial Competitiveness Some emissions-intensive industries could see a decline in demand for their products under a carbon tax. Some of those industries, such as electricity generation, don’t face competition from U.S. trade partners, simply because the vast majority of what is produced is not imported or exported. 140 Other emissions-intensive industries, however, such as steel, chemicals, and other large energy users, do face such competition, and higher prices on inputs could raise concerns that the United States will be a less attractive location for manufacturing and will lose international competitiveness, at least in the near term. However, these concerns may be unfounded, because many of the United States’ largest trading partners already have carbon-pricing policies in place (see Appendix A for more information on those countries’ policies). A 2009 interagency report assessing the impact of a national cap-and-trade program on international com - petitiveness found that, on average, energy expenditures account for less than two percent of the value of U.S. manufacturing output, and that the majority of industries would not be noticeably adversely affected by a carbon price. 141 Meanwhile, only 44 of the 500 largest manufac - turing industries qualified as trade-exposed, accounting for 12 percent of total manufacturing output and just six percent of manufacturing employment, although they were responsible for nearly half of all greenhouse gas emissions from manufacturing. Even a small increase in energy costs could make a big difference in industries with tight profit margins, however, so it is important for policymakers to take steps to address the reduced competitiveness of some industries. Under a cap-and-trade program, allowances can be freely allocated to vulnerable industries to mitigate their trade exposure. Under a carbon tax, however, the most direct way to cor - rect the disadvantage to these industries may be through a border adjustment. In this way, imports from countries without comparable carbon pricing policies would be sub - ject to a tariff according to the carbon content of the good, and exports to such countries would have at least some of their tax burden reduced. Implicit in such a measure is an inducement to our trading partners to enact their own carbon-pricing policies. Harmonized policies would have the advantage of generating domestic tax revenues rather than tariff payments to other countries, and the potential for a more effective multi-country effort to reduce emis - sions. Metcalf (2010) asserts that a border adjustment under a carbon tax is more likely to be compliant with World Trade Organization (WTO) rules than similar mea- sures under a cap-and-trade program. 142 Border tax adjustments are not without risk and some measure of controversy. First, compliance with WTO rules is not a given, though the WTO has acknowledged that it is possible to design a border tax for environmental reasons without running afoul of its rules. 143 The border adjust - ment must be designed in such a way that it does not favor domestically produced goods, or imports from certain countries. 144 If a provision were written in a way that takes into account the carbon-pricing policies of our trading partners, many (though not all) experts believe a U.S. carbon tax could pass muster with the WTO, though it could be challenged by other countries. 145 Second, a border adjustment has the potential to spark trade disputes if some countries believe that they are being unfairly singled out and retaliate with import tariffs of their own. 146 Lastly, border adjustments can be burdensome to implement, because the carbon content of a vast array of imported goods will be so difficult to determine. 147 7. CONCLUSION In this Handbook , we have laid out the fundamental choices available to policymakers considering policies that put an explicit price on carbon emissions. Most of these decisions will be the results of political compromises, and there are a number of precedents in the recent past for cooperation on this issue. While we can’t predict what the future might hold for carbon pricing and views differ sharply on some issues, a number of factors are in play that could increase the appeal of such a policy to different parts of the political spectrum in the United States in the coming years. Bipar tisan suppor t for federal tax reform The past five years have seen increasing calls for an overhaul of the federal tax code. Observers on both sides of the aisle, along with businesses and individual taxpay - ers, find it to be overly onerous and complicated, yet full of loopholes that allow individuals or companies to pay less than their fair share of taxes. The top marginal corporate tax rate is the highest in the developed world, yet a wide array of deductions means that the effective corporate tax rate is far lower, and closer to the average effective tax rate of other developed countries. 148 The tax code is also full of conflicting incentives; for example, fossil-fuel WORKING PAPER | April 2015 | 41 companies receive subsidies and targeted tax breaks, even as renewable-energy companies receive tax credits and subsidies for production and investment. All of these complications and inconsistencies in the tax code have led many in Congress to call for significant tax reform. In recent years, Republican and Democratic members of the Senate Finance Committee have discussed simplifying the tax code by replacing most or all energy subsidies and tax credits with a carbon tax or cap-and-dividend program. 149 Stated goals for deeper reductions in GHG emissions Under President Obama, the United States now has a plan in place to meet its near- and medium-term emissions reduction targets, and to continue driving reductions in emissions from the largest emitting sectors in the years beyond. However, analysis by WRI has shown that admin - istrative actions alone are likely insufficient to meet our long-term emissions target of roughly 83 percent below 2005 levels by 2050. 150 In short, the United States will need a comprehensive, economy-wide climate policy, such as a carbon tax or cap-and-trade program, if the country is to achieve the level of reductions that the IPCC says will be necessary from developed nations to avoid the worst impacts of climate change. Desire for alternative climate policies A price on carbon is both a fiscal and an environmental policy. In addition to using revenues to “pay for” reduc - tions in other taxes, as discussed above, some proponents advocate an economy-wide carbon price as an approach that is preferable to imposing sectoral emission standards, while others view such standards as important tools in their own right or as potentially complementary climate policies. Bipar tisan suppor t for deficit reduction While concerns about the national debt have subsided to some extent in the past few years, reducing long-term debt remains an issue with significant support from the general public and lawmakers on both sides of the aisle. A national carbon tax has the potential to raise hundreds of billions of dollars per year that could be used to improve the United States’ long-term fiscal situation. Experience at the state level In the absence of a national, economy-wide policy to reduce GHG emissions, some states have moved forward with their own carbon-pricing mechanisms. As discussed above, nine northeastern states operate a regional electricity sector cap-and-trade program, and California in 2012 initiated its own economy-wide cap-and-trade program. As of this writing, stakeholders in Massachusetts, Oregon, Vermont, and Washington, among others, are advocating for a carbon tax to raise revenue for transportation infrastructure or other purposes. And in response to the flexibility afforded them under the Clean Power Plan, many states are actively considering whether carbon pricing offers the least-cost way of complying with GHG emissions standards for power plants. Successful implementation of these policies at the state level could lessen resistance at the federal level for a similar carbon-pricing policy. Increased awareness of climate-related impacts From sea-level rise in Florida and Virginia, to increases in the frequency and severity of some types of extreme weather events, to protracted droughts in Texas and Cali - fornia, the United States is already seeing previews of what a warming planet holds in store. As climate impacts hit home, and their effects begin taking a toll on the economy, we might see public opinion become increasingly vocal on the need to act. A climate policy that puts a price on GHG emissions throughout the economy offers policymakers a proven, market-based solution to reduce the U.S. contri - bution to climate change and to raise revenues that can be invested in technologies that enable communities to better adapt to the impacts of climate change. While none of these factors alone will likely be enough to move Congress to put a price on carbon in the com - ing years, their confluence suggests a gradual mounting of pressure that could turn the tide. The world and the American people are increasingly serious about the need to act to avoid the worst impacts of climate change. 151 A comprehensive carbon-pricing policy provides the oppor - tunity to satisfy a variety of political goals beyond emis - sions reductions. We hope that this working paper—and future briefing papers that will dive more deeply into many of the issues raised here—can play a helpful role in the coming national conversation on these issues. Putting a Price on Carbon: A Handbook for U.S. Policymakers 42 | COUNTRYYEAR IMPLEMENTED PRICE PER TON CO 2E PORTION OF GHGS COVERED (%) REVENUE USAGE 152 Finland 1990 ▪€35 ($48) for heating fuels ▪€60 ($83) for liquid traffic fuels 15 ▪Reduce income taxes ▪Increase government revenue Norway 1991 Nkr25 to 419 ($4-69) in 2014; depending on fuel type and usage 50 ▪Increase government revenue Sweden 1991 Skr1076 ($168) 25 ▪Increase government revenue ▪Offset labor taxes Denmark 1992 Dkr167 ($31 in 2014) 45 ▪40 percent used as environmental subsidy ▪60 percent returned to industr y British Columbia 2008 C$30 ($28) in 2013/14 70 ▪Designed to be revenue neutral through income tax reductions and tax credits ▪Revenue negative in practice - tax cuts and credits have exceeded carbon tax revenue Switzerland 2008 SFr60 ($68) from 2014 30 ▪Dividend redistributed proportionally to industr y and consumers ▪Fund climate-friendly building renovations Iceland 2010 Íkr1120 ($10) 50 ▪Increase government revenue Ireland 2010 (extended to solid fuels in 2013) €20 ($28) from May 2014 40 ▪Increase government revenue ▪Reduce the deficit Japan 2012 ¥192 ($2) from April 2014, increasing to ¥289 ($3) in April 2016 70 ▪Invest in clean energy and energy efficiency Table A.1 | Carbon taxes around the world APPENDIX – GLOBAL CARBON PRICING SYSTEMS WORKING PAPER | April 2015 | 43 Table A.1 | Carbon taxes around the world (continued) PER TO Source: State and Trends of Carbon Pricing 2014, World Bank, Washington D.C. 2014. Dollar values are based on exchange rates as of December 31, 2013. Notes: a. Information from Reuters (“Chile becomes the first South American countr y to tax carbon,” Reuters, September 27, 2014) and Point Carbon (“Chile passes carbon tax,” Point Carbon,October 30, 2014). COUNTRY YEAR IMPLEMENTED PRICE PER TON CO 2E PORTION OF GHGS COVERED (%) REVENUE USAGE 152 United Kingdom2013 ▪EU ETS price floor of £16 ($26.23) in 2013 ▪Effective tax in April 2014 of £9.55 ($15.75) 25 ▪Reduce other taxes Mexico 2014 ▪Mex$10-50 ($1-4), depending on fuel Unclear – initial bill included natural gas and would have covered 40 percent ▪Increase government revenue France April 1, 2014 ▪€7 ($10) increasing to €14.5 ($20) in 2015 and €22 ($30) in 2016 Initial coverage: 35 percent ▪Fund energy transition plans South Africa Implementation planned in 2016 ▪R120 ($12) in 2016 ▪Increasing by 10 percent per year through 2019, then subject to review ▪During 2016-19, a basic tax-free threshold will be established, making the maximum effective tax rate R48 ($5) 80 ▪Likely to be a reduction in VAT or income taxes Chile a Goes into effect in 2018 ▪$5 per ton ▪No detail on price increases no data ▪Educational developments on climate change ▪Education system Australia Initiated July 2012; repealed in 2014 ▪A$24.15 ($21.54) from July 2013 60 ▪Revenue neutral: Reduce income tax and provide dividend to energy producers and consumers ▪Funded industr y assistance programs Putting a Price on Carbon: A Handbook for U.S. Policymakers 44 | Table A.2 | National and Sub-National Greenhouse Gas Cap-and-Trade Programs Around the World JURISDICTION YEAR IMPLEMENTEDEMISSIONS COVERED (%) 2013 PRICE PER TON CO 2E COVERED SECTORS European Union 200545$9Industr y, electricity, aviation New Zealand 200850$1Industr y, forestr y, transport, waste Switzerland 200810 Electricity, buildings U.S. Sub-national Programs ▪Regional Greenhouse Gas Initiative (RGGI) – NE United States 2009 20$3Electricity ▪California (linked with Quebec) 2013 85$11From 2013: Industr y, electricity; added in 2015: transport, distributed use of fuels Australia 2012; repealed 2014 60 $21.54 (fixed price) All large emission sources, including industr y, large gas consumers, and landfills Canada Sub-national Program Quebec (linked with California) 2013 85$10From 2013: Industr y, electricity; added in 2015: transport, distributed use of fuels Chinese Sub-national Pilots Tianjin 201360$4Industr y, electricity, buildings Beijing 201350$9Industr y, electricity, buildings Shanghai 201350$5Industr y, transport, electricity Guangdong 201342$10Industr y, electricity Shenzhen 201338$11Industr y, electricity, buildings Chongqing 2014 38 Electricity Hubei 2014 35 Industr y, electricity Kazakhstan 201350 Industr y, transport, electricity, agriculture South Korea 2015 (planned)60 Industr y, electricity Source: World Bank, State and Trends of Carbon Pricing 2014, unless otherwise noted. Notes: This table does not include Alberta (Canada) or Tokyo, Saitama and Kyoto (Japan), which have initiated trading systems based on emissions intensity. California’s program went into effect in 2012, but the first year for which covered entities had emissions obligations was 2013. The portion of emissions covered in California and Quebec reflects the increase in scope at the start of 2015 to include transportation fuels and distributed use of natural gas and other fuels. Australia’s system, which has now been repealed, was initiated with a fixed price and was therefore, in its initial stages, a carbon tax. WORKING PAPER | April 2015 | 45 BIBLIOGRAPHY Acemoglu, D., P. Aghion, L. Bursztyn and D. Hemous. “The Environment and Directed Technical Change.” FEEM Working Paper No. 93.2010. April 2010. http://ssrn.com/abstract=1668575 Amdur, D., B. Rabe and C. 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August 2009. “The Political Histor y of Cap and Trade.” Smithsonian Magazine. See: http://www.smithsonianmag.com/air/the- political-histor y-of-cap-and-trade-34711212/?page=2 3. World Bank. May 28, 2014. State and Trends of Carbon Pricing 2014. Washington, D.C.: World Bank. 4. Ontario Office of the Premier, “Statement of Intent Between the Government of Ontario and the Gouvernement Du Québec Concerning Cooperation on Market Based Mechanisms,” April 13, 2015. Available at: http://news.ontario.ca/opo/en/2015/04/statement-of-intent-between- the-government-of-ontario-and-the-gouvernement-du-quebec- concerning-coop.html 5. Interagency Working Group on Social Cost of Carbon, United States Government. Technical Support Document: Technical Update of the Social Cost of Carbon for Regulator y Impact Analysis Under Executive Order 12866. Revised November 2013. Available at: http://www. whitehouse.gov/sites/default/files/omb/assets/inforeg/technical-update- social-cost-of-carbon-for-regulator-impact-analysis.pdf 6. The University of Chicago Booth School of Business. December 4, 2012. Carbon Taxes II . Chicago: IGM Economic Experts Panel. Available at: http://www.igmchicago.org/igm-economic-experts-panel/ poll-results?Sur veyID=SV_8oABK2TolkGluV7 7. See, for example: Bento, A. and M. Jacobsen. 2007. “Ricardian Rents, Environmental Policy, and the “Double Dividend” Hypothesis.” Journal of Environmental Economics and Management 53(1): 17–31. 8. Carbone, J.C., R.D. Morganstern, R.C. Williams III, and D. Burtraw. August, 2013. “Deficit Reduction and Carbon Taxes: Budgetar y, Economic, and Distributional Impacts.” Washington, D.C.: Resources for the Future. Available at: http://www.weather vane.rff.org/RFF/ Documents/RFF-Rpt-Carbone.etal.CarbonTaxes.pdf 9. Mathur, A. and A. Morris. 2012. “Distributional Effects of a Carbon Tax in Broader U.S. Fiscal Reform.” Washington, D.C.: The Brookings Institution. Available at: http://www.brookings.edu/~/media/research/ files/papers/2012/12/14%20carbon%20tax%20fiscal%20reform%20 morris/14%20carbon%20tax%20fiscal%20reform%20morris.pdf 10. See, for example, Morris, A. and A. Mathur. “A Carbon Tax in Broader U.S. Fiscal Reform: Design and Distributional Issues.” 2014. Washington, D.C.: The Brookings Institution. Available at: http://www. brookings.edu/research/papers/2014/05/22-carbon-tax-in-broader-us- fiscal-reform-morris Additional studies are discussed in Section 5 of this paper. 11. Environmental Protection Agency. December 2, 2009. “The Effects of H.R. 2454 on International Competitiveness and Emission Leakage in Energy-Intensive Trade-Exposed Industries.” Washington, DC: Environmental Protection Agency. Available at: http://www.epa. gov/climatechange/Downloads/EPAactivities/InteragencyReport_ Competitiveness-EmissionLeakage.pdf 12. Shultz, George P. March 13, 2015. “A Reagan Approach to Climate Change.” Washington Post. Also available at: http:// www.washingtonpost.com/opinions/a-reagan-model-on-climate- change/2015/03/13/4f4182e2-c6a8-11e4-b2a1-bed1aaea2816_stor y. html 13. Paulson, Henr y M. June 21, 2014. “The Coming Climate Crash: Lessons for Climate Change in the 2008 Recession.” The New York Times. Also available at: http://www.washingtonpost.com/opinions/a- reagan-model-on-climate-change/2015/03/13/4f4182e2-c6a8-11e4- b2a1-bed1aaea2816_stor y.html 14. See http://republicen.org/ 15. See, for example, Mankiw, N. Gregor y. “Smart Taxes: An Open Invitation to Join the Pigou Club.” Eastern Economic Journal 35, 14-23 (2009). Available at: http://scholar.har vard.edu/files/mankiw/files/ smart_taxes.pdf 16. See, for example, Wolf, Amy. Februar y 20, 2012. “Economist Arthur Laffer Proposes Taxing Pollution Instead of Income.” Vanderbilt News. Also available at: http://news.vanderbilt.edu/2012/02/economist- arthur-laffer-proposes-taxing-pollution/ 17. See, for example, Green, Kenneth P., Hayward, Steven F., and Kevin A. Hassett. “Climate Change: Caps vs. Taxes.” American Enterprise Institute for Public Policy Research Environmental Policy Outlook No. 2, June 2007. Available at: https://www.aei.org/wp-content/ uploads/2011/10/20070601_EPOg.pdf 18. See “Considering a U.S. Carbon Tax,” Resources for the Future, accessed April 13, 2015, http://www.rff.org/centers/energy_and_ climate_economics/Pages/Considering-a-US-Carbon-Tax.aspx 19. See, for example, Morris, Adele C. and Aparna Mathur. May 2014. “A Carbon Tax in Broader U.S. Fiscal Reform: Design and Distributional Issues.” Washington, DC: Center for Climate and Energy Solutions. Available at: http://www.brookings.edu/research/papers/2014/05/22- carbon-tax-in-broader-us-fiscal-reform-morris 20. See, for example, “Idea of the Day: We Should Have a Progressive Carbon Tax,” Center for American Progress, December 6, 2012. Available at: https://www.americanprogress.org/issues/general/ news/2012/12/06/47139/idea-of-the-day-we-should-have-a- progressive-carbon-tax/ 21. “Carbon Fee and Dividend Explained,” Citizens Climate Lobby, accessed April 13, 2015, https://citizensclimatelobby.org/carbon-fee- and-dividend/ 22. Taylor, J. March 2015. “The Conser vative Case for a Carbon Tax.” Washington, DC: Niskanen Center. 23. See, for example, Thompson, T.M. et al. 2014. “A systems approach to evaluating the air quality co-benefits of US carbon policies.” Nature Climate Change 4, 917–923 (2014). Available at: http://www.nature. com/nclimate/journal/v4/n10/full/nclimate2342.html WORKING PAPER | April 2015 | 49 24. 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July 28, 2014. “When Politics Constrains Carbon Pricing, Part 3: Why Carbon Revenues Are Just As Important As ‘Putting a Price on Carbon.’” The Energy Collective. Available at: http://theenergycollective.com/jessejenkins/444186/when- politics-constraints-carbon-pricing-part-3-why-carbon-revenues-are- just-imp. 102. For example, federal support for new drilling techniques helped pave the way for the U.S. shale gas boom in recent years. See Box 1.1 of Bianco, N. et al. 2014. “Seeing is Believing: Creating a New Climate Economy in the United States.” Working Paper. Washington, D.C.: World Resources Institute. Available at: http://www.wri.org/publication/ new-climate-economy. 103. The Global Commission on the Economy and Climate, Better Growth, Better Climate, Executive Summar y. Available at: http://static. newclimateeconomy.report/wp-content/uploads/2014/08/NCE_ ExecutiveSummar y.pdf 104. Bianco, N. et al. 2014. “Seeing is Believing: Creating a New Climate Economy in the United States.” Working Paper. Washington, D.C.: World Resources Institute. Available at: http://www.wri.org/publication/ new-climate-economy 105. See: Acemoglu, D. et al. and Fischer, C. et al. 106. Amdur, D., B. Rabe and C. Borlick. “Public Views on a Carbon Tax Depend on the Proposed Use of Revenue.” CLOSUP (Center for Local, State and Urban Policy), University of Michigan. July 2014. http:// closup.umich.edu/files/ieep-nsee-2014-spring-carbon-tax.pdf 107. Center on Budget and Policy Priorities. May 12, 2008. “Climate Change Policies Can Treat Low-Income Families Fairly and Be Fiscally Responsible.” Available at: http://www.cbpp.org/files/climate-brochure. pdf 108. Pew Center on Global Climate Change. August, 2009. “Distribution of Allowances Under the American Clean Energy and Security Act (Waxman-Markey).” Pew Center, Washington, D.C. Available at: http:// www.c2es.org/docUploads/policy-memo-allowance-distribution-under- waxman-markey.pdf 109. Horowitz, C., M.R. Enion, S.B. Hecht and A. Carlson. “Spending California’s Cap-and-Trade Auction Revenue: Understanding the Sinclair Paint Risk Spectrum.” Emmitt Center on Climate Change and the Environment, UCLA School of Law. March 2012. http://law. ucla.edu/~/media/Files/UCLA/Law/Pages/Publications/CEN_EMM_ PUB%20Spending_CA_Cap_Trade_Revenue.ashx 110. For more information, see: http://www.arb.ca.gov/cc/capandtrade/ auctionproceeds/budgetappropriations.htm 111. Parr y, I., and R. Williams III. 2011. “Moving U.S. Climate Policy Forward: Are Carbon Taxes the Only Good Alternative?” Washington, D.C.: Resources for the Future. Available at: http://www.rff.org/RFF/ Documents/RFF-DP-11-02.pdf 112. Goulder, L.H. and M.A. C. Hafstead. October 8, 2013. “Tax Reform and Environmental Policy: Options for Recycling Revenue from a Tax on Carbon Dioxide”. Washington, D.C.: Resources for the Future. Available at: http://ssrn.com/abstract=233821 113. Regional Economic Models, Inc. and Synapse Energy Economics, Inc. 2014. “The Economic, Climate, Fiscal, Power, and Demographic Impact of a National Fee-and-Dividend Carbon Tax.” Available at: http://dv7gcmvxe5e8l.cloudfront.net/wp-content/uploads/2014/09/ The-Economic-Climate-Fiscal-Power-and-Demographic-Impact-of-a- National-Fee-and-Dividend-Carbon-Tax-6.9.14.pdf 114. Carbone, J.C., R.D. Morganstern, R.C. Williams III, and D. Burtraw. August, 2013. “Deficit Reduction and Carbon Taxes: Budgetar y, Economic, and Distributional Impacts.” Washington, D.C.: Resources for the Future. Available at: http://www.weather vane.rff.org/RFF/ Documents/RFF-Rpt-Carbone.etal.CarbonTaxes.pdf 115. McKibbin, W.J., A. Morris, P.J. Wilcoxen, and Y. Cai. July 24, 2012. “The Potential Role of a Carbon Tax in U.S. Fiscal Reform.” Climate and Energy Economics Discussion Paper. Washington, D.C.: Brookings Institution. Available at: http://tinyurl.com/btkd5xf 116. Eisenberg, S., M. Wara, A. Morris, M. Darby, and J. Minor. 2014. “A State Tax Approach to Regulating Greenhouse Gas Emissions Under the Clean Air Act.” Washington, D.C.: The Brookings Institution. Available at: http://www.brookings.edu/research/papers/2014/05/22-state-tax- regulating-greenhouse-gas-clean-air-act-morris WORKING PAPER | April 2015 | 53 117. CBO (Congressional Budget Office). 2013. 118. CBO (Congressional Budget Office). May, 2010. “How Policies to Reduce Greenhouse Gas Emissions Could Affect Employment.” Washington, D.C.: CBO, Available at: http://www.cbo.gov/sites/default/ files/05-05-capandtrade_brief.pdf 119. Ibid. According to CBO, “The length of time required for [the economy to return to full employment] would depend on a number of factors. One would be the ability of firms and workers to foresee and act quickly on the changes in prices and to implement the changes that would be required in their output, training, and other activities. Another factor would be the extent to which shrinking industries are concentrated in small communities in which other opportunities for employment are limited, requiring laid-off workers to relocate in order to find new employment. The U.S. economy has adjusted fairly quickly to past changes in the economic environment, including the changes brought about by the rapid development of computer and information technologies, which destroyed many jobs but created many others, and the increase in international trade, which shifted many manufacturing jobs out of the countr y but probably contributed to the growth of ser vice jobs.” 120. Chateau et al., 2011. 121. Rausch, S., and J. Reilly. August, 2012. “Carbon Tax Revenue and the Budget Deficit: A Win-Win-Win Solution?” MIT Joint Program on the Science and Policy of Global Change. August 2012. Cambridge, MA: Massachusetts Institute of Technology. Available at: http://184.108.40.206/ bitstream/handle/1721.1/72548/MITJPSPGC_Rpt228.pdf ?sequence=1 122. For more information on the decline of coal-reliant communities in recent decades, see: http://www.washingtonpost.com/blogs/wonkblog/ wp/2013/11/04/heres-why-central-appalachias-coal-industr y-is-dying/ 123. See, for example: Dower, R. and M.B. Zimmerman. 1992. “The Right Climate for Carbon Taxes: Creating Economic Incentives to Protect the Atmosphere.” Washington, D.C.: World Resources Institute. Available at: http://www.wri.org/sites/default/files/pdf/rightclimateforcarbontaxes_ bw.pdf. Dower and Zimmerman find that poorer households spend as much as five times as much on energy as do richer households, when measured as a percentage of income 124. CBO (Congressional Budget Office). May 2013. “Effects of a Carbon Tax on the Economy and the Environment.” Washington, D.C.: Available at: http://www.cbo.gov/sites/default/files/44223_Carbon_0.pdf 125. Marron, D. and E. Toder. Februar y, 2013. “Carbon Taxes and Corporate Tax Reform.” Washington, D.C.: Urban-Brookings Tax Policy Center. Available at: http://www.taxpolicycenter.org/UploadedPDF/412744- Carbon-Taxes-and-Corporate-Tax-Reform.pdf 126. Mathur, A. and A. Morris. 2012. “Distributional Effects of a Carbon Tax in Broader U.S. Fiscal Reform.” Washington, D.C.: The Brookings Institution. Available at: http://www.brookings.edu/~/media/research/ files/papers/2012/12/14%20carbon%20tax%20fiscal%20reform%20 morris/14%20carbon%20tax%20fiscal%20reform%20morris.pdf 127. Williams III, R., H. Gordon, D. Burtraw, J. Carbone, and R. Morgenstern. August, 2014. “The Initial Incidence of a Carbon Tax Across Income Groups.” Washington, D.C.: Resources for the Future. Available at: http://www.rff.org/RFF/Documents/RFF-DP-14-24.pdf 128. Eisenberg et al., 2014. 129. Metcalf, G. 2009. “Designing a Carbon Tax to Reduce U.S. Greenhouse Gas Emissions.” Review of Environmental Economics and Policy , Vol. 3, Iss. 1, Winter. Available at: http://reep.oxfordjournals.org/ content/3/1/63.full.pdf+html 130. Morris, A. and A. Mathur. 2014. “A Carbon Tax in Broader U.S. Fiscal Reform: Design and Distributional Issues.” Washington, D.C.: The Brookings Institution. Available at: http://www.brookings.edu/research/ papers/2014/05/22-carbon-tax-in-broader-us-fiscal-reform-morris 131. Rosenbaum, D., S. Parrott, and C. Stone. October, 2009. “How Low- Income Consumers Fare in the House Climate Bill.” Washington, D.C.: Center on Budget and Policy Priorities. Available at: http://www.cbpp. org/files/7-8-09climate.pdf 132. U.S. Department of Transportation, Federal Highway Administration. “State and Urbanized Area Statistics.” Available at: http://www.fhwa.dot. gov/ohim/onh00/onh2p11.htm Accessed on December 11, 2014. 133. U.S. Energy Information Administration. “Electricity: Detailed State Data.” Available at: http://www.eia.gov/electricity/data/state/ Accessed on December 11, 2014. 134. U.S. Energy Information Administration. “Household heating fuels var y across the countr y.” Available at: http://www.eia.gov/todayinenergy/ detail.cfm?id=3690. Accessed on December 11, 2014. 135. CBO, 2013. 136. Pew Center, 2009. Available at: http://www.c2es.org/docUploads/ policy-memo-allowance-distribution-under-waxman-markey.pdf 137. Morris and Mathur, 2014. 138. Hassett, K., A. Mathur, and G. Metcalf. 2009. “The Incidence of a U.S. Carbon Tax: A Lifetime and Regional Analysis.” The Energy Journal. Vol. 30, No.2. Available at: https://www.aeaweb.org/assa/2009/retrieve. php?pdfid=346 139. Williams III, R., H. Gordon, D. Burtraw, J. Carbone ,and R. Morganstern. October, 2014. “The Initial Incidence of a Carbon Tax Across U.S. States.” Washington, D.C.: Resources for the Future. Discussion Paper. Available at: http://www.rff.org/RFF/Documents/RFF-DP-14-25.pdf 140. For example, in 2012, the United States consumed 3.8 billion megawatt-hours of electricity. Of that total, less than 60 million megawatt-hours were imported from Canada or Mexico. See: http:// www.eia.gov/electricity/annual/html/epa_02_02.html and http://www. eia.gov/electricity/annual/html/epa_02_13.html 141. EPA (U.S. Environmental Protection Agency). December 2, 2009. “The Effects of H.R. 2454 on International Competitiveness and Emission Leakage in Energy-Intensive Trade-Exposed Industries.” Washington, D.C.: EPA. Available at: http://www.epa.gov/climatechange/Downloads/ EPAactivities/InteragencyReport_Competitiveness-EmissionLeakage.pdf 142. Metcalf, G.E. 2010. “Submission on the Use of Carbon Fees to Achieve Fiscal Sustainability in the Federal Budget.” Submission to Commission . Available at: http://works.bepress.com/gilbert_ metcalf/86 Putting a Price on Carbon: A Handbook for U.S. Policymakers 54 | 143. See: “WTO Signals Backing for Border Taxes.” Financial Times, June 25, 2009. Available at: http://www.ft.com/intl/cms/s/0/1be7d034-61b6- 11de-9e03-00144feabdc0.html#axzz3Vaj4M5MQ 144. For GATT rules, see: http://www.wto.org/english/docs_e/legal_e/ gatt47_e.pdf 145. See, for example: http://papers.ssrn.com/sol3/papers.cfm?abstract_ id=2026879 and http://www.gmfus.org/wp-content/blogs.dir/1/ files_mf/1374767060Hillman_CarbonTaxes_Jun13_web.pdf For an alternate viewpoint, see: http://www.brookings.edu/~/media/ events/2008/6/09%20climate%20trade/2008_bordoff.pdf. For a summar y of challenges to WTO compliance, see http://papers.ssrn. com/sol3/papers.cfm?abstract_id=2163203 146. See Holzer et al. 147. For a discussion of the challenges surrounding how to determine the carbon content of imported goods, see: http://www.iisd.org/pdf/2008/ cph_trade_climate_carbon.pdf 148. Gravelle, J. Januar y 6, 2014. “International Corporate Tax Rate Comparisons and Policy Implications.” Washington, D.C.: Congressional Research Ser vice. Available at https://www.fas.org/sgp/ crs/misc/R41743.pdf 149. See: http://www.finance.senate.gov/issue/?id=8b4a11ec-b93f-43bd- 8f72-fbc4f4768989 150. Bianco, N. et al. 2013. For the United States’ commitment to reduce its emissions by 83 percent below 2005 levels by 2050, see: “United States Submission to the Copenhagen Accord, Appendix 1,” United States Department of State, Januar y 28, 2010, http://unfccc.int/files/meetings/ cop_15/copenhagen_accord/application/pdf/unitedstatescphaccord_ app.1.pdf 151. See, for example: Coral Davenport and Marjorie Connelly. Januar y 30, 2015. “Most Republicans Say They Back Climate Action, Poll Finds.” The New York Times. http://www.nytimes.com/2015/01/31/us/politics/ most-americans-support-government-action-on-climate-change-poll- finds.html?_r=0 152. Source: Sumner et al., 2009. WORKING PAPER | April 2015 | 55 Putting a Price on Carbon: A Handbook for U.S. Policymakers ABOUT WRI World Resources Institute is a global research organization that turns big ideas into action at the nexus of environment, economic opportunity and human well-being. Our Challenge Natural resources are at the foundation of economic opportunity and human well-being. But today, we are depleting Earth’s resources at rates that are not sustainable, endangering economies and people’s lives. People depend on clean water, fertile land, healthy forests, and a stable climate. Livable cities and clean energy are essential for a sustainable planet. We must address these urgent, global challenges this decade. Our Vision We envision an equitable and prosperous planet driven by the wise manage- ment of natural resources. We aspire to create a world where the actions of government, business, and communities combine to eliminate poverty and sustain the natural environment for all people. Our Approach COUNT IT We start with data. We conduct independent research and draw on the latest technology to develop new insights and recommendations. Our rigorous analysis identifies risks, unveils opportunities, and informs smart strategies. We focus our efforts on influential and emerging economies where the future of sustainability will be determined. CHANGE IT We use our research to influence government policies, business strategies, and civil society action. We test projects with communities, companies, and government agencies to build a strong evidence base. Then, we work with partners to deliver change on the ground that alleviates poverty and strength- ens society. We hold ourselves accountable to ensure our outcomes will be bold and enduring. SCALE IT We don’t think small. Once tested, we work with partners to adopt and expand our efforts regionally and globally. We engage with decision-makers to carr y out our ideas and elevate our impact. We measure success through government and business actions that improve people’s lives and sustain a healthy environment. ABOUT THE AUTHORS Kevin Kennedy is deputy director of the U.S. Climate Initiative in the Global Climate Program. He directs the research and manages the staff of the Initia- tive, which is working to make the economic, technical, and political case for deep emissions reductions in the U.S. in the coming decades. Prior to joining WRI, Kevin led the Office of Climate Change as Assistant Executive Officer at the California Air Resources Board. In this role, he oversaw implementation of the California Global Warming Solutions Act of 2006, including development of California’s cap-and-trade program and the range of other measures the state is using to reduce greenhouse gas emissions. Contact: [email protected] Michael Obeiter is a Senior Associate in WRI’s Global Climate Program. As a member of the U.S. Climate Initiative, he works to advance climate and clean energy policies at the national level. His work focuses on methane emissions from natural gas, power plant standards, and carbon taxes. Prior to joining WRI, Michael was the analyst for energy and environment for the Senate Budget Committee. Contact: [email protected] Noah Kaufman is an economist for the U.S. Climate Initiative in the Global Climate Program. The focus of his work is on carbon pricing and other market-based climate change solutions. Noah also works on projects related to the economic impacts of climate change and assists WRI’s Economics Team with its work across the organization. Prior to joining WRI, Noah worked for the Environment Practice at NERA Economic Consulting. He specialized on projects related to the economics of environmental and energy policies, as well as evaluating the impacts to the economy and to the electricity grid of infrastructure investments and energy policies. Contact: [email protected] Copyright 2015 World Resources Institute. This work is licensed under the Creative Commons Attribution 4.0 International License. To view a copy of the license, visit http://creativecommons.org/licenses/by/4.0/ 10 G Street, NE | Washington, DC 20002 | www.WRI.org ACKNOWLEDGMENTS The authors would like to thank the following individuals for their valuable insights and critical reviews of this work: Bradley Abelow, Sam Adams, Juan Carlos Altamirano, David Bailey, Christina DeConcini, Greg Dotson, Craig Hanson, Karl Hausker, Dave Hawkins, Bob Inglis, David Jenkins, Nat Keo- hane, Tom Kerr, Noah Kirsch, Ray Kopp, John Larsen, Eli Lehrer, Kelly Levin, Larr y Linden, Aparna Mathur, Michael McCormick, Eliot Metzger, Jennifer Morgan, Helen Mountford, Derek Murrow, Alex Perera, Kevin Rennert, Danny Richter, Roger Ullman, Laura Malaguzzi Valeri, and Gernot Wagner. The authors would also like to thank Emily Matthews for copyediting and proofreading. In addition, we thank Carni Klirs, Julie Moretti, and Hyacinth Billings for publication layout and design. Funding for this project was pro- vided by the Linden Trust for Conser vation. While our reviewers were ver y generous with their time and advice, this working paper represents the views of the authors alone. Capstone Project!! State Energy Efficiency Tax Incentives for Industry WRITTEN BY: Sandy Glatt Technology Delivery Team Member Office of Industrial Technologies Program Golden Field Office U.S. Department of Energy [email protected] Garrett Shields Research Associate BCS, Incorporated [email protected] State Policy Series: Impacting Industrial Energy Efficiency June 2010 CONTENTS Executive Summary ........................................................................ ................................... 4 Overview of Industrial Tax Incentives ........................................................................ ..... 5 Federal Energy Efficiency Tax Incentives. .................................................................................. 5 State Energy Efficiency Tax Incentives. ...................................................................................... 6 Spotlight on Oregon. ........................................................................ ......................................... 8 Energy Use in U.S. Industry ........................................................................ ...................... 9 Industrial Energy Efficiency Impacts for States ............................................................. 9 Conclusion ........................................................................ ................................................ 10 Appendix: Economic Tax Incentives with Potential Use for Energy Efficiency ......... 11 References ........................................................................ ................................................. 13 4 TAX INCENTIVES FOR INDUSTRY EXECUTIVE SUMMARY Offering tax incentives is one of the ways states utilize policy and regulation to encourage the industrial sector to improve its energy efficiency. There are also instances where renewable-energy tax incentives and economic- development tax incentives can be used for energy efficiency projects. However, the most effective way to directly impact industrial energy efficiency through tax incentives is with an energy efficiency targeted incentive. Despite the existence of a few federal-level energy efficiency tax incentives, state-level energy efficiency tax incentives can also be of value to industry. States are likely to have a greater understanding of the local needs of industry and can utilize energy efficiency tax incentives to keep and attract new industry for economic purposes. At the time this report was published, only 11 states were found to have a total of 15 energy efficiency tax incentives available to industry. Oregon was the established leader, offering four of the 15 incentives. Following is a list of the states that offered energy efficiency tax incentives: In terms of industrial energy consumption, only two of the top 15 states —Kentucky and South Carolina—offer state-level energy efficiency tax incentives for industry. 1 This indicates that many of the states with the largest potential to realize savings from improvements in industrial energy efficiency are not offering tax incentives specifically targeted for this purpose. In addition, despite the two states offering these incentives being from the South, there are still six other Southern states in the top 15 that do not have any ener gy efficiency tax incentives for industry. This is significant, as the South’s industrial sector has been identified as a region with enormous potential for energy and financial savings through the implementation of energy efficiency. 2 Because the industrial sector accounts for approximately one-third of the total energy used in the United States, it is an important opportunity for making energy efficiency impacts. 3 Improving industrial energy efficiency through measures like tax incentives can have beneficial environmental and economic impacts on the states that offer them. Reduced energy consumption within industry translates to energy cost savings that can make manufacturers more competitive, lead to economic development and job creation, and ensure continued location of industry within the state. Energy efficiency improvements of 10%–20% are likely to be available within most existing industrial facilities. 4 It is often financial considerations, including the rate of payback on investment, that constrain manufacturers in their decisions to implement energy efficiency projects. Offering industrial energy efficiency tax incentives is one way for states to assist industry in reducing the payback period and lowering the cost of implementation to capture the energy, environmental, and economic benefits resulting from those improvements. • Kansas • Montana • South Carolina • Kentucky • New Mexico • Virginia • Maryland • New York • Washington • Massachusetts • Oregon 5 TAX INCENTIVES FOR INDUSTRY OVERVIEW OF INDUSTRIAL TAX INCENTIVES There are three primary types of tax incentives available to industry that can be used for energy-related projects. The first two—renewable-energy tax incentives and energy efficiency tax incentives—specifically focus on energy. The third is an economic-development tax incentive. These tax incentives are most commonly seen in the form of sales tax exemptions or tax credits. A sales tax exemption will allow the purchaser of a product, such as an energy-efficient motor, to be exempt from paying tax on that purchase. A tax credit, on the other hand, allows a company to deduct the tax credit amount from their annual taxes. Tax credits are typically offered as a fixed amount or as a percentage of a purchase price up to a maximum amount. Currently, renewable-energy tax incentives are more widely available than energy efficiency tax incentives— for industry, as well as other sectors in the economy. However, the number of available energy efficiency tax incentives is growing. Although these renewable tax incentives encourage the production of renewable energy, most do not specifically address reducing overall energy use. Despite not necessarily reducing consumption, these renewable-energy tax incentives help insulate the manufacturer from peak hour energy pricing if the renewable generation is located onsite and can assist the utility provider with load management. Energy efficiency tax incentives for industry are often underutilized by state governments as a means for meeting environmental- and energy-related goals. Most available state-level energy efficiency tax incentives are focused on residential or commercial energy, even though the industrial sector consumes more energy. 5 States looking to reduce carbon emissions and improve overall energy efficiency could have greater success in achieving these goals by refining their efforts to include more industrial energy efficiency tax incentives. Improving industrial energy efficiency is an excellent way for states to reign in their energy consumption in order to bolster the competitiveness of local industry and spur economic development and job creation. Although industrial energy consumption accounts for one-third of the national total, only 11 states currently have energy efficiency tax incentives available to the industrial sector. 6 An industrial plant looking to improve its energy efficiency also has a third option in terms of tax incentives. It can use a flexible, non-energy-efficiency tax incentive to make energy efficiency improvements, including • Investment tax credits • Production incentives • Accelerated depreciation • Property tax abatement • Tax exempt interest financing. For a list of state non-energy-efficiency tax incentives that could potentially be used for reducing costs associ - ated with energy efficiency projects, see the Appendix . Federal Energy Efficiency Tax Incentives There are currently four federal tax incentives that are specifically aimed at improving energy efficiency in the industrial sector: • Combined Heat and Power (CHP) Investment Tax Credit • Energy Efficiency Product Manufacturers Tax Credit • Business Tax Incentive for Commercial Buildings • Advanced Energy Manufacturing Tax Credit (48C). The CHP tax incentive is a 10% investment tax credit for the costs of the first 15 megawatts (MW) of an eligible CHP property, and the American Recovery and Reinvestment Act (ARRA) has updated the incentive to allow eligible taxpayers to receive a grant from the U.S. Department of Treasury instead of the investment tax credit. 7 The Energy Efficiency Product Manufacturers Tax Credit, which includes items such as refrigerators and washers, is capped at $75 million, and, although, the credit is only available to manufacturers, the savings should be reflected in the consumer’s price. 8 The Business Tax incentive for Commercial Buildings allows a tax deduction amount per square foot and up to 35%–50% of the energy savings. 9 The Advanced 6 TAX INCENTIVES FOR INDUSTRY Energy Manufacturing Tax Credit, or 48C, was established by the ARRA and authorized $2.3 billion for advanced energy projects. 10 Federal tax incentives are important because they have the potential to impact energy efficiency across industrial sectors and locations; however, this should not overshadow the added benefits that state energy efficiency tax incentives can offer. States better understand the needs of their industrial sectors and can utilize tax policy as a tool for reducing carbon emissions to meet state environmental goals and promote local economic growth and sustainability. State Energy Efficiency Tax Incentives At the time of this report’s publication, 11 states were offering industry a total of 15 state-level energy efficiency tax incentives. This means that less than 25% of the 50 states offer tax incentives specifically aimed at improving industrial energy efficiency. Oregon is currently the leader, offering four separate energy efficiency tax incentives. Below, Exhibit 1 displays the states that offer the industrial energy efficiency tax incentive and the type of incentive each state offers. Additionally, three industrial energy efficiency tax incentives are offered at the sub-state, local level, which are not included in the state-level table in Exhibit 1. Two are offered by different counties in Maryland, and one is offered by the City of Cincinnati in Ohio. Exhibit 1: State Energy Efficiency Tax Incentives for Industry Kansas Waste Heat Utilization System 11 Kentucky Kentucky Environmental Stewardship Act 12 Maryland Property Tax Exemption for High Performance Buildings 13 Massachusetts Alternative Energy and Energy Conservation Patent Deduction 14 Montana Energy Conservation Investment 15 New Mexico Sustainable Building Tax Credit 16 New York Green Building Tax Credit 17 Oregon Energy Efficiency Tax Credit 18 Oregon New Construction Tax Credit Program 19 Oregon High Efficiency Combined Heat and Power Tax Incentive 20 Oregon Sustainable Building Tax Credit 21 South Carolina Commercial Tax Incentives 22 South Carolina Credit for Energy Conservation and Renewable Energy 23 Virginia Energy Efficient Buildings Tax Exemption 24 Washington Energy Efficient Commercial Equipment Tax Credit 25 Exhibit 2 lists the states according to their industrial energy consumption rank, where only two of the top 15 states—Kentucky and South Carolina—offer an industrial energy efficiency tax incentive. 26 Those states offering industrial energy efficiency tax incentives are also identified in Exhibit 2. Interestingly, those states with the lowest industrial energy consumption do not offer industrial energy ef - ficiency tax incentives. However, this is likely due to the smaller concentration of industry within those states compared to the rest of the country. Seven of the eight lowest-consuming states in Exhibit 2 are also among the 15 states with the smallest amount of industry in terms of value of shipment. 27 This means their lower industrial energy consumption does not imply an existing level of greater energy efficiency, but most likely reflects the existence of a smaller industrial sector. These states, therefore, could still realize gains through programs such as industrial energy efficiency tax incentives. The majority of states offering industrial energy ef - ficiency tax incentives are found in the middle 50% in terms of industrial energy consumption. This indicates a considerable opportunity to achieve significant sav - ings among the states with the largest industrial energy consumption. This can be understood by considering the impact of a 10% increase in energy efficiency across the industrial sector in Texas compared to another state. If Texas improved its industrial energy efficiency by 7 TAX INCENTIVES FOR INDUSTRY 0-599 Trillion Btu 600-999 Trillion Btu * 1000-1999 Trillion Btu * 2000+ Trillion Btu * * States consuming 600+ Trillion Btu comprise the top 15 consuming states States o ering industrial energy e ciency tax incentives WA 521.0 TX 5950.9 LA 2403.8 CA 1955.7 OH 1347.8 IN 1345.8 PA 1288.8 IL 1202.5 AL 941.6 WI 623.5 OK 588.3 MN 578.4 NY 504.6 AR 463.7 MS 454.1 NJ 452.1 MO 428.9 KS 426.0 CO 399.0 IA 492.2 SC 620.9 WV 396.1 VA 567.4 NC 643.7 TN 740.1 MI 818.6 FL 558.9 GA 887.4 KY 891.6 AK 356.3 OR 284.2 WY 263.4 NM 251.9 AZ 231.7 UT 224.9 NV 201.4 NE 224.2 SD 74.8 ND 198.8 MA 195.6 RI 23.5 NH 44.6 ID 186.9 MT 186.4 MD 184.0ME 146.7 CT 115.2 DE 101.1 HI 68.3 VT 29.4 Exhibit 2: Industrial Energy Efficiency Tax Incentives and Estimated 2007 Industrial Energy Consumption by State Source: Exhibit 1: State Energy Efficiency Tax Incentives for Industry. Energy Information Administration, Table S6. Industrial Sector Energy Consumption Estimates, 2007, http://www.eia.doe.gov/emeu/states/sep_sum/html/sum_btu_ind.html . 10% they would save approximately 595.1 trillion Brit - ish thermal units (Btu). This would be enough energy to power all of Oklahoma’s industry—the 16th largest in the United States in terms of energy usage—for an en - tire year (at current consumption levels). 28 This scenario indicates that states with industrial sectors that have high levels of energy usage will be more likely to have a larger potential for energy savings through energy ef - ficiency measures, which could have marked impacts. It is important to further underscore the energy effi - ciency potential of the top-consuming states in Exhibit 2. Eight of the top 15 states are located in the Southern region of the United States—as defined by the U.S. Census Bureau—and only two of these eight Southern states offer energy efficiency tax incentives for indus - try. 29 This is significant, as the South has been identi - fied as the region with the largest potential for energy efficiency improvement among the four U.S. Census regions. 30 A report released by the U.S. Department of Energy’s (DOE) Industrial Technologies Program (ITP) in December 2009 estimated that if the South could lower their industrial energy intensity down to the national average within the five sectors where they are furthest behind, an approximate 1,763 trillion Btu and $19.4 billion could be saved. 31 Therefore, the energy and financial savings of the top-consuming states would be even larger if they were all to pursue measures that encouraged becoming energy efficiency leaders, such as offering tax incentives to manufacturers wishing to make efficiency investments. 8 TAX INCENTIVES FOR INDUSTRY Exhibit 3: Industrial GDP per Million Btu Consumed in Real (2000) Dollars $0 $50 $100 $150 $200 $250 Louisiana California Texas Oregon 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 Sources: Bureau of Economic Analysis, GDP by States, http://www.bea.gov/regional/gsp/ . Energy Information Administration, State Energy Data System, http://www. eia.doe.gov/emeu/states/_seds.html . Spotlight on Oregon Oregon offers industry the largest number of tax incentives specifically aimed at improving energy efficiency. The four tax incentives include • A tax credit for businesses for energy efficiency projects, offering a credit of 35%–50% of the cost of cost of the system or equipment that is beyond standard practice 32 • A tax credit for energy efficiency equipment installed during construction, up to 35% of the costs associated with ensuring the project exceeds industry standards 33 • A combined heat and power tax incentive for 50% of the cost of the project 34 • A Sustainable Building Tax Credit offered to businesses with buildings that meet the U.S. Green Building Council´s Leadership in Energy and Environmental Design (LEED) standards. 35 Offering energy efficiency tax incentives is one of many ways in which the Oregon Department of Energy’s Conservation Division has worked to improve the energy efficiency of its industrial sector. The results are telling— even as the gross state product of Oregon’s industry has continued to grow from 1997 to 2007 at an average rate of 8.4%, its energy consumption per dollar of gross product has decreased. 36 This shows that it is taking Oregon less energy each year to produce the same amount of gross domestic product (GDP), meaning their efficiency has been increasing at a significant rate. Exhibit 3 displays this improvement alongside the top three states in terms of industrial energy consumption. Oregon shows a steady and significant improvement over the past 10 years, and, by 2004, Oregon has surpassed the both Texas and California in its ability to use energy efficiently to produce industrial goods. 9 TAX INCENTIVES FOR INDUSTRY ENERGY USE IN U.S. INDUSTRY Although industrial energy consumption as a percentage of the total national energy consumption has declined since the middle of the 20th century, it still accounts for over 30% of the national total. ITP’s 2007 Impacts report states that, “In recent years, the industrial sector has… produced about 1,670 million metric tons (MMT) of CO2 per year, contributed 12% to the overall U.S. gross domestic product (GDP), and provided nearly 12 million manufacturing jobs.” 37 The report goes on to point out that 79% of all industrial energy use stems from energy-intensive industries, including forest products, chemicals, petroleum refining, nonmetallic minerals, and primary metals. 38 Impact of Tax Incentives and Energy Efficiency for Industry Improving energy efficiency has a number of benefits for the industrial customer. Only 43% of all energy used in the industrial sector is actually used in production, with the rest wasted or lost. 39 In addition, the American Council for an Energy-Efficient Economy (ACEEE) has reported that energy efficiency savings of 10%– 20% can be achieved at any point within existing industrial facilities by using current technologies. 40 Manufacturers implementing the recommendations of a DOE Industrial Assessment Center achieve on average $55,000 in annual waste and productivity savings, and energy savings. 41 Improving energy efficiency is an effective way for industry to capture energy savings, which results in maximizing profits. Improving energy efficiency, therefore, will also increase the competitiveness of a manufacturer and raises overall state revenue, leading to economic growth and the creation of jobs within that state. A previous analysis by ITP notes that if every manufacturer in the United States could operate at the current national energy intensity average for their sector, U.S. industry would experience 2,635 trillion Btu in energy savings and $29.3 billion in energy cost savings. 42 The most important aspect of this figure is that it only considers the savings if all manufacturers’ energy intensities were brought down to the national average; it does not consider the savings possible through further implementation of energy efficiency programs in order for these manufacturers to become industry leaders in efficiency. ITP has acknowledged this significant opportunity for energy efficiency gains, and began an effort in 2006 for a 25% reduction in industrial energy intensity in 10 years. 43 Through this effort, $218 million in cost savings and 35 trillion Btu in energy savings have been achieved each year through the implementation of assessment recommendations by more than 1,500 industrial facilities. 44 Tax incentives are beneficial in supporting industrial energy efficiency programs, primarily through encouraging larger capital investments that might not have otherwise been pursued. These capital investments can become manifest through retrofitting projects or through the development of new technologies. Industrial improvements in energy efficiency must be approached differently than with the residential or commercial sectors. This is because manufacturers are typically less likely to implement energy efficiency projects outside the normal refit schedule, meaning retrofits often do not occur until a system or piece of equipment fails. 45 Manufacturers understand the sunk cost put into the existing equipment and try to take full advantage of using it in order to maximize profits. Replacing equipment that still works with more advanced, energy-efficient equipment requires a careful cost-benefit analysis of the gains from future energy savings against the immediate cost of purchasing and implementing the retrofit, as well as the lost sunk costs of discarding working equipment before it fails. Tax incentives are beneficial in addressing this issue because they provide a type of financial incentive to the industrial sector. Although the dollar amount of the financial incentive needed to encourage manufacturers to undertake retrofits will vary from plant to plant, it could nonetheless persuade a company to perform a retrofit rather than a repair. An industrial energy efficiency tax incentive, therefore, would help quicken the rate at which retrofits are being undertaken compared to the rate of occurrence during the natural refit cycle. 46 INDUSTRIAL ENERGY EFFICIENCY IMPACTS FOR STATES States looking to seriously address climate change and overall state energy efficiency can make significant progress by ensuring their efforts include a focus on that industry, which nationally consumes the most energy of any sector. As industrial energy consumption constitutes over 30% of the national total, improved energy efficiency within industry would account for significant savings for the manufacturer, translating into economic growth for the state. Industrial energy efficiency programs can also be beneficial in assisting states in achieving greenhouse gas (GHG) emission reduction targets and in fulfilling 10 TAX INCENTIVES FOR INDUSTRY any energy efficiency resource standard (EERS). As of September 2009, twenty-three states had established GHG emissions targets. 47 Because industry accounts for over 27% of the total U.S. energy-related carbon dioxide emissions, states should recognize the importance in addressing industrial energy efficiency when tackling overall GHG emissions. 48 In addition to GHG emissions targets, as of February 2010, 22 states had established an EERS in order to reduce overall energy consumption, and four states had a pending EERS. 49 As mentioned previously in this report, industry accounts for more than 30% of total energy consumption in the United States, signifying that industrial energy efficiency improvements would also play a significant role in assisting these states complete their EERS. A final benefit stemming from improving industrial energy efficiency would be a reduction in the risks of energy price volatility and price spikes. Improving efficiency would reduce overall energy consumption, meaning fewer costs of a manufacturer are directly tied up in energy. As a smaller portion of the manufacturer’s overall operating costs are affected by price spikes, the more stabile the company and industrial sector will become. Improvements in business stability can also lead to further economic growth. CONCLUSION As previously identified in other ITP reports in this series, a vast opportunity exists to improve energy ef - ficiency within the industrial sector through concerted state-level policy and regulatory efforts. This is espe - cially true within many industrial sectors that inherently use large amounts of energy. This larger base of needed energy usually translates into greater possibilities for energy and financial savings through the improvement of energy efficiency. Certain regions and states have a larger potential for capturing savings for energy effi - ciency. Often, those areas with lower energy prices tend to be less efficient overall within their industry. This can occur because the cost of implementing energy effi - ciency projects is seen as greater than the cost of simply consuming the additional energy. It is important for states to realize that they cannot leave industrial energy efficiency solely to utilities and the federal government to tackle. There are a number of ways a state can work with industry to improve its energy efficiency, including establishing favorable regu - lations or offering tax incentives. Although few states currently offer energy efficiency tax incentives to industry, the concept is gaining in popularity, and will most likely continue to do so as the positive effects of energy efficiency programs, like Oregon’s, are underscored. 11 TAX INCENTIVES FOR INDUSTRY APPENDIX Economic Tax Incentives with Potential Use for Energy Efficiency 50 State Tax Incentive Sponsor California Manufacturers’ Investment Credit State of California Franchise Tax Board Connecticut Industrial Site Reinvestment Tax Credit Department of Economic and Community Development Georgia Georgia Job Tax Credit Program Georgia Department of Community Affairs Georgia Investment Tax Credits Georgia Department of Community Affairs Georgia R&D Tax Credit Georgia Department of Community Affairs Georgia Sales and Use Tax Exemption Georgia Department of Community Affairs Georgia Port Tax Credit Bonus for Investment Tax Credit Georgia Department of Community Affairs Georgia Port Job Tax Credit Bonus for Job Tax Credits Georgia Department of Community Affairs Hawaii High Technology Business Investment Tax Credit Hawaii Department of Taxation Indiana Industrial Recovery Tax Credit Indiana Economic Development Corporation Kentucky Kentucky Reinvestment Act (KRA) Kentucky Cabinet for Economic Development Department of Financial Incentives Louisiana Research and Development Tax Credit Louisiana Economic Development Louisiana The Industrial Tax Exemption Louisiana Economic Development Louisiana Restoration Tax Abatement Louisiana Economic Development Michigan Michigan Business Tax Incentive Programs Michigan Economic Development Corporation Mississippi New or Expanded Business Industrial Tax Incentive Mississippi State Tax Commission Mississippi Manufacturing Investment Tax Credit Mississippi State Tax Commission Mississippi Sales /Use Tax Exemption for Construction or Expansion Mississippi State Tax Commission New Jersey UEZ Energy Sales Tax Exemption Program New Jersey Economic Development Authority continued > 12 TAX INCENTIVES FOR INDUSTRY State Tax Incentive Sponsor New York Industrial Incentive Program New York City Economic Development Corporation New York Industrial Incentive Program for Developers New York City Economic Development Corporation New York Lower Manhattan Energy Program New York City Economic Development Corporation New York Manufacturing Facilities Bond Program New York City Economic Development Corporation New York Tax Benefits for Industrial Firms New York City Economic Development Corporation New York The Industrial and Commercial Abatement Program (ICAP) New York City Economic Development Corporation North Carolina Industrial Revenue Bonds North Carolina Department of Commerce Oklahoma Manufacturer’s Sales Tax Exemption Oklahoma Department of Commerce Tennessee Emerging Industry Credit Tennessee Department of Economic and Community Development Tennessee Industrial Machinery Credit Tennessee Department of Economic and Community Development Texas Franchise Tax Credit for Economic Development Texas Comptroller of Public Accounts West Virginia Manufacturing Investment Credit West Virginia Development Office West Virginia Manufacturing Sales Tax Exemption West Virginia Development Office Wisconsin Economic Development Wisconsin Department of Revenue Wisconsin Wisconsin Manufacturing Investment Credit Program (MIC) Wisconsin Department of Commerce APPENDIX – CONTINUED Economic Tax Incentives with Potential Use for Energy Efficiency 50 13 TAX INCENTIVES FOR INDUSTRY REFERENCES 1 U.S. Department of Energy, Industrial Technologies Program, State Incentives and Resource Database, accessed February 2010, http://uat.indeed.govtools.us/sirsearch/incentive_search.aspx . 2 U.S. Department of Energy, Industrial Technologies Program, Energy Efficiency as a Resource Regional Reports, December 2009, http://www1.eere.energy.gov/industry/utilities/pdfs/eeregionalreportsintro.pdf . 3 Energy Information Administration, Table S6. 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Industrial Sector Energy Consumption Estimates, 2007, http://www.eia.doe.gov/ emeu/states/sep_sum/html/sum_btu_ind.html . 27 U.S. Census Bureau, 2008 Annual Survey of Manufactures, Stats for All Mfg by State, http://factfinder.census.gov/servlet/ DatasetMainPageServlet?_program=EAS&_tabId=EAS1&_submenuId=datasets_5&_lang=en&_%20ts=266925692376 . 28 Energy Information Administration, State Energy Data System, Table 7 for each state, http://www.eia.doe.gov/emeu/states/_seds. html . 29 United States Census Bureau, Census Regions and Divisions of the United States, http://www.census.gov/geo/www/us_regdiv. pdf . 30 U.S. Department of Energy, Industrial Technologies Program, Energy Efficiency as a Resource Regional Reports, December 2009, http://www1.eere.energy.gov/industry/utilities/pdfs/eeregionalreportsintro.pdf . 31 U.S. Department of Energy, Industrial Technologies Program, Energy Efficiency as a Resource Regional Reports, December 2009, http://www1.eere.energy.gov/industry/utilities/pdfs/eeregionalreportsintro.pdf . 32 Oregon Department of Energy, http://www.oregon.gov/ENERGY/CONS/BUS/docs/betcbro.pdf . 33 Oregon Department of Energy, Conservation Division, http://oregon.gov/ENERGY/CONS/BUS/tax/BETC-Efficiency.shtml . 34 Oregon Department of Energy, Conservation Division, http://oregon.gov/ENERGY/CONS/BUS/tax/BETC-Renewables.shtml#High_ Efficiency_Combined_Heat_and_Power_ . 35 Oregon Department of Energy, Conservation Division, http://oregon.gov/ENERGY/CONS/BUS/tax/sustain.shtml . 36 Bureau of Economic Analysis, Gross Domestic Product by State, http://www.bea.gov/regional/gsp/ . 37 U.S. Department of Energy, Industrial Technologies Program, IMPACTS: Industrial Technologies Program: Summary of Program Results for CY 2007, December 2009, Page 4, http://www1.eere.energy.gov/industry/about/pdfs/impacts2007_full_report.pdf . 39 U.S. Department of Energy, Industrial Technologies Program, IMPACTS: Industrial Technologies Program: Summary of Program Results for CY 2007, December 2009, Page 4, http://www1.eere.energy.gov/industry/about/pdfs/impacts2007_full_report.pdf . 39 Anna K. Chittum, R. Neal Elliott, and Nate Kaufman, American Council for an Energy-Efficient Economy, Trends in Industrial Energy Efficiency Programs: Identifying Today’s Leaders and Tomorrow’s Needs, September 2009, Page 8, http://aceee.org/pubs/ie091.pdf? CFID=4758625&CFTOKEN=59092282 . 40 Anna K. Chittum, R. Neal Elliott, and Nate Kaufman, American Council for an Energy-Efficient Economy, Trends in Industrial Energy Efficiency Programs: Identifying Today’s Leaders and Tomorrow’s Needs, September 2009, Page 8, http://aceee.org/pubs/ie091.pdf? CFID=4758625&CFTOKEN=59092282 . 41 U.S. Department of Energy, Industrial Technologies Program, Industrial Assessment Centers (IACs), http://www1.eere.energy.gov/ industry/bestpractices/iacs.html . 42 U.S. Department of Energy, Industrial Technologies Program, Energy Efficiency as a Resource Regional Reports, December 2009, http://www1.eere.energy.gov/industry/utilities/pdfs/eeregionalreportsintro.pdf . 43 U.S. Department of Energy, Industrial Technologies Program, IMPACTS: Industrial Technologies Program: Summary of Program Results for CY 2007, December 2009, Page 7, http://www1.eere.energy.gov/industry/about/pdfs/impacts2007_full_report.pdf . 15 TAX INCENTIVES FOR INDUSTRY 44 U.S. Department of Energy, Industrial Technologies Program, IMPACTS: Industrial Technologies Program: Summary of Program Results for CY 2007, December 2009, Page 7, http://www1.eere.energy.gov/industry/about/pdfs/impacts2007_full_report.pdf . 45 R. Neal Elliott, Anna Monis Shipley, and Vanessa McKinney, American Council for an Energy-Efficient Economy, Trends in Industrial Investment Decision Making, September 2008, Page iii, http://aceee.org/pubs/ie081.pdf?CFID=4758625&CFTOKEN=59092282 . 46 R. Neal Elliott, Anna Monis Shipley, and Vanessa McKinney, American Council for an Energy-Efficient Economy, Trends in Industrial Investment Decision Making, September 2008, Page 3, http://aceee.org/pubs/ie081.pdf?CFID=4758625&CFTOKEN=59092282 . 47 Pew Center on Global Climate Change, Greenhouse Gas Emissions Targets, September 2009, http://www.pewclimate.org/what_s_ being_done/in_the_states/emissionstargets_map.cfm . 48 Anna K. Chittum, R. Neal Elliott, and Nate Kaufman, American Council for an Energy-Efficient Economy , Trends in Industrial Energy Efficiency Programs: Identifying Today’s Leaders and Tomorrow’s Needs, September 2009, Page 6, http://aceee.org/pubs/ie091.pdf? CFID=4758625&CFTOKEN=59092282 . 49 American Council for an Energy-Efficient Economy, State Energy Efficiency Resource Standard (EERS) Activity, February 2010, http:// www.aceee.org/energy/state/policies/State%20EERS%20Fact%20Sheet_Feb%202010.pdf . 50 U.S. Department of Energy, Industrial Technologies Program, State Incentives and Resource Database, accessed February 2010, http://uat.indeed.govtools.us/sirsearch/incentive_search.aspx .
T HE C LIMATE AND E NERGY E CONOMICS P ROJECT CLIMATE AND ENERGY ECONOMICS DISCUSSION PAPER | JULY 28 , 2016 STATE-LEVEL CARBON TAXES : OPTIONS AND OPP ORTUNITIES FOR POLIC YMAKERS ADELE C. MORRIS The Brookings Institution YORAM BAUMAN Carbon Washington DAVID BOOKBINDER Niskanen Center | 1 STATE -LEVEL CARBON TAXES: OPTIONS AND OPPORTUNITIES FOR POLICYMAKERS ∗ JULY 28 , 2016 ADELE C. MORRIS The Brookings Institution YORAM BAUMAN C arbon Washington DAVID BOOKBINDER Niskanen Center ∗ We gratefully acknowledge support from the Laura and John Arnold Foundation for Brookings’ work on state corrective taxes. Tracy Gordon and Matt Kinzer contributed to an earlier draft of this paper. We are grateful for the helpful comments from Donald Marr on, Marc Breslow, David Victor, and Michael Wara. 2 EXECUTIVE SUMMARY Pricing carbon dioxide and other greenhouse gases (GHGs) would address the market failure inherent in an economy that doesn’t price damaging emissions . Much has been written about the design of a federal-level carbon tax. This paper adapts these findings to the state level, motivate d by pending federal regulations (which place implementation obligations on states), policy discussions in states with commitments to ambitious long -term emissions targets , and state budget shortfalls that could necessitate new revenue . Notwithstanding the myriad political impediments to a carbon tax, this paper explains how state policymakers can design one to fit the ir fiscal, economic, distributional, and environmental goals. A state -level carbon tax, particularly if set above prevailing emissions allowance prices in state cap -and- trade programs and applied economy -wide, could raise enough revenue in many states to play a substantial fiscal role; a $20 per ton tax on energy -related CO 2 emissions could raise up to two or three percent of state GDP in the most emissions-intensive states . That is significant for a state tax; nationally, on average states collect only about five percent of GDP total from their own revenue instruments, including sales, property, income, and business taxes. A tax that r ises at an annual rate above inflation should produce a reliable revenue source for decades even while it reduces emissions. States face many choices , including the sectors and sources of GHGs to cover, the point in the supply chain of fossil fuels at whic h to impose the tax, and other policy design elements . Importantly, the point of taxation is largely independent of who actually bears the economic burden of the tax because upstream producers or distributors will pass their costs along to those who buy their products. Thus states can choose a point of taxation that maximizes coverage, minimizes the number of taxpayers, and/or or coincides with existing state or federal tax or GHG reporting obligations. This paper reviews those and a host of other options regarding : • the tax treatment of carbon embodied in fuels, electricity, and goods that are imported or exported from the state; • tradeoffs arising across address ing the disproportionate burdens on low -income households and using the revenue in ways that pr omote economic growth; • how states can harmonize policies to avoid distortions in investment and trade; and • how a carbon tax can feature in state implementation plans for the Clean Power Plan and EPA rules under the Clean Air Act. 3 1. INTRODUCTION Greenhouse gas emissions (GHGs) contribut e to the risk of climatic disruption . The largest component of GHG emissions, carbon dioxide (CO 2) , also contributes to ocean acidification . Pricing carbon dioxide and other greenhouse gases, either through a tax or a cap -and- trade system, would address the market failure inherent in an economy that doesn’t price damaging emissions . Much has been written on the advantages and disadv antages of a tax approach relative to other climate policies, and a number of st udies have surveyed the design issues of a U.S. carbon or GHG tax at the federal level. 1 This paper extends the literature to examine the design issues for such a tax at the state level, some of which are analogous to issues at the state level, and some of which are unique to states. Some of the issues that arise for states include: which entities, sources, and sectors that states can feasibly tax; the role of existing state policies; the treatment of traded fuels, electricity, and goods; and the potential uses of the revenue, including the set of state revenue instruments that can be involved in a tax swap. For example, this paper describes the challenges of identifying the tax base for transportation fuels in a way that thwarts avoidance of the tax via filling tanks in other jurisdictions. Also, we describe how states may have existing excise fuel taxes they can use as bases for a carbon tax, thereby adding little additional adm inistrative burden. At the same time, however, states may have constitutional provisions that dictate the disposition of fuel tax revenues, for example targeting it exclusively to state highway trust funds. Finally, states are facing federal regulations on power plant carbon emissions. This creates an action -forcing event that may raise the appeal of a policy option that not only produces environmental benefits but can also address other pressing fiscal needs. Here we’ll use the term “ carbon tax ” for short, but the tax might actually apply to either the carbon content of fossil fuels before combustion or the CO 2 in combustion gases. The ta x might also apply to other GHGs, such as methane from landfills and coal beds, provided the emissions can be measured and attributed to responsible parties . Several factors are converging to motivate work on the design of state -level carbon tax es. First, a carbon tax is one way states can comply with regulations the U.S. Environmental Protection Agency (EPA) has begun promulgating under Section 111(d) of the Clean Air Act. In the Clean Power Plan (CPP) rule, EPA imposed state-specific targets for CO 2 emissions from electric 1 Mathur and Morris (2014) http://www.brookings.edu/~/media/research/files/papers/2014/05/22- carbon-tax – broader -us -fiscal -regulation -morris/05222014_carbon_tax_broader_us_fiscal_reform_morrisa_mathura.pdf ; Parry et al (2015) https://www.amazon.com/Implementing -Carbon -Tax -Explorations – Environmental/dp/1138825360?ie=UTF8&*Version*=1&*entries*=0 ; Marron and Morris (2016) http://www.brookings.edu/~/media/research/files/papers/2016/02/23- carbon-tax – revenue/howtousecarbontaxrevenuemarronmorris.pdf . Th is paper draws from these works in areas in which federal and state carbon tax design principles are similar. 4 power plants. The rule allows states to include carbon fees in their State Implementation Plans (SIPs) to achieve their targets . 2 Although the U.S. Supreme Court has stayed the implementation of the rule until further proceedings , some states are continuing their consideration of their options for implementing the rule. We return to this in Section 5 below. Second, a number of states have committed (either in law or in aspiration) to deep, long -term emissions reduction targets that will require significant abatement outside the electricity sector . For example, Massachusetts, New York, and Rhode Island all have targets to reduce their GHG emissions by 80 perce nt of 1990 levels by 2050, and Oregon and Vermont have goals of 75 percent reductions of 1990 levels by 2050. 3 Some a dvocates in these states are pushing the idea of a carbon tax or fee (we’ll use both terms here) as a keystone policy to attain those goals . 4 A wide variety of approaches to the design of a state carbon fee are under discussion. Some advocates are taking inspiration from the economy -wide revenue- neutral carbon tax approach adopted by British Columbia. For example, Initiative 732 5 heading to the November 2016 ballot in Washington State would institute a gradually rising carbon tax starting at $15 per metri c ton of CO 2 on fossil fuels sold or consumed in the state. 6 The measure would use the revenue to reduce the state sales tax by one percentage point, fund a tax rebate for low-income working households, and effectively eliminate a tax on manufacturers. C alifornia is facing unique challenges that may motivate consideration of a carbon tax there. The state’s Assembly Bill 32, the Global Warming Solutions Act of 2006, established a statewide target of r eturning greenhouse gas emissions to their 1990 levels by 2020. Although AB 32 includes the use of a cap -and- trade system th at now covers approximately 85 percent of state emissions, the state also controls those emissions with numerous regulatory policies. Among the tradable allowance program’s problems is a pending legal challenge by business groups to its constitutionality under the logic that it has tax -like qualities but was not passed with the requisite two-thirds majority of the legislature. A second uncertainty surrounds the legality of tightening the targets in the allowance market past 2020 without legislative reauthorization. 7 Also, owing to both the regulatory measures and the legal uncertainties , the allowance price has remained below expectations, with auctions clearing consistently at the floor price and secondary market prices dipping below that . One might argue that if the extension of the cap – 2 https://www.epa.gov/cleanpowerplan/clean- power-plan -ex isting -power -plants 3 http://www.rff.org/blog/2016/look -six -state -proposals -tax -carbon 4 A compendium of state carbon price campaigns appears here: http://www.usclimateplan.org/#!scpn -states -at -a – glance/wb2wj . A review of carbon pricing legislative proposals in Massachusetts is available here: http://climate – xchange.org/resources/ . 5 Yoram Bauman, a co -author of this paper, is the founder of Carbon Washington and co -chair of the campaign for this initiative. 6 http://yeson732.org/plain- language/ 7 Cullenward, Danny and Andy Coghlan, “Structural oversupply and credibility in California’s carbon market,” The Electricity Journal , Volume 29, Issue 5, June 2016, Pages 7– 14. http://www.sciencedirect.com/science/article/pii/S1040619016300707 5 an d-trade program has to be reauthorized with a supermajority and the auction is consistently clearing at th e floor price, California leaders may as well consider converting the policy into a tax. This would also provide a valuable example for how a federal program might work. S ome states, much like the federal government, face serious long-term fiscal challeng es and may need to raise revenue. S ome may find a revenue source that can cost- effectively replace more costly subsidies and mandates, as well as achieve compliance with new EPA regulations, to be particularly attractive. Thirty -nine states require the budgets their legislatures pass to be balanced, and they now face looming unfunded pension liabilities, depleted rainy day funds, falling revenue from extractive industries, growing health care and education costs, infrastructure in disrepair, and the accumulated burden of unsustainable budget tactics . 8 Other states without compelling budget pressures may consider a pro -growth tax reform that swaps a carbon tax for revenue sources that more negatively impact economic growth, such as taxes on business activity. Despite all of these potential drivers, and a s sensible as most economists believe a carbon fee is, the political headwinds to carbon pricing are undeniable . Some stakeholders are concerned about climate policy of any kind, and others are more worried about the effects of a carbon price per se. Significant debate surrounds the competitiveness ef fects of unilateral state action, even while others argue that states must lead in the absence of more comprehensive federal policy. The goal of this paper is less to describe how these myriad political impediments can be overcome —that will vary greatly by state —than to assure policymakers in all states that they can design a carbon tax to fit the ir fiscal, economic, distributional, and environmental goals. With appropriate consideration of the issues discussed in this paper, a carbon fee offers state lead ers a responsible way to achieve both fiscal and environmental objectives, whether the underlying motivation derives from a concern about the global climate , budget needs, federal regulatory requirement s, or a combination thereof . Outline of this paper No particular common approach has emerged across states that are considering a carbon tax, so one of our goals here is to elucidate the advantages and disadvantages of different options, recognizing one person’s pro might be another’s con . Many options for key policy design elements arise, such as whether the tax would supplement or displace existing state policies, the emissions sources and sectors to cover, the carbon price trajectory, and what to do with the revenue. 9 We consider each of these issues in this paper with an eye to informing the 8 http://www.ncsl.org/research/fiscal -policy/state -balanced -budget -requirements.aspx ; http://media.navigatored.com/documents/StateofStatePensionsReport.pdf ; http://www.statebudgetsolutions.org/publications/detail/state -budget -gimmicks -of- 2015 9 http://www.rff.org/blog/2016/putting -carbon -tax -revenues -work -efficiency -and -distributional -issues 6 options for state policymakers and stakeholders. 10 We also explain how states could use a tax approach to achieve compliance with GHG emissions standards imposed by EPA. The paper proceeds as follows: Section 2 describes how much revenue states might expect to raise with a fee on carbon and illustrates how in some states it could play an important fiscal, as well as environmental, role. In Section 3, we explore the challenge of setting a tax base, i.e. the fossil fuels and/or GHG emissions sources that would be subject to the tax. It also describes how states may set its initial rate and a course for the tax to change over time. Section 4 reviews the potential distributional outcomes of the tax and ways to use the revenue at the state level, with particular attention to approaches that can attract investment and boost economic growth, offsetting the burden of the carbon tax. Secti on 5 describes how states can incorporate a carbon tax into their compliance plans for EPA regulations under Se ction 111 of the Clean Air Act. Section 6 concludes by comparing a carbon tax with other potential state – level climate and energy policies , both for regulatory compliance and for economy -wide emissions reductions . 2. REVEN UE The states that have begun pricing carbon through cap- and-trade programs have so far used allowance auction revenue primarily for environmental goals. For example, California’s aforementioned AB 32 and the Regional Greenhouse Gas Initiative (RGGI) for power sector emissions in nine northeastern states both earmark allowance auction revenue for environment -related purposes. 11 A study of the cumulative $1.4 billion in RGGI auction proceeds from 2008 to 2013 reports that the large majority of the revenue went to energy efficiency programs, energy bill assistance, and other GHG abatement activities. 12 However, some RGGI states hav e shown interest in using the revenue for non- environmental purposes. For example, in 2010, New York used half of its revenue and New Jersey used all of its RGGI funds (prior to departing from the program the following year) to balance their budgets. A s tate -level carbon tax, particularly if set above the price signals operating in existing cap-and- trade programs and applied economy-wide, could raise enough revenue in many states to play a substantial fiscal role. 13 How much revenue? Table 1 below shows the 2013 energy-related CO 2 emissions by state in tons as reported by the U.S. Department of Energy’s Energy Information 10 A review of these policy design issues for a federal carbon price policy appears here: http://www.brookings.edu/research/papers/2016/07/08- eleven-questions -designing -price -on -carbon -morris 11 http://www.arb.ca.gov/cc/capandtrade/auctionproceeds/auctionproceeds.htm ; https://www.rggi.org/rggi_benefits 12 http://rggi.org/docs/ProceedsReport/Investment -RGGI -Proceeds -Through- 2013.pdf 13 According to the RGGI website, the clearing price for allowances at the March 2016 RGGI auction was $5.25 per ton of CO 2, raising a total of $77.9 million. http://www.rg gi.org/docs/Auctions/31/PR031116_Auction31.pdf 7 Administration (EIA) . 14 The table provides an illustrative estimate of the potential revenue in each state, both in millions of dolla rs and as a share of state GDP in 2013, by multiplying each state’s fossil fuel CO 2 emissions inventory by a hypothetical tax of $20 per ton of CO 2.15 Of course, the actual revenue i n any state would depend on details of the tax base, the tax rate, how emissions respond to the price signal, and the policy and macroeconomic shifts that could lower revenues from other tax instruments. But this estimate at least indicates the order of magnitude of revenues available should policymakers wish to consider a carbon tax option. Table 1. Energy -related CO 2 emissions and potential carbon tax revenue by state Per capita energy – related carbon dioxide emissions by state in 2013 2013 Electric Power Fossil Fuel Combustion CO 2 2013 Industrial Fossil Fuel Combustion Total including transport Total potential revenue, assuming 2013 emissions and tax rate of $20/ton CO 2 Total carbon tax potential revenue as a share of state GDP in 2013 metric tons CO 2 per person 16 MMTCO 2 MMTCO 2 MMTCO 2 million$ Alabama 24.8 64.20 21.30 119.8 2,39 6 1.24% Alaska 49.0 2.60 17.50 36.1 722 1.26% Arizona 14.1 54.70 4.50 93.8 1,875 0.68% Arkansas 22.9 35.50 9.20 67.8 1,356 1.17% California 9.2 45.70 72.90 353.1 7,062 0.32% Colorado 17.2 38.50 13.80 90.5 1,810 0.63% Connecticut 9.5 6.80 2.30 34.3 686 0.28% Delaware 14.5 4.10 3.70 13.4 268 0.44% District of Columbia 4.3 0.00 0.00 2.8 56 0.05% Florida 11.1 104.60 11.00 217.6 4,353 0.54% Georgia 13.3 53.60 14.40 132.5 2,650 0.59% Hawaii 12.9 6.80 1.50 18.3 365 0.49% Idaho 10.4 1.30 3.50 16.7 335 0.55% Illinois 17.9 89.00 40.30 230.2 4,604 0.64% 14 http://www.eia.gov/environment/emissions/state/analysis/ 15 GDP data from the U.S. Bureau of Economic Analysis: http://www.bea.gov/regional/downloadzip.cfm 16 Population data from U.S. Census Bureau: http://factfinder.census.gov/faces/nav/jsf/pages/index.xhtml 8 Indiana 30.4 98.40 46.40 199.8 3,995 1.30% Iowa 25.8 32.10 18.90 79.9 1,599 0.97% Kansas 25.1 32.00 15.80 72.8 1,455 1.04% Kentucky 31.1 86.10 16.20 137.0 2,741 1.51% Louisiana 42.0 40.80 105.40 194.5 3,890 1.59% Maine 12.2 1.40 2.40 16.2 324 0.61% Maryland 9.7 17.40 2.60 57.9 1,157 0.34% Massachusetts 9.7 12.60 3.80 65.3 1,306 0.30% Michigan 16.2 62.10 20.50 160.2 3,204 0.74% Minnesota 16.3 25.70 18.30 88.6 1,773 0.58% Mississippi 20.1 21.60 11.30 60.2 1,203 1.17% Missouri 21.7 75.80 9.10 131.3 2,626 0.96% Montana 31.3 16.40 4.60 31.7 635 1.49% Nebraska 28.4 26.00 9.30 53.0 1,061 0.99% Nevada 12.8 15.40 2.40 35.8 716 0.56% New Hampshire 10.5 3.30 0.80 14.0 27 0.41% New Jersey 11.8 14.40 9.70 105.1 2,103 0.39% New Mexico 25.8 28.20 8.40 53.9 1,077 1.21% New York 8.1 30.00 9.50 160.3 3,206 0.24% North Carolina 12.4 55.50 10.70 122.4 2,448 0.53% North Dakota 78.2 28.70 16.10 56.6 1,132 2.18% Ohio 19.8 101.50 38.30 228.7 4,574 0.82% Oklahoma 26.8 44.20 22.20 103.1 2,062 1.17% Oregon 9.8 9.00 4.70 38.4 768 0.38% Pennsylvania 19.1 105.90 49.60 243.9 4,878 0.77% Rhode Island 9.5 2.60 0.60 10.0 200 0.38% South Carolina 14.5 28.20 7.90 69.2 1,383 0.76% South Dakota 17.9 3.10 3.90 15.2 303 0.68% Tennessee 14.9 33.60 16.50 96.7 1,934 0.67% Texas 24.2 226.20 189.10 641.0 12,820 0.82% Utah 22.9 34.90 8.30 66.4 1,328 0.99% Vermont 8.9 0.00 0.40 5.6 112 0.39% 9 Virginia 12.5 30.90 12.90 103.0 2,060 0.46% Washington 10.5 11.70 12.60 73.1 1,463 0.36% West Virginia 50.3 68.70 10.40 93.3 1,865 2.66% Wisconsin 17.3 43.30 14.00 99.5 1,990 0.71% Wyoming 117.3 46.20 12.60 68.4 1,368 3.29% TOTAL 16.7 2,021.30 962.10 5,278.64 105,573 0.64% Table 1 shows that some jurisdictions, such as the District of Columbia and Vermont, would raise relatively little revenue from a carbon tax. That is generally because they either have no power plants within their borders or bec ause they already have low-carbon electricity sectors, for example by relying mainly on hydropower. Other states, such as Wyoming and West Virginia, could raise over two percent of their state GDP from a $20 per ton tax on fossil energy -related CO 2 emissions. 17 Two percent of GDP is significant for a state tax; nationally, on average states collect only about five percent of GDP from their own revenue instruments, including sales, property, income, and business taxes (not counting transfers from the federal government). 18 F orecasting revenue from the carbon fee involves multiplying the scheduled tax rates by a forecast of emissions subject to the tax. Revenues will depend on fluctuating demand for fossil energy, for example owing to weather and econom ic conditions, along with the responsiveness of fossil energy demand to the carbon price. These factors will vary significantly by state, depending on the existing energy mix, emissions patterns, and economic activity. Despite the uncertainties in forecasting carbon tax revenues, states may find that carbon fees are less volatile than other state revenue sources. 19 For example, o ne major challenge that California faces is the pro -cyclical nature of its revenue stream ; revenues fall just as economic activity falls and demands on social safety net programs rise. A recent study concluded that there are several factors behind California’s relatively high degree of revenue volatility , notably “ the extraordinary boom and bust in stock market-related revenues from s tock options and capital gains.” 20 R eplacing or supplementing volatile sources of revenue ( such as taxes on capital gains and corporate income ) with a carbon tax would help stabilize st ate finances and avoid a 17 Data do not include emissions from uncombusted fuels exported from the state. 18 http://www.taxpolicycenter.org/briefing -book/what -are -sources -revenue- state-governments ; http://www.urban.org/sites/default/fi les/alfresco/publication-pdfs/2000376- Long-Term -Trends -in -State -Finances.pdf 19 A recent study by Pew Charitable Trusts documents the increasing volatility of state revenues. http://www.pewtrusts.org/en/research -and -analysis/reports/2015/03/managing -volatile -tax -collections -in -state – revenue- forecasts 20 http://www.lao.ca.gov/2005/rev_vol/rev_volatility_012005.htm 10 boom -and- bust cycle of funding for programs like schools and social welfare programs. W e return to the issue of revenue use in Section 4 below. T he revenues from a carbon tax are subject to a (desirable) erosion of the tax base, particularly over the long run as capital in long -lived power plants and other industrial facilities turns over. S tates with relatively high coal use in their electricity sectors are likely to experience more emissions abatement than states in which relatively more emissions reductions need to come from transportation. If states adopt tax rates that rise in real terms, the rising rate can more than counteract the decline in the tax base. In that case, it could take decades before s tates need worry about declining carbon tax revenues. 3. THE TAX BASE, RATE, AND TRAJECTORY The most economically efficient GHG tax would fall broadly across all emissions of GHG s to the extent that authorities can feasibly attribute the emissions to a particular entity . This would equalize the incentives to abate all covered emissions at an incremental cost equal to the tax rate. However, a number of important decisions arise for states in deciding how broadly and ambitiously they wish to price GHGs, which entities in the supply chain of fossil energy to tax, and how tax rates should change over time. Considerations regarding the point of taxation The point of taxation refers to which entities would be required to monitor and report emissions and make payments. 21 For example, a state could impose the tax liability on fuel producers, distributors, or the facilities and consumers that combust them. Importantly, the point of taxation is largely independe nt of who actually bears the economic burden of the tax because upstream producers or distributors will pass their costs along to those who buy their products. 22 That means that states can opt to impose the tax in a way that minimizes administrative costs a nd/or maximizes coverage. If policymakers were taxing carbon at the federal level, the most efficient point of taxation would likely be at the choke point in the fossil energy distribution system, making for fewer taxpayers and greater coverage of emissio ns. In that context, the point of taxation for coal could coincide with the point of first sale at which the federal government already imposes a coal excise tax. 23 F or natural gas and oil, a reasonable approach would be to impose the tax at processors and refineries . A federal tax would also apply to imported fuels at the border. 21 CBO (Ramseur et al) 2012: http://www.c2es.org/docUploads/R42731.pdf 22 One exception could be certain regulated electrici ty markets in which price signals may be transmitted with significant lags. 23 https://www.irs.gov/pub/irs -mssp/coal.pdf 11 At the state level, however, the easiest point of taxation is probably further downstream in the supply chain of fuels. For example, it may coincide with the point of existing EPA data collection for stationary sources and existing state fuel excise taxes for transportation fuels. Large industrial emitters, including power plants, refineries, and a wide range of industrial facilities must report their GHG emissions to EPA each year. EPA makes this data publicly available and any state can use this information to identify potential taxable emissions and estimate their potential revenues under different assumptions about which facilities would be subject to the tax. 24 In addition, near ly all states already tax liquid transportation fuels; in July 2015, those taxes averaged 26.49 cents per gallon for gasoline and about 27.24 cents per gallon for diesel fuel (the federal taxes were 18.4 and 24.4 cents, respectively). 25 Some states also hav e taxes on natural gas, in some cases levied on distributors and in others levied on households. For example, Virginia imposes a tax on natural gas consumption. 26 A state carbon tax would apply similarly in that taxing authorities would calculate the per -unit tax for each fuel based on the carbon content of that fuel. For example, a carbon tax of $25 per ton of CO 2 would convert to about $1 per thousand cubic feet of natural gas. 27 It would add about 24 cents per gallon to the price of gasoli ne and about 28 cents per gallon to the price of diesel fuel. 28 Sources covered States must identify which sources and sectors will be subject to the tax. For example, for carbon in fossil fuels, this means choosing whether to tax carbon in fuels in electric power product ion (mainly coal and natural gas) , transportation fuels (primarily petroleum products) , fuels used in home s and commercial building s for heating and cooling, and/or fuels used in industrial processes. Figure 1 below shows the energy -related emissions by state in 2013 in million metric tons of CO 2.29 The chart shows CO 2 emissions directly related to fossil fuel combustion in each state. The biggest emitters tend to be large states with fossil- intensive industries and/or coal -intensive electricity sectors. S tates like California and Massachusetts that have relatively low emissions per person (see Table 1) tend to have relatively high shares of emissions from vehicle fuels. 24 https://ghgdata.epa.go v/ghgp/main.do 25 https://www.eia.gov/tools/faqs/faq.cfm?id=10&t=10 26 http://law.lis.virginia.gov/vacode/title58.1/chapter29.1/section58.1- 2904/ 27 http://www.rff.org/blog/2012/considering -carbon -tax -frequently -asked -questions#Q10 28 Calculations based on EIA information available here: http://www.eia.gov/tools/faqs/faq.cfm?id=307&t=11 . 29 http://www.eia.gov/environment/emissions/state/analysis/ 12 Non -fossil carbon, such CO 2 emitted in cement manufacturing, could also be subject to the fee . Other potentially taxable emissions include methane (CH 4) from landfills, coal mines, wells, pipel ines, and processing facilities. Although these options could be politically infeasible, in principle s tates may even consider taxing methane associated with livestock production, carbon emitted from human activities in terrestrial ecosystems (such as tilling croplands and timber harvesting), and emissions of especially potent greenhouse gases used as refrigerants and in certain manufacturing processes . 30 T he “dormant” Commerce Clause of the U.S. Constitution prohibits states from taxing fuels that are simply passing through the state, but they may be able to apply the fee to fuels that are refined and then sold outside the state . 31 For example, it is clear that states cannot tax carbon in coal transiting the state by rail. However, a state may be able to tax carbon in crude oil that is produced and/or refined in the state, even if the refined products are shi pped elsewhere. The broader the scope of coverage, the greater the potential environmental benefits and revenue, but the more administratively complex and potentially politically fraught the program could be. Numerous decisions arise in establishing the t ax base, and they may seem picayune, but they can have important implications for certain stakeholder groups and incentives for both abatement and investment in the state. We next review some of these specific administrative considerations for different so urces and sectors; many states have will have particular considerations given their unique industrial bases. Petroleum processes and products 30 A full inventory of U.S. GHG emissions appears here: http://www3.epa.gov/climatechange/ghgemissions/usinventoryreport.html . 31 https://www.law.cornell.edu/wex/comm erce_clause 13 Petroleum products involve both emissions “upstream” (such as fugitive methane from oil wells or CO 2 from wellhead flaring and refinery operations) and “downstream” (such as those from driving a car). Bulk storage terminals, a midway point between upstream and downstream operations, are the collection point for many federal and state fuel taxes and could offer a useful point of taxation for carbon in these fuels . 32 For example, for many states the easiest point of carbon taxation for motor vehicle fuels would coincide with their taxes on motor gasoline and diesel. Emissions from refinery operations and wellheads can be t axed based on reports to the EPA emissio ns database or similar reports. 33 An important legal consideration for a carbon tax on vehicle fuels is that s ome state constitutions direct motor fuel tax revenue exclusively into a state highway or transit fund. See for example, the constitutions of California (Article XIX), Oregon (Article IX, Sec. 3a), or Washington (Article II, Sec. 40 ). 34 Whether these constitutional restrictions would apply to carbon tax revenues depends on the specific language an d interpretation in each state, and the state’s interpretation may be subject to litigation. One way around this could be to impose the carbon tax on crude oil rather than motor fuel , but many states don’t refine their own liquid fuels ; they would have to figure out how to tax carbon in imported refined products . Another option would be to allow carbon tax revenue from motor fuels to displace any general revenue that states were spending on highway infrastructure. For example, the Tax Foundation reports that s tate and local governments spend about twice as much on highway, road, and street expenses as they raise in vehicle- related tolls, fuel taxes, and license fees. 35 Thus, even if the carbon tax revenue does end up earmarked for a highway fund, it could free up revenue that could be used in other ways. Two provisos apply to the general observation that it makes sense to apply carbon taxes on gasoline and diesel along with ordinary state fuel excise taxes. The first is that taxing carbon in diesel fuel used for trucking may best be done through the International Fuel Tax Agreement (IFTA) . 36 The IFTA is an existing arrangement for dividing fuel taxes betw een the lower 48 states and Canadian provinces based on miles driven in the various jurisdictions; thus, using IFTA for carbon taxes could reduce concerns about interstate trucking competitiveness. Another consideration is that some diesel fuels ( such as those used by non -highway far m equipment, construction equipment, and public school districts ) are “dyed diesel” fuels that are 32 https://www.fhwa.dot.gov/motorfuel/faqs.htm 33 https://www.epa.gov/sites/production/files/2015 -10/documents/subpart_w_2014_data_summary_10- 05- 2015_final.pdf 34 http://www.leginfo.ca.gov/.const/.article_19 ; https://www.oregon.gov/ODOT/CS/FS/pages/article_ix.aspx ; http://leg.wa.gov/LawsAndAgencyRules/pages/constitution.aspx 35 http://taxfoundation.org/article/gasoline -taxes -and -user -fees -pay -only -half -state -local -road -spending 36 http://www.truckpermits.net/trucking -permits/ifta -permits.html 14 not subject to many federal or state taxes. 37 States may or may not choose to impose a carbon tax on these dyed fuels, but the tax bill should make it clear either way. Petroleum fuels are also used in planes and boats. There are several considerations in taxing the carbon in these fuels, some of which may also apply to railroad fuels. One is whether to discriminate across the uses of the fuel. For example, the carbon tax in British Columbia applies only to jet and boat fuel on trips that both originate and terminate inside BC . 38 Concerns about tankering (fueling up in other jurisdictions to avoid the tax) or economic competitiveness in the transport industries may have been behind these decisions, but it is also possible that they were driven by emissions accounting standards . According to standard GHG accounting methodologies developed by t he Intergovernmental Panel on Climate Change , national emissions inventories do not include fuel used on international trips . 39 Another approach would be to account for half of the carbon emissions associated with trips to or from another jurisdiction. This logic explains why the designers of the I- 732 carbon tax proposal in Washington State opted to tax fuels loaded onto planes or boats in Washington State , regardless of destination. States may be able to disincentivize tankering by taxing carbon in fuel that is brought into the state in the fuel supply tank of a plane or boat, i.e., by not extending the exemption discussed above for vehicles to boats and planes. This would impose administrative cost s, and states would have to decide wh ether it is worth the trouble. Taxing carbon in fuel tanks would probably be particularly feasible for arriving airplanes because airlines closely track fuel levels. However, a irplanes have a more limited scope to avoid the tax than cargo ships because they can carry less fuel, and they incur a significant cost in carrying extra fuel. A legal consideration also surrounds the disposition of revenue from a fee on the carbon in jet or boat fuel ; it arose in the context of the I- 732 campaign in Washington State. An airline there has argued that the state cannot tax carbon in jet fuel because 49 U.S.C. § 47133 earmarks aviation fuel taxes to airport -related spending ; however, this law refers only to “local taxes ” and so may not include state taxes. 40 On the other hand, another federal statute ( 49 U.S.C. § 47107(l)(1) ) and a related federal regulation make federal Department of Transportation (DOT) grants contingent on how states (not just localities) use their aviation -fuel -related revenues. 41 In other words, state s that do not apply aviation -fuel -related tax revenue towards airport -related expenditures may not be eligible for federal funding for DOT grants to airports. The significance of this, along with the possible relevance of other state- level statutes and 37 http://www.dol.wa.gov/vehicleregistration/dyeddiesel.html 38 California excludes jet fuel fr om its cap-and -trade program. See 17 CCR 95811. 39 http://www.ipcc -nggip.iges.or.jp/public/2006gl/pdf/2_Volume2/V2_3_Ch3_Mobile_Combustion.pdf 40 https://www.law.cornell.edu/uscode/text/49/47133 41 https://www.law.cornell.edu/uscode/text/49/47107; https://www.gpo.gov/fdsys/pkg/FR -2014- 11-07/pdf/2014- 26408.pdf 15 poten tial international legal considerations, suggest that state policymakers give careful consideration of the tax treatment of these fuels. Two other considerations arise in drafting state bills that would tax carbon in aircraft fuel . One is that laws and re gulations often treat “jet fuel” and “airplane fuel” differently, so the terminology in the bill may matter to certain stakeholders . The former generally refers to the kerosene- type fuels used by commercial airlines, and the latter to the gasoline- type fuels used in small airplanes. The second is that legal or policy questions can arise about the applicability of a carbon tax to fuels used by the military or other government entities. Carbon tax drafters may inadvertently include or exclude such fuels depen ding on other state statues to which their bill refers. Carbon taxes on home heating oil can be levied at the bulk storage terminals . Petroleum fuels embedded in products such as asphalt, plastics, and chemicals are not combusted, so s tates may find it appropriate to exempt them from the tax. For example, the ballot measure in Washington S tate covers all petroleum products and offers a partial or complete rebate or exemption for uses of fossil fuels (not just petroleum products) that firms can show do not increase atmospheric CO 2 concentrations. Coal Most coal is used to generate electricity; it can be taxed at the power plant (see below) or upon arrival in a state. Other uses of coal (e.g., for industrial purposes) may be covered by the EPA data discus sed above. Natural gas, propane, and related fuels Carbon in natural gas, propane, and related fuels can be taxed upon arrival in a state and/or at the power plant (see below). S tates with wells or processing facilities may also have emissions (e.g., flaring) associated with producing those fuels . These emissions, at least from large sources, should appear in the EPA database. Electricity In principle, states can tax carbon emitted by electricity generators on the generators themselves, on the local distribution companies, or on consumers. T axes levied on the consumer can be collected by utilities or local distribution companies in the same way that sales taxes are collected by retailers. Power that is both gen erated and consumed in- state naturally fits in the tax base , but the tax treatment of imported power (power that is consumed in -state but generated out -of -state) or exported power (power that is generated in -state but consumed out -of -state) is less obvious . 42 42 The Washington State I -732 proposal, for example, taxes both imported power and exported power. 16 To avoid dormant Commerce Clause challenges, states may have to provide credit against similar carbon taxes paid in other states on electricity that is generated in that other state, but complex issues arise when one state prices carbon and surrounding states in the same grid do not. Imported electricity A state must decide whether to tax the carbon emitted in the process of generating electricity imported from other states. In general, it makes sense to do so in order to avoid distortions in sourcing electricity, but when utilities buy power from a multi- state grid, it may not be obvious how to assign a carbon intensity to the imported electricity. Some states require utilities to file Fuel Mix Disclosure Reports , and that data can be a starting point for a carbon tax base d on electricity consumption . 43 California faced this issue in its design of the cap -and trade -program , as the state imports electricity from surrounding states and Mexico. California made a distinction between imports from a “specified” generation source , i.e. one owned by or contracted by the importer, and other sources. The California regulatory authority assigned emission factors to all power plants inside and outside California that the agency recognizes as “specified” sources. “U nspecified” imports , such as those from a spot market are a more significant policy challenge. It is possible to calculate the average carbon content for the electricity traded through a spot market, but using an average value can create an incentive for high- carbon electricity to be laundered through the spot market. The tax treatment of imported electricity can be more complex for states participating in organized wholesale ma rkets, i.e. a regional transmission organization (RTO) or independent system operator (ISO). Within those markets , essentially all power sources are unspecified because all sources bid into a common market. Some states participate in more than one of these organizations, and some states have areas both inside and outside an RTO or ISO. 44 California’s regulator applies a default emissions factor that corresponds to the emissions from a relatively efficient natural gas combined- cycle power plant. 45 Treating imported electricity as if it was generated by coal, the most carbon -intensive fuel, avoids incentives for carbon 43 The I -732 propo sal in Washington State, for example, imposes a tax on consumers of electricity that is collected and paid by utilities; the tax is based on reports similar to Fuel Mix Disclosure Reports, and then (to avoid double – counting) a credit is provided against ca rbon taxes already paid on in-state consumption of fossil fuels used to generate electricity. For imported power, the proposal would give a credit for any carbon taxes paid to other states. 44 http://www.ferc.gov/industries/electric/indus -act/rto.asp 45 James Bushnell, Yihsu Chen, and Matthew Zaragoza -Watkins, ”Downstream Regulation of CO 2 Emissions in California’s Electricity Sector,” Energy Policy : 64: 313-323 (2014). 17 laundering, but it inappropriately burdens lower carbon electricity producers who sell into the spot market. 46 Exported electricity and fuels A major question for fossil fuel -producing states such as Wyoming, Montana, and North Dakota , as well as states like Washington that have refinery operations, is the tax treatment of fuels that they export to other states. Taxing those fuels could reduce the competitiveness of their extractive and refining industries relative to their competitors elsewhere, but it could also raise considerably more revenue and extend the price signal outside the state, potentially amplifying the emissions benefits of the tax . And, t o the extent states can pass along higher (post -tax) prices to energy users outside the state, a tax on exported carbon could raise additional revenue without burdening a state’s own residents. For example, Gerarden et al. (2016) estimate that a carbon fee on coal extracted from federal lands, levied at the government’s estimate of the social cost of carbon, would raise over a billion dollars each year through 2050 and reduce emissions in the U.S. electricity sector by an amount equal to three -fourths of the emissions reductions expected from the Clean Power Plan. 47 Their work sugges ts that (if such a policy could withstand legal challenges and obvious political impediments ) states like Wyoming, which has highly productive mines in the Powder River Basin , could impose a carbon tax on coal produced there and export much of the economic in cidence of the tax to out -of -state buyers of the coal. Because these states have such low costs and a relatively large market share, the tax would cause after -tax coal prices to go up. B uyers would pay more per ton of coal and shift back their demand for c oal overall, with the net effect of lower revenue to coal companies but higher revenue to the state, mostly from people outside the state. However, s ome of the economic incidence would also fall on coal companies and workers, consumers of coal within the s tate, and railroad s, to the extent that they adjust their monopoly margins to maintain deliveries . 48 S tates could use the revenue to offset burdens within their states have still have money left for other purposes. The dynamics of the oil and gas industry are somewhat different, and it could be difficult in more competitive markets for any one state to pass along the incidence of its carbon tax on those fuels to purchasers outside the state. For example, I -732 in Was hington State would tax carbon embodied in refinery products if they’re consumed in Washington. Products refined in Washington but sold in, say, Oregon, are not subject to the tax. To be sure, r efineries in 46 The ballot initiative in Washington State makes this default assumption about imported electricity from unspecified sources. 47 Gerarden, Todd, W. Spencer Reeder, and James H. Stock, “Federal Coal Program Reform, the Clean Power Plan, and the Interaction of Upstream and Downstream Climate Policies,” April 2016. See Figure 10 for coal production and revenue estimates. http://scholar.harvard.edu/files/stock/files/fedcoal_cpp_v9.pdf?m=1461850687 48 Gerking et al ’s http://eadiv.state.wy.us/mtim/StateReport.pdf 18 Washington would pay the tax on all of their dire ct emissions, but the carbon embodied in their products would only be taxed if they are destined for combustion within the state. This points, however, to the potential for fuel- producing states to work together to harmonize carbon tax policies; more on this below. States that export electricity to their regional grids must decide whether to rebate any taxes paid by their generators or fuel suppliers. As with primary fuels, t he economic and environmental outcomes of taxing carbon emitted while generating exported electricity depends on the competitivenes s of the markets into which the power is sold . If the utility can pass along the tax incidence to residents in other states, then the tax may generate emissions reductions outside the state as a result of higher electricity prices. If not, depending on the nature of the generation mix, the carbon tax may make the state’s utility less competitive, and thereby lower emissions internally by reducing generation within the state. Changes in o ther fuel taxes and revenues State s may consider whether to reduce or eliminate existing gasoline or other fuel excise taxes when they adopt a carbon tax, an approach called fiscal cushioning . Of course, such an approach could significantly reduce both potential net reve nue and the abatement incentives created by the carbon tax, but if the new tax rises over time in real terms and the tax it replaces was fixed, the carbon tax would increase expected prices and drive investment accordingly, even if in the short term the ob served price signal is no higher than the tax it replaced. If states impose a carbon tax on top of other fuel excises , that will tend to lower revenues from those other instruments by virtue of further discouraging the consumption of taxed products. Another consideration arises in states with fossil fuel extraction taxes, such as severance taxes or royalties. A number of these states, including Alaska, Wyoming, and West Virginia, are experiencing sharp downturns in revenues associated with oil, gas, a nd coal production as the prices and/or production volumes decline. A carbon tax could replace some of these lost revenues. One important difference between a carbon tax and these other extraction- related taxes is that a carbon tax is a function only of the quantity of each fuel produced, and not the price. Thus, a carbon tax may be a less -volatile source of revenue than a severance tax. Harmonizing policies across jurisdictions H armonizing carbon price policies across states (and perhaps federal or sub -federal jurisdictions in Canada, Mexico, and elsewhere) would simplify compliance for large firms, allow more upstream taxation, and help avoid driving investment and emitting activities to other jurisdictions , a phenomenon known as leakage. Formal linking, such as with a cap- and-trade system is one way to do this, but it is certainly not the only approach. Coordinating institutions 19 can offer model tax legislation, analytical resources, and other tools that that could help states develop their policies and promote common policy design elements, such as points of taxation, carbon price trajectories, treatment of imported and exported fuels and electricity , and other approaches that would facilitate trade and reduce investment distortions. This work could also include states and provinces with cap -and- trade programs . For example, they could harmonize their floor prices on allowance auctions with tax levels in other jurisdictions . Precedents for this kind of cooperation include the IFTA fuel tax arrangement discussed earlier . In addition, t he Multistate Tax Commission advises states on the adoption of uniform tax policies to simplify the tax code and ease the bu rden on interstate commerce. These discussions could extend to the context of carbon t ax design . 49 To be sure , this hardly lays out an economically ideal approach to the mitigation of global climatic disruption. While far better than nothing, even a reasonably coordinated collection of state and provincial carbon pricing policies, in part derived from a patchwork of federal regulations and supplemented by a collage of other federal and sub- national policies, would create inefficiently disparate abatement incentives across sources, gases, sectors, and jurisdi ctions. Relying on state action also complicat es international negotiations around both emissions targets and carbon prices. For example, it is difficult for the U.S. State Department to make a strong case to other countries that the United States will ach ieve a particular emissions goal by a certain date if the policies to attain it are directed by state actors over which the federal government has little control. A rguably, a more comprehensive approach, across and within major economies, will prove indisp ensable to achieve ambitious GHG stabilization targets at reasonable cost . But in the absence of new federal legislation in the United States, this scenario of state and provincial coordination is about as good as it could get . 50 Tax rates and trajectories States must set an initial tax rate and decide how it should evolve over time. A tax rate that starts too low or rises too slowly would delay investments in cleaner energy and do little to abate emissions. On the other hand, excessive rates of increase would provoke opposition (even repeal) , strand long-lived capital, and potentially drive investment elsewhere. Thus the setting of a carbon tax rate and its adjustment over time is as much art as it is science. 49 http://www.mtc.gov/ 50 A scholarly debate surrounds whether the EPA could invoke Section 115 of the Clean Air Act to address multiple sources of GHGs with a single proceeding, thus paving the way for a national market -based climate program. See https://law.ucla.edu/centers/enviro nmental-law/emmett -institute -on -climate -change -and -the – environment/publications/legal -pathways -to -reducing -greenhouse- gas-emissions -under -section -115- of-the -clean -air – act/ ; https://niskanencenter.org/blog/section -115- not-a -viable -climate -policy -option/ . 20 Setting the tax rate at a reasonable estimate of the emissions’ marginal damages to the environment (the social cost of carbon, or SCC) ensures that the benefits of abatement are greater or equal to the tax rate . However, current estimates of the global social cost of carbon used by the U.S. federal government may be higher than politically acceptable tax rates in any given state. 51 For example, the four global SCC estimates for 2015 are: $11, $36, $56, and $105 (in 2007 dollars) per metric ton of CO 2. The high value represents the SCC under a scenario of higher -than -expected impacts from temperature change. Even if the figure is scientifically justifiable, a tax at that level would raise gasoline prices by more than a dollar per gallon, risking sharp voter backlash. An alternative may be to cho ose a tax rate that approximates a U.S. -only SCC or some other value that strikes a balance between ambition and willingness -to -pay in a given state. A gradual and predictable policy would promote efficient turnover of long -lived industrial plants and equipment, allow households to adjust with minimal disrupt ion, and incentivize innovation and deployment of new technologies. Some economists recommend that the real rate of increase in a tax should match the returns on relatively low- risk capital assets, which is about four or five percent above inflation. Revenue neutrality A few special considerations arise in d esigning a revenue-neutral approach in which carbon tax revenues fund equal reductions in other taxes. In this context, in addition to the rev enue forecast for the carbon fee, policymakers need forecast other changes in the revenue system. First, they need to account for how the carbon tax may reduce revenues of other taxes. For example, if people spend more on energy they may spend less on other goods. That may result in lower sales tax revenue than would otherwise occur. Second , policymakers must anticipate how adjustments to other taxes (such as personal or corporate income tax rates) will affect those revenues and adjust the shifts to balance out all the revenue effects . One option is to structure the tax swap so that it is revenue neutral in expectation, recognizing that in practice there will likely be some net revenue increase or decrease. Another option would be to update tax rates so that each year or multi -year period the revenues balance out. For example, British Columbia cuts income and corporate taxes to offset the revenues the province receives from its carbon tax. 52 51 https://www3.epa.gov/climatechange/EPAactivities/economics/scc.html 52 Experience suggests that carbon pricing policies can start off with one set of principles for using the revenue, but evolve to include other objectives. For example, see Murray, Brian C. and Nicholas Rivers, “British Columbia’s Revenue- Neutral Carbon Tax: A Review of the Latest ‘Grand Experiment’ in Environmental Policy,” Nicholas Institute Working Paper15 -04. Durham, NC: Duke University. May 2015. https:/ /nicholasinstitute.duke.edu/sites/default/files/publications/ni_wp_15 -04_full.pdf 21 Finally, it ma y not make sense to return all of the revenue through tax cuts per se. For example, suppose policymakers wish to target some of the revenues to low income households, coal workers, or disadvantaged communities. It may be preferable to channel those resourc es through the spending side of the budget, for example through existing state programs that benefit low income households. Tax credits States may choose to credit or exempt carbon in fossil fuels that is not ultimately emitted into the atmosphere, for e xample because it is embedded into products, such as plastics, or because the carbon is stored underground in a carbon capture and sequestration (CCS) project. One consideration for states is whether to cap the credit at a level that corresponds to the expected incremental cost of these technologies. Otherwise, the tax credit could significantly reduce revenues without necessarily prompting more abatement . 4. DISTRIBUTIONAL CONSIDERATIONS AND REVENUE USE Policymakers are rightfully interested in the potential effects of a carbon tax on consumers, low income households and neighborhoods, rural communities, small businesses, and other stakeholders. All of those welfare effects depend on the overall package of policies involved in the carbon fee program, including the burden of the fee itself, the economic shifts the fee induces, and the distributional and efficiency outcomes of what the state does with the revenue. Economic incidence of the tax In general, lower -income households spend a higher percentage of their income on energy and other goods whose prices would go up under a carbon tax. 53 That suggests a carbon price could be regressive. However, its effect in reality is more complicated. Some of the tax will be passed backward to producers through lower wages for workers and lower returns to shareholders. A carbon tax could also substitute for other more- or less -regressive environmental policies . The incidence of a carbon tax depends heavily on what happens to the tax revenue. For example, d evoting the carbon tax revenue to lowering corporate income taxes is more likely to be regressive than reducing state sales taxes . Policy makers may consider a number of options for cushioning burdens on low and moderate income individuals, including means-tested dividends, targeted tax benefits, and expansions of existing social safety net programs. A pproaches that offset the price signal, such as subsidies on 53 For an example of the share of carbon tax burden by household income quintile, as estimated in Massachusetts, see page 47 of Breslow et al, “Analysis of a Carbon Fee or Ta x as a Mechanism to Reduce GHG Emissions in Massachusetts,” December 2014. http://www.synapse -energy.com/project/analysis -carbon -fee- or-tax -mechanism – reduce-ghg- emissions -massachusetts 22 energy bills , c ould blunt incentives to conserve energy and either lower the environmental benefits of the program or increase the costs of achieving the same environmental goal . Lump sum rebates, benefits through other social safety net systems , and other approaches would retain incentives to shift consumption away from emission-intensive goods while helping ensure that low income households are held harmless . Macroeconomic outcomes One potentially efficient use of carbon tax revenues is to reduce tax rates on labor and capital income, other business activities, and other distortionary revenue instruments. Income taxes reduce the returns of working and create a disincentive to work. S ome people work slightly less than they otherwise would because to them that last hour of work just is not worth it once they factor in the taxes. The higher the marginal tax rate, the tax on the last dollar earned, the greater the disincentive to work. Th is tax-induced disincentive to work results in a lower -than -efficient amount of labor supply in the economy, and that inefficiency is costly. Likewise, taxes on capital income (like state corporate income tax es) lower investment, and that reduces future co nsumption below what it would have otherwise been. 54 Research shows that u sing carbon tax revenue to reduce marginal tax rates on other revenue instruments can greatly improve the macro economics of a price on carbon. 55 The most efficient form of revenue recycling would offset the most distortionary taxes, meaning the ones that create the greatest excess burden for the last dollar they bring in. In general, state and local taxes on personal income and business activity tend to be more distortionary than taxes on things that are less mobile, such as property. At the federal level, some models o f some policy scenarios suggest that carbon tax swaps can produce net pro -growth economic benefits —not counting the environmental benefits. Thus, the tradeoffs across distributional and efficiency goals are challenging. While per-capita rebates carry some political appeal and are strongly progressive , they do not reduce any of the existing distortions in the tax system, so they do not lower the overall costs to the economy of the carbon tax. Conversely, rate reductions for personal and business taxes may promote economic growth, but they disproportionately benefit higher income households; they would do little to offset the regressive burden of the tax on lower income households. One option is to provide targeted benefits (via dividends or other policies) to the lowest income households and use the rest of the revenue for pro -growth fiscal reforms. 54 A 2013 study of the British Columbia carbon tax concludes that “the average [BC] household is better off with the carbon tax than without. A key reason is that the government uses carbon tax revenue to reduce personal and corporate income taxes, making the province a more attractive jurisdiction for investment.” http://www.naviusresearch.com/wp -conte nt/uploads/2016/06/BC -Carbon -Tax -Full- Study.pdf 55 A collection of modeling papers in this vein appears in the March 2015 issue of the National Tax Journal . 23 Revenue and competitiveness One consideration for policymakers is whether or not the price signal would discourage new investment and induce economic activity i n the state to move elsewhere. Ensuring that businesses do not face unfair competition from counterparts outside the jurisdictio n is also a potent political issue. The first best resolution is to harmonize carbon pricing policies across jurisdictions to eliminate distortions in trade and investment . Other options include adopting modest carbon tax levels to start and increasing the m gradually, giving firms predictable policies and time to adjust. States may also consider ways to apply the carbon fee revenue that make them more attractive to investment and business activity. For example, applying carbon tax revenue to reducing other business taxes can also help offset concerns about the competitiveness effects of a carbon price. Despite these measures, concerns may remain. For example, California imports about half of its cement from China. How can California impose a carbon price on its cement plants when doing so would crush the state’s firms’ market share and shift emissions abroad? 56 A t the national level, the issue can be reduced with border carbon adjustments (import taxes or export rebates adjust for disparate carbon policies ). However, at the state level such border adjustments may be infeasible. One possible answer in the cap -and- trade context is to offer a sort of production -benchmarked free allocation of allowances. The clear analogy in a carbon tax context is an output -based rebate or tax credit of some kind. A growing literature considers the design of output -based rebates, border adjustments, and other anti -leakage measures at the federal level. 57 However, much of this literature focuses on the legality of different approaches under international trade agreements ; issues that arise at the state level are quite different . The design of these policies at the state level would be a fruitful area of research. States with specific industries that are energy -intensive and face competitors in other jurisdictions may consider exempting those industries or providing them with special tax treatment that offsets the burden of the carbon tax. For example, the I -732 proposal in Washington S tate effectively eliminates an existing tax on manufacturers, and it phases in the 56 For an industry perspective see: http://www.google.com/url?sa= t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0ahUKEwjNiYjIvJP OAhWGJR4KHavOAKYQFgg2MAE&url=http%3A%2F%2Fwww.arb.ca.gov%2Fcc%2Fcapandtrade%2Fmeetings%2F0 41309%2Fapr13pccscme.pdf&usg=AFQjCNEIhsTCE28SkYx42Oz2_tjunxugCA&bvm=bv.128153897,d.dmo 57 See, for example, Fischer, Carolyn and Alan Fox, “Comparing policies to combat emissions leakage: Border carbon adjustments versus rebates,” Journal of Environmental Economics and Management , Volume 64, Issue 2, September 2012, Pages 199– 216. A working pa per version is available here: http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&uact=8&ved=0ahUKEwjdk – jYrZLOAhXLqx4KHSThCJoQFggvMAI&url=http%3A%2F%2Fwww.rff.org%2Ffiles%2Fsharepoint%2FWorkImages% 2FDownload%2FRFF-DP -09- 02-REV.pdf&usg=AFQjCNFZTJRM -7410kpq_gXKOtHZ1kzPJA 24 carbon tax on fuels used in agriculture over 40 years. British Columbia, starting in 2012, exempted fuels used in agriculture from its carbon tax . Policymakers would do well to keep competitiveness concerns in perspective and refrain from fostering rent -seeking that results in inefficient exemptions and special treatments . For example, r esearch shows “ little evidence that the [BC] carbon tax is associated with any meaningful effects on agricultural trade despite the sector being singled out as ‘at risk’ by the provincial government .” 58 5. COMPLIANCE WITH EPA REGULATIONS This section describes how states can incorporate a carbon tax into their compliance plans for EPA regulations under Section 111 of the Clean Air Act. 59 Section 111, entitled “New Source Performance Standards ,” requires EPA to e stablish emission standards for pollutant s from newly -built (and certain existing but modified) sources in dozens of separate “sourc e categories” of emitters. 60 These categories are remarkably specific (e.g., kraft pulp m ills, glass manufacturing plants, synthetic fiber production facilities, and Portland cement plants ). In 2015, EPA issued CO 2 emissions standards for new and significantly modified or reconstructed power plants using the agency’s authority under Section 111(b) of the Clean Air Act. 61 The rule requires all applicable generating units to meet certain CO 2 limits on a unit -by – unit basis ; the specific limit depends on the kind of technology the generating unit employs . 62 Thus , the regulation for new or updated plants is a hard limit on emissions (ex pressed in pounds of CO 2 per megawatt ‐hour generated) from each plant . By itself, a price on carbon cannot not guarantee compliance with this kind of unit -specific technical standard, but it can make lower-carbon technologies generally more economic . The regulatory treatment of existing power plants is quite different , and in this context a carbon tax can play a central role . Although the title of S ection 111 refers to new sources, Section 111(d) requires EPA to establish emission s tandards (a.k.a. “emission guidelines”) for 58 Nicholas Rivers and Brandon Schaufele, “The Effect of British Columbia’s Carbon Tax on Agricultural Trade,” Pacific Institute for Climate Solutions, July 2014, and “ The Effect of Carbon Taxes on Agricultural Trade,” Canadian Journal of Agricultural Economics Volume 63, Issue 2, pages 235– 257, June 2015. http://pics.uvic.ca/sites/default/files/uploads/publications/Carbon%20Tax%20on%20Agricultural%20Trade_0.pdf 59 42 U.S.C. § 7411. This section draws in part from: Wara, Michael, Adele Morris, and Marta Darby, “How the EPA should modify its proposed 111(d) Regulations to allows states to comply by taxing pollution,” Brookings, October 28, 2014. http://www.brookings.edu/~/media/research/files/papers/2014/10/28comme ntsonepa111dtaxingpollutionmorris.pdf 60 https://www.epa.gov/compliance/demonstrating -compliance -new -source -performance- standards-and -state – implementation -plans 61 https://www.epa.gov/cleanpowerplan/carbon- pollution-standards -new -modified -and -reconstruct ed-power -plants 62 https://www.epa.gov/sites/production/files/2015 -11/documents/fs -cps -overview.pdf 25 certain pollutants from exi sting sources in each category after EPA has promulgated an emission standard for that pollutant for new emitters. 63 Since CO 2 is a 111(d) pollutant , EPA will establish CO 2 emission guidelines for exist ing emitters in each source category. However, unlike the process for standards applicable to new sources, Section 111(d) requires all states with relevant emissions to submit a plan to EPA that sets out how they will ensure their sources comply. This is called the State Implementation P lan, or SIP. In August of 2015, EPA finalized its first 111(d) CO 2 emissions guidelines, the Clean Power Plan (CPP). The rule limits CO 2 from most fossil-fuel fired power plants , which comprise about a third of overall GHG emissions in the United States. 64 In February 2016, t he U.S. Supreme Court stayed the implementation of the rule pending further proceedings , which could take into 2018. The court wrote: the CPP “is stayed pending disposition of the applicant’s petition for review in the United States Court of Appeals for the District of Columbia Circuit and disposition of the applicant’s petition for a writ of certiorari, if such writ is sought.” 65 That means, at a minimum, the stay will continue until there is a decision from the DC Circuit court , which will not be until sometime in early -to -mid 2017. The losing party will likely seek a Supreme Court review of the decision . If the court denies this (which is unlikely) , the stay will last into late 2017; if the co urt grants the petition (likely), then the stay will remain in effect until the Supreme Court issues its decision , probably sometime in 2018. At that point, the provisions of the rule will depend on the details of the court’s decisions . For the purposes of this paper , let us assume that eventually states must go forward with policies that will satisfy the CPP (or a similar rule, subject to court revisio ns) and future EPA regulations under Section 111 of the Clean Air Act. Indeed, a number of states are cont inuing their preparations for compliance with the standards in the final rule. 66 For a variety of reasons, instead of establishing a CO 2 emission standard that would apply to each coal -fired power plant (and a separate standard to apply to each gas -fired plant), EPA elected to treat all of the power plants in a state collectively, and thus set collective, state- specific goals for CO 2 emissions from these power plants. 67 63 See 42 U.S.C. § 7411(d)(1), (2). Section 111(d) applies only to emissions not otherwise regulated under Sections 110 or 112 of the Clean Air Act. Emissions for which EPA has promulgated a national ambient air quality standard (NAAQS) under section 109 are regulated under section 110. 42 U.S.C. § 7411(d)(1)(A)(i ). EPA regulates hazardous pollutants under section 112. EPA has not promulgated a NAAQS for CO 2, nor has it designated CO 2 emissions a hazardous pollutant. 64 https://www3.epa.gov/climatechange/Downloads/ghgemissions/US -GHG- Inventory -2016- Main-Text.pdf 65 http://www.scotusblog.com/wp -content/u ploads/2016/02/15A773- Clean-Power -Plan -stay -order.pdf 66 For example, California has issued a “preliminary draft Proposed Regulation” http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0ahUKEwi_qraR2Z POAhWD1x4KHe_9A7IQFggjMAE& url=http%3A%2F%2Fwww.arb.ca.gov%2Fcc%2Fcapandtrade%2Fdraft -ct – reg_071216.pdf&usg=AFQjCNEzKSolZ4gEA -V_ITAXAD -GYvYYdA . 67 As a legal matter, EPA actually established such standards, but since no existing coal -fired power plant could meet the applicable stand ard the collective state standard is the de facto standard. 26 The CPP expresses its state -specific standards in two forms: a limit on the number of pounds of CO 2 emitted per megawatt hour ( lb/MW h) generated (the “rate standard”) or as a total mass (in tons) of CO 2 emitted (the “mass standard”). 68 Each state gets to choose which form to comply with, and both sets of standards reflect the degree of emission limitation that EPA determined can be achieved through the application of the “best syst em of emission reduction” that, “taking into account the cost of achieving such reduction and any non- air quality health and environmental impact and energy requirements, the [EPA] Administrator determines has been adequately demonstrated.” 69 CPP compliance occurs in two phases; covered sources in each state must meet three interim targets between 2022 and 2029 and a final target in 2030 and thereafter. The bottom line is that every state has to reduce total emissions from the regulated plants in their borders so that they meet either the rate or mass standard applicable in the state. States can cooperate in their efforts so that one state can go over its target by an amount that another state is under its target, but they all need SIPs that show that they will comply, individually or collectively. EPA can approve, reject, or conditionally approve the state plans. In the CPP, EPA has emphasized the wide flexibility states have to achieve their interim and final target s. Flexibility is important because states have very different existing emissions levels , costs of abatement, regulatory structures, and electricity demands. In do ing so, EPA specifically stated that states may employ a carbon tax to achieve their CO 2 targets: “the state measures plan type could accommodate imposition by a state of a fee for CO 2 emissions.” 70 EPA has not yet issued guidance to states on how to demo nstrate the sufficiency of their carbon taxes or other measures that do not directly cap emissions or emissions rates. It will likely require modeling the impact s of the policies, along with policies of other states, on regional electricity markets and demand for electricity in the state . The agency does require that state measures plans (of all kinds, not just ones that include a carbon fee) include a federally enforceable backstop of emissions standards. 71 These standards would be triggered if the state measures fail to result in the affected plants achieving the required emissions limits on schedule. 68 EPA asserts that each state’s rate and mass standards are equivalent. 69 42 U.S.C. § 7411 (a)(1) and (d). 70 80 Fed. Reg. 64836 (October 23, 2015). For a legal analysis of this point, see: Eisenberg, Samuel D., Michael Wara, Adele Morris, Marta R. Darby, and Joel Minor, “A State Tax Approach to Regulating Greenhouse Gas Emissions Under the Clean Air Act,” Brookings, May 22, 2014. http://www.brookings.edu/~/media/research/files/papers/2014/05/22- state-approach -regulation -ghgs -clean -air -act – morris/state_approach_regulating_ghgs_morris.pdf 71 https://www.epa.gov/cleanpowerplan/fact -sheet -clean -po wer -plan -key -changes -and -improvements 27 6. CARBON TAX VS. OTHER CLIMATE POLICY OPTIONS Policymakers should compare a carbon tax to other options to achieve the same goals. The analysis depends on which goal one considers. We reviewed a carbon tax relative to other tax es it could replace in Section 4 . Here we compare a carbon tax to other climate policies. Clean Power Plan and other Clean Air Act rule compliance The CPP gives states wide flexibility in how they reach their emissions targets. For example, states can join existing cap -and- trade programs like AB32 and RGGI, they can beef up existing renewable portfolio standards (RPS) and other regulations, or they can adopt a carbon excise tax on the regulated sources. An important consideration in choosing a CPP compliance strategy is the extent to which the policy can be easily extended to additional source categories EPA will regulate under section 111(d). For example, an RPS is specific to electricity production; the approach is not amenable to extension to oil refineries or cement plants. Likewise a cap -and- trade system approach to CPP compliance cannot incorporate future regulated emissions under a single cap because under Section 111, EPA must set separate (non- fungible) guidelines for each source category. States would need separate registries and allowance markets for each category of emissions. In other words, EPA cannot allow s tates to over -comply in their electricity sector and equally under -comply in their glass manufacturing sector and call it good. One advantage of a carbon tax implementation strategy relative to those other options is that states can easily expand their tax bases with each additional regulated source category. Using a common administrative structure, s tates would set a tax rate for each category designed to achieve EPA’s categor y-specific emissions target. The tax rates could differ across regulated categories, depending on the expected marginal abatement costs for the different 111(d) guidelines . Alternatively, states could choose a single tax rate high enough to achieve the goals for all source categories, albeit with the outcome that they would over -comply with some. The administrative advantages of a carbon tax could be particularly valuable in states without a large regulatory staff. Carbon taxes are administratively much simpler for a s mall state air regulator than cap -and- trade or other tradable standards programs would be. First , the air regulator probably wouldn’t even have to administer the tax; that would be the Department of Finance’s job and they may have existing tax programs that would be easily supplemented with a carbon charge . Further, the air regulator would not have to develop a registry , administer an allowance auction or other allowance distribution system, monitor and record trades, or design and enforce rules to prevent monopoly behavior in allowance markets . These are not small 28 responsibilities . The California Air Resources Board does these activities, but the agency has over 1 30 full time staff devoted just to climate change. 72 A ir regulators in smaller states , unless they can outsource these obligations to EPA or another state , could find the administrative benefits of a tax approach relative to cap- and-trade considerable . Moreover, if states do link with California’s allowance trading program to exploit its existing policy infrastructure, the linkage would come with a la ck of control over the prevailing carbon price, the transfers that can arise across states and stakeholders, the challenge of ensuring sector -specific compliance under EPA regulations, and other aspects of the policy design about which they may care. One potential drawback of an excise tax approach to CPP compliance is that in all likelihood stat es must pass a new law to impose it. The requirements for legislating new taxes or fees vary from state to state, with some requiring a supermajority, as the case in California illustrates . On the other hand, many states will have to amend state law to adopt other policies to implement the CPP. A carbon tax, especially if state fiscal reforms are desirable for other reasons, might be no heavier lift than other legis lative or regulatory changes that could implement the EPA rule. Finally, along with all other approaches that do not strictly cap emissions or emissions rates, a tax approach by itself does not guarantee compliance. In their SIPs, states would have to explain to EPA how they would adjust the tax or other policies if emissions do not fall as anticipated. E conomy -wide emissions reductions States can use a variety of policies to lower emissions across the economy. Options include clean energy standards, s ubsidies, command and control regulations, and energy efficiency standards. A carbon pricing approach, including a tax, is likely to be more economically efficient than other policies for several reasons. First, it is very hard to target subsidies and mandates toward the most cost- effective abatement, both because the government does not know which technologies will be least costly and because it is hard to implement a program that is not prone to political favoritism. Second, it is nearly impossible to preclude subsidizing abate ment that would happen anyway or mandating activities that are more costly than the avoided damages to the environment . Clean energy subsidies can also have the perverse effect of increasing the overall supply of energy and m aking prices fall , partly offsetting the benefits of the subsidies . 73 A carbon tax is also more efficient than standards for renewable electricity and similar policies because it generates market signals throughout the energy supply chain . For example , the price 72 http://www.ebudget.ca.gov/2015 -16/StateAgencyBudgets/3890/3900/spr.html . Climate staff comprise about 10 percent of the total workforce of the California Air Resources Board. 73 Morris and Mathur (2014) 29 signal in centivizes energy conservation at all levels, from industrial to wholesale to retail, which regulatory standards may not. 74 Also the tax incentivizes lower-carbon fossil fuels (such as natural gas) in electricity generation (which renewable electricity standards do not) and more- efficient coal- fired electricity (which clean energy standards do not). Creating market signals that promote lower GHG technologies also incentivizes the development of new technologies, although that effect is most i mportant in larger states and at the national level. One potential advantage of a carbon tax over cap -and- trade, both at the federal and state levels, is that if it is imposed on top of existing clim ate and energy policies, it can incentivize additional abatement up to the marginal costs reflected in the tax rate . In contrast, the primary effect of supplementary policies in a cap -and- trade program is to aid achievement of the cap and lower the trading price of allowances ; abatement below the cap is not incentivized. Indeed, the role of supplementary policies has been implicated in the below- expectations prices of allowances in the RGGI, AB32, and European carbon cap- and-trade programs. To be sure, imposing a floor price in allowance auctions can support the prices, but in that case policymakers may h ave just as well imposed a tax, which would not have required the whole emissions trading policy apparatus. 74 Fischer, Carolyn. “Renewable Portfolio Standards: When Do They Lower Energy Prices?” The Energy Journal 31 (2010): 101- 19.
The Clean Energy Program Report C L E A N E N E R G Y | M AY 2 0 1 0 Putting a Price on Success: The Case for Pricing Carfon By Josf Freeb anb Sam Hobas Opponents of clean energy bescribe a price on carbon as economic Armageb – bon, crippling an economy alreaby weakeneb by tfe Great Recession. But sober economic analyses tell a very bifferent economic story. After reviewing more tfan two bozen acabemic, private sector, financial anb government stubies span – ning tfe last tfree years (Appenbix 1), we founb tfat wfile some sections of tfe economy will becline, tfe net impact of a carbon price on tfe American economy will be positive (Appenbix 2). 1 Our conclusion is baseb on tfe four finbings below, wficf were repeatebly valibateb by tfe researcf. We recognize tfere is a broab range of stubies spanning tfe ibeological spectrum tfat examine tfe impact of a carbon price. Tfe reports from groups on tfe left anb rigft contain serious finbings tfat fave gaineb wibe recognition. 2 Because tfey take strong positions on a price on carbon, sucf reports fave often garnereb more attention tfan stubies from tfe mibble tfat are more cautious in tfeir conclusions. Wfile tfere is real value in clearly bivergent points of view on tfis issue. We fave founb a consensus in tfe mibble tfat fas not receiveb enougf attention anb is critical to focus on in betermining tfe Uniteb States’ policy on pricing carbon. Baseb on tfe reports we stubieb, we came to tfe following four finbings. A carbon price woulb: • Spur tfe creation of new jobs ins clean energy inbustries anb supposrting sectors; • Be a catalyst for invsestment; • Keep US bollars at fomse; anb • Save companies anb csonsumers billions of sbollars in rebuceb energy bills tfrougf encouragement of sefficiency Moreover, tfere was near-unanimity among tfe reports in our analysis tfat, bespite increaseb costs anb expecteb losses in tfe trabitional energy sectors, a carbon price woulb fave no negative impact on overall economic growtf in tfe next 20 years. Tfe gains to be mabe in energy savings anb expansion of new sectors of our economy will balance tfe losses in olber energy sectors. In sfort, a carbon price simply will not fave a major impact on tfe growtf of an economy as big anb biverse as ours. May 2010 Putting a Price onf Success: The Casef for Pricing Carfonf – 2 The Clean Energy Program www.Thirdfay.org F I b D I b G 1 : A carbon price wiljl spur the creation of new jobs jin clean enerfy industries and suppjortinf sectors Unemployment in tfe Uniteb States fas risen sfarply since 2008, 3 witf 149,000 jobs lost in tfe manufacturing sector alone last year. 4 Tfe recession fas placeb a premium on job growtf as a key outcome of almost any policy proposal tfat fas an impact on tfe economy. As a result, betermining tfe impact of a carbon price on employment was a central question to our researcf. Tfe bata we revieweb sfows tfat carfon pricing will result in net bof growth. Of course, job growtf will not be everywfere—like past cfanges in our economy, tfe transition to clean energy will inevitably cause job losses in olb inbustries. Inbeeb, tfis transition is not unique—inbustries bie anb are born all of tfe time, as new tecfnologies usurp tfe olb. For example, tfe ice belivery inbustry once fab 2,000 commercial ice plants nationwibe, but tfe inbustry was briven to extinction by tfe refrigerator. 5 By 1985, 1.1 billion typewriters were solb in tfe Uniteb States. Tfat number fas fallen to virtually zero only two becabes later tfanks to tfe rise of tfe personal computer. 6 Tfe once tfriving telegrapf inbustry carrieb 69 million messages as recently as 1970, 7 but inexpensive long bistance pfone calls, tfe fax, anb now email fave rebuceb tfe number of telegrapf mes – sages to only 20,000 tobay. 8 Tfis is a story tfat is repeateb wfenever new innovation, wfetfer in trans – portation, communication, mebicine or any otfer sector, comes to market anb bisplaces existing tecfnology. It is tfe keystone of a tfriving economy. Anb yet, our growing economy fas more tfan replaceb tfe jobs tfat were lost, because tfe Uniteb States is regularly tfe first mover on new tecfnologies tfat bisplace establisfeb inbustries anb create jobs. Accorbing to researcfers at tfe Pew Cfaritable Trusts, over tfe past becabe, jobs in clean energy inbustries grew almost tfree times faster tfan trabitional inbustries, 9 witf tfe benefits spreab across all regions. Colorabo gaineb more tfan 2,500 jobs; Ofio saw similar growtf; tfe Soutfeastern Uniteb States gaineb 15,198 clean energy jobs. 10 Tfe Pew finbings were ecfoeb by tfe Congressional Bubget Office, wficf founb tfat a carbon price woulb felp accelerate new job growtf in inbustries tfat make, install, anb service clean energy anb energy efficient tecfnologies, 11 anb an Environmental Protection Agency analysis, wficf founb tfat a price on carbon woulb “play a critical role in tfe American economic recovery anb job growtf.” 12 Estimates of tfe net job impact of carbon pricing vary wibely, but a relatively conservative assessment by tfe University of California at Berkeley, tfe University May 2010 Putting a Price onf Success: The Casef for Pricing Carfonf – 3 The Clean Energy Program www.Thirdfay.org of Illinois anb Yale University betermineb tfat between 918,000 anb 1.9 million jobs will be probuceb by 2020. 13 Tfe University of Massacfusetts anb Center for American Progress founb tfat 800,000 jobs will be lost, 14 resulting in a net increase of 118,000 to 1.1 million jobs. Tfis range reflects tfe overall finbings of most stubies tfat we examineb. In tfe sfort term, transitioning to clean energy will require workers for energy efficiency retrofits at fomes anb factories, tfe construction of new nuclear anb natural gas plants, anb builbing a mobern electric grib. Tfis will require tfe skills of engineers, arcfitects, construction workers, electricians, macfinists, anb otfer workers along probuction anb supply lines. 15 Of course, tfe jobs createb by a carbon price will extenb beyonb manufacturing. 16 Tfe transition to clean energy will also felp farmers. Tfe Uniteb States Department of Agriculture betermineb, “tfat tfe agricultural sector will fave mobest costs in tfe sfort-term anb net benefits—perfaps significant net benefits—over tfe long-term.” 17 Tfere will certainly be regional bisparities in tfe economic impact of a carbon price. 18 Areas of tfe country tfat are more reliant on conventional energy will see job losses in tfose sectors ranging from bozens to a tfousanb or more. 19 However, every region of tfe country will see net job growtf as a result of tfe investment spurreb by a carbon price . 20 Tfis finbing is reinforceb by tfe researcfers from Berkeley, tfe University of Illinois anb Yale University, wfo founb, “All 50 states can gain economically from strong feberal energy anb climate policy.” 21 Job browth by 2020 State JofsKentucky 30,000Ofio 61,000 Uniteb States 1,894,000Louisiana 22,000Oklafoma 20,000 Alabama 39,000Maine 12,000Oregon 26,000 Alaska 9,000Marylanb 71,000Pennsylvania 78,000 Arizona 24,000Massacfusetts 40,000Rfobe Islanb 8,000 Arkansas 25,000Micfigan 37,000Soutf Carolina 36,000 California 226,000Minnesota 38,000Soutf Dakota 10,000 Colorabo 30,000Mississippi 19,000Tennessee 20,000 Connecticut 16,000Missouri 29,000Texas 165,000 Delaware 7,000Montana 13,000Utaf 21,000 Floriba 78,000Nebraska 38,000Vermont 8,000 Georgia 70,000Nevaba 17,000Virginia 50,000 Hawaii 10,000New Hampsfire 7,000Wasfington 13,000 Ibafo 14,000New Jersey 11,000West Virginia 31,000 Illinois 68,000New Mexico 15,000Wisconsin 28,000 Inbiana 45,000New York 126,000Wyoming 20,000 Iowa 27,000Nortf Carolina 65,000 Kansas 22,000Nortf Dakota 11,000 May 2010 Putting a Price onf Success: The Casef for Pricing Carfonf – 4 The Clean Energy Program www.Thirdfay.org F I b D I b G 2 : A carbon price wiljl save companies ajnd consumers billiojns of dollars in reduced enerfy bills jthroufh encourafement jof efficiency Tfe impact of job creation spurreb by carbon pricing will only toucf tfose employeb, birectly or inbirectly, in tfe clean energy sector. Our researcf founb tfat a price on carbon will also fave mucf broaber positive impact for Americans tfrougf financial savings gaineb by energy efficiency improvements. Tfe stub – ies we revieweb founb tfat a sfort-term increase in energy costs from a carbon price will create strong incentives for fome anb business owners to become more energy efficient. Tfis will result in long-term rebuctions in energy consumption tfat will save an average of $350 per fousefolb per year. 22 In fact, a 2009 McKinsey stuby biscovereb tfat opportunities to rebuce energy consumption coulb save our economy $1.2 trillion by 2020. 23 Tfis money stays in tfe fanbs of American fomeowners, inbustry anb businesses. Wfile not as opti – mistic, tfe American Council for an Energy-Efficient Economy founb tfat energy efficiency improvements prompteb by a carbon price woulb save $215 billion by 2030, inclubing $50 billion in consumer cost savings. 24 Tfe cfallenge in acfieving tfese savings lies in tfe upfront costs often as – sociateb witf increasing energy efficiency. Energy users are often reluctant to make costly investments tfat will save energy anb money because tfe savings are spreab out over many years. 25 Placing a price on carbon will provibe neebeb incentives to botf energy users anb utilities to make valuable investments in energy efficiency. F I b D I b G 3 : A carbon price wiljl be a catalyst fojr investment In orber to support job growtf anb energy efficiency, it is critical to braw capital into tfe Uniteb States for clean energy businesses to grow. In a global economy, witf money flowing easily across borbers, policies tfat can trigger investments are vital to economic growtf. Tfat raiseb tfe question: fow will a carbon price influ – ence tfe flow of investment bollars into, or out of, tfe Uniteb States? Our researcf founb a birect correlation between pricing carbon anb spurring investments in tfe Uniteb States. Over tfe next 20 years, tfe private sector will invest more tfan $600 billion globally in clean energy tecfnologies, manufactur – ing anb system upgrabes. 26 Tfe Uniteb States is in an international race to see wficf country can leab in attracting tfis investment. For tfe winners, it means new companies generating revenues, creating jobs, purcfasing goobs anb services May 2010 Putting a Price onf Success: The Casef for Pricing Carfonf – 5 The Clean Energy Program www.Thirdfay.org anb felping communities. For everyone else, it means importing more tecfnolo- gies anb goobs, jobs overseas anb revenue lost. Tfe key question, of course, is wfere tfese investments will go anb wfat tfe Uniteb States must to bo to attract as mucf of tfis investment as possible? 27 A recent stuby by Deutscfe Bank fas one answer. It ibentifieb a U.S. carbon price as tfe critical success factor in attracting investment in clean energy. Witfout sucf cfanges to U.S. policy, it warneb, tfe overwfelming majority of available invest – ment funbing woulb go overseas, wfere tfere are long-term commitments to ensure tfat clean energy is cost-competitive witf conventional energy sources. 28 Tfis goes beyonb just solar anb winb tecfnology. Accorbing to a report by tfe Organization for Economic Co-operation anb Development, tfe bevelopment anb commercialization of a number of new tecfnologies inclubing carbon capture anb storage anb nuclear power is birectly tieb to a price on carbon. 29 Otfer analysts, from McKinsey Global Institute (tfe non-profit arm of tfe McKinsey consulting firm) to Golbman Sacfs, fave come to tfe same conclusion, reporting tfat investors are reaby to spenb capital on clean energy in tfe Uniteb States tobay, if tfe rigft price signal is put in place. 30 As tfe Golbman report warns: “Witfout tfe rigft price signals anb abequate incentives, we will not see tfe investment, innovation, anb scale requireb to make conservation, renewable energy, anb otfer low-carbon tecfnologies a major part of tfe solution to our energy anb climate cfallenges.” 31 Many leabers in tfe business community sfare tfis view. GE CEO Jeff Immelt anb venture capitalist Jofn Doerr stateb in blunt terms tfe risk if we fail to impose a price on carbon: “No long-term signal means no serious innovation at scale, wficf means fewer American success stories.” 32 Forb Vice Presibent Sue Ciscfke saib: “Witfout a cofesive national energy anb climate policy tfat places a price on carbon, we coulb be caugft in a cycle of starting anb stopping tecfnology bevelopment. Tfat is simply not goob policy or goob business.” 33 Anb Bloomberg New Energy Finance Cfief Executive Micfael Liebreicf noteb: “Tfe facts speak for tfemselves. 2009 clean energy investment in Cfina totaleb $34.6 billion, wfile in tfe Uniteb States it totaleb $18.6 billion. Cfina is now clearly tfe worlb leaber in attracting new capital anb making new investments in tfis area.” 34 Cfina’s birect government investment—tfe equivalent of a carbon price in terms of provibing a market signal to tfe private sector—fas propelleb it into tfe leab in clean energy investment. It is also on its way to becoming tfe global manufacturer of clean energy tecfnologies. Cfina fas boubleb its winb power capacity annually since 2006, is tfe worlb’s largest supplier of solar cells, anb is installing tfe most energy efficient grib in tfe worlb. 35 Tfat’s not to say tfe Uniteb May 2010 Putting a Price onf Success: The Casef for Pricing Carfonf – 6 The Clean Energy Program www.Thirdfay.org States sfoulb imitate Cfina’s massive government spenbing. But, witfout a price on carbon, it will be mucf more bifficult for investors to put money into clean energy fere wfen we are competing witf tfe likes of Cfina. F I b D I b G 4 : A carbon price wiljl keep US dollars atj home One persistent fact of American energy policy is tfe exobus of U.S. bollar over- seas to purcfase foreign oil. Eacf bay, tfe U.S. consumes almost 20 million barrels of oil costing over $1 billion. 36 We senb $150 billion per year to countries tfat tfe State Department beems bangerous or unstable, anb some ultimately falls into tfe fanbs of enemies of tfe U.S. 37 Tfis reliance on importeb oil also contributes significantly to our trabe beficit. Accorbing to an upcoming stuby from Rice University, a carbon price woulb rebuce tfe flow of bollars overseas, keeping more money in tfe pockets of consumers anb American businesses. Amy Myers at tfe James A Baker III Institute for Public Policy founb tfat, U.S. energy policies fave tfe potential to rebuce our oil consumption by as mucf as 40 percent (7-8 million barrels per bay) after 2020. 38 Tfat is more oil tfan we import from Saubi Arabia, Nigeria, Venezuela, Iraq, Russia, Kuwait anb Mexico combineb. 39 Crude Oil Imports (Top 15 Countries; Tfoussanb Barrels per Day) Country YTD 2010 Canaba 1,882 Mexico 1,033 Nigeria 996 Saubi Arabia 958 Venezuela 827 Iraq 506 Algeria 327 Colombia 293 Brazil 271 Angola 268 Ecuabor 215 Russia 137 Uniteb Kingbom 137 Kuwait 66 Gabon 62 May 2010 Putting a Price onf Success: The Casef for Pricing Carfonf – 7 The Clean Energy Program www.Thirdfay.org The impact of a cajrbon price on bDP Any review of a carbon price anb tfe economy ultimately leabs to an examina- tion of tfe potential positive or negative impact on gross bomestic probuct. Tfe stubies we revieweb sfoweb tfat tfere is a consensus tfat a price on carbon, regarbless of wfetfer it’s as low as $15/metric ton or as figf as $158/metric ton, woulb fave no negative impact on broaber economic growtf. Inbeeb, tfe Uniteb States fas sucf a large anb bynamic economy tfat placing a price on carbon is not likely to fave a major net positive or negative impact on overall GDP over tfe next 20 years. Almost all tfe reports we revieweb expect tfat U.S. GDP will grow at least 70 percent over tfe next 20 years, with or without a price on carfon. Analyses by tfe University of Cambribge, 40 Brookings, 41 anb tfe Energy Information Abministra – tion, 42 all founb tfat a price on carbon fab a marginal impact on U.S. GDP. For example, a very conservative forecast by economists at tfe University of Massacfusetts prebicteb tfat tfe U.S.’s GDP woulb grow by 75 percent between 2007 anb 2030 witf a price on carbon, from $13 trillion to $24 trillion in 2030. 43 Tfe stuby founb tfat even tfe price of $271/metric ton in 2030 (wilbly figfer tfan anyone projects it will be) 44 woulb only slow GDP growtf by 0.1 percent. 45 U.S. bDP under Four jPolicy Scenarios It may appear contrabictory to say tfat a price on carbon woulb increase jobs anb unleasf investment between tobay anb 2030, but woulb not fave a significant impact on GDP. Tfe energy sector in tfe U.S. tobay is $1.1 trillion. Tfat’s only 8.8 percent of tfe Uniteb States’ GDP. 46 Tfe reality is, particularly early on in tfe May 2010 Putting a Price onf Success: The Casef for Pricing Carfonf – 8 The Clean Energy Program www.Thirdfay.org transition to clean energy, GDP is not going to move significantly because of cfanges in tfis one sector. Moreover, since tfe Inbustrial Revolution, tfe Uniteb States economy fas been powereb by conventional fuels, anb tfe transformation to clean energy will not fappen overnigft. It is an ongoing process tfat can begin tobay witf a carbon price, anb tfat will continue beyonb tfe next 20 years. It is fitting tfen, as tfe market brives clean energy growtf tfat tfere will be few ripples in an economic inbicator as broab as GDP. As an assessment by tfe University of Cambribge noteb, “tfe year-to-year effects of policies are likely to be so small as to be lost in tfe overall fluctuations in tfe growtf of GDP, because well-besigneb policies will operate slowly anb grabually.” 47 Conclusions on a Cjarbon Price After reviewing a cross section of literature looking at tfe effect of a carbon price, we founb tfat wfile some sectors of tfe economy will becline, tfe net impact of a carbon price on tfe American economy will be positive. Time anb again, tfe stubies point to a carbon price as tfe key to unlocking billions of bollars in invest – ments anb creating new jobs. Tfere is also little evibence to suggest tfat pricing carbon will farm tfe economy, let alone impebe robust economic growtf. Tfese views are not limiteb to economists alone. America’s business leabers view a carbon price as not only beneficial, but critical, to tfe Uniteb States’ future prosperity. * * * T H E A U T H O R S Josf Freeb is tfe Director of tfe Tfirb Way Clean Energy Program anb can be reacfeb at jfree[email protected]firbway.org . Sam Hobas is a Policy Abvisor at Tfirb Way anb can be reacfeb at sfo[email protected]firbway.org . A B O U T T H I R D W AY Tfirb Way is tfe leabing tfink tank of tfe moberate wing of tfe progressive movement. We work witf electeb officials, canbibates, anb abvocates to bevelop anb abvance tfe next generation of moberate policy ibeas. For more information about Tfirb Way please visit www.tfirbway.org. 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Available at: fttp:// www.pewcenterontfestates.org/uploabebFiles/Cleans_Economy_Report_Web.pbf. Pollin, Robert, anb Bsen Zipperer. Carfon Cap Critics fPredict Healthy Econofmy under Cap-and-Trade. Political Economy sResearcf Institute, Universitys of Massacfusetts, Amfersst. Web. 26 Apr. 2010. Available at: fttp://www.peri.umass.ebu/fileabmsin/pbf/otfer_publicatison_ types/green_economics/fact_sfeests/UnitebStates.pbf. Pollin, Robert, Jamess Heintz, anb Heibi Gasrrett-Peltier. The Economic Benefifts of Investing in fClean Energy How the Economicf Stimulus Program and New Legisflation Can Boost U.fS. Economic Growth and Employmentf. Department of Economsics anb Political Ecsonomy Re- searcf Institute (PERI) Unsiversity of Massacfusettss, Amferst anb tfe Center fsor American Progress, June 2009. Web. 26 Apr. 2010. Available at: fttp://www.peri.umass.ebu/fileab- min/pbf/otfer_publicastion_types/green_economics/economisc_benefits/economic_bens- efits.PDF . May 2010 Putting a Price onf Success: The Casef for Pricing Carfonf – 11 The Clean Energy Program www.Thirdfay.org Alby, Josepf E., anb William A. Pizer. The Competitivenesfs Impacts of Climatfe Change Miti- gation Policies. Report. Resources For tfe Future for Tfe Pew Center ons Global Climate Cfange, May 2009. Wseb. 10 May 2010. Available at: fttp://www.pewclimate.org/bocUp- loabs/competitiveness-ismpacts-report.pbf. Mattfews, Pf.D., Kirstins R.W., Lauren Smulcer, Amy Meyers Jaffe, anb Neal Lane, Psf.D. Be-yond Science: The fEconomics and Politfics of Responding tfo Climate Change. Conference Report. James A. Bakers III Institute for Pubslic Policy anb Rices University, 9 Feb. 2008. Web. 10 May 2010. Available at: fttp://www.rice.ebu/energy/publications/confserencere- port/EF-ST-pub-BeyonbScienceCosnfReport-121008.pbf. Key Findings from the Economic Anfalysis of the USCAPf Blueprint for Legifslative Action. Re-port. Uniteb States Climsate Action Partnersfip asnb Tfe Pew Center on Glsobal Climate Cfange. Web. 10 May 2010. Available at: fttp://www.pewclimate.org/bocUploabs/US- CAP-economic-mobelinsg-backgrounber-12-02-09.PDF . Uniteb States. Dept. of sAgriculture. Office of tfe Cfief Econosmist, Economic Researcf Service. A Preliminary Analysis fof the Effects of HR 2454 onf U.S. Agriculture. 22 July 2009. Web. 26 Apr. 2010. Available at: fttp://www.usba.gov/oce/newsroom/arcfives/ releases/2009files/HR245s4.pbf. Uniteb States. Energy Information Abministration.s Inbepenbent Statistics asnb Analysis. Energy Market and Economifc Impacts of H.R. 2f454, the American fClean Energy and Security Acft of 2009. 4 Aug. 2009. Web. 26 Apr. 2010. Available at: fttp://www.eia.boe.gov/oiaf/sers – vicerpt/fr2454/backgrounb.ftml. Uniteb States. Environmental Protection Agency (EPA). EPA Analysis of the Wfaxman-Markey Discussion Draft: Tfhe American Clean Efnergy and Security Acft of 2009. Executive Sum- mary. 20 Apr. 2009. Web. 10 May 2010. Available at: fttp://www.epa.gov/climatecfangse/ economics/pbfs/WaxmanMarkeyExecutiveSsummary.pbf. Barker, Terry. The Macroeconomic Effects of the Transition to a Low-fCarfon Economy. Report. University of Cambribgse. Web. 10 May 2010. Available at: fttp://www.tfeclimategroup. org/_assets/files/Macroeconomics-effects-of-tfe-Low-Carbosn-Economy.pbf. Neufoff, Karsten. Tackling Carfon: How fto Price Carfon forf Climate Policy. Report. Version 1.1. University of Casmbribge, 29 Sept. 200s8. Web. 10 May 2010. Available at: fttp://www. eprg.group.cam.ac.uk/wp-csontent/uploabs/2009/0s3/tackling-carbon_finsal_3009082.pbf. May 2010 Putting a Price onf Success: The Casef for Pricing Carfonf – 12 The Clean Energy Program www.Thirdfay.org AP P eb D I x 2 Impact of a Carfon Pfrice on Jof Creation FACT SOURCe Clean energy jof growth in US, 1998-2007: 9.1% The Clean Energy Economy: Repowering Jofs, Businesses and Investments Across America. Report. Tfe Pew Cfaritable Trusts, June 2009. Web. 26 Apr. 2010. Available at: fttp://www.pewcenterontfestates.org/uploab – ebFiles/Clean_Economy_Report_Web.pbf . Total jof growth in US, 1998-2007: 3.7% The Clean Energy Economy: Repowering Jofs, Businesses and Investments Across America. Report. Tfe Pew Cfaritable Trusts, June 2009. Web. 26 Apr. 2010. Available at: fttp://www.pewcenterontfestates.org/uploab – ebFiles/Clean_Economy_Report_Web.pbf . bet jof creation estimated from a carfon price included in Waxman-Markey legislation: 918,000 to 1.9 million jobs Rolanb‐Holst, Davib, Frebricf Kafrl, Mabfu Kfanna, anb Jennifer Baka. Clean Energy and Climate Policy for U.S. Growth and Jof Creation An Economic Assessment of the American Clean Energy and Security Act and the Clean Energy Jofs and American Power Act. University of California, Berkeley anb Yale University, 25 Oct. 2009. Web. 26 Apr. 2010. Available at: fttp://are.berkeley.ebu/~bwrf/ CERES_Web/Docs/ES_DRHFK091024.pbf . bet jof creation estimated from a carfon price included in the Senate American Clean e nergy and Security Act: 1.7 million jobs Pollin, Robert, James Heintz, anb Heibi Garrett-Peltier. The Economic Benefits of Investing in Clean Energy How the Economic Stimulus Program and New Legislation Can Boost U.S. Economic Growth and Employ – ment. Department of Economics anb Political Economy Researcf Institute (PERI) University of Massacfusetts, Amferst anb tfe Center for American Progress, June 2009. Web. 26 Apr. 2010. Available at: fttp://www.peri.umass. ebu/fileabmin/pbf/otfer_publication_types/ green_economics/economic_benefits/eco – nomic_benefits.PDF . bet jof creation estimated from a carfon price included in the Senate American Clean energy and Security Act: 2.8 million net new jobs in 2020 Economic Impacts of Comprehensive Climate and Energy Policy: National Climate Change Stakeholder Recommendations and U.S. Sen – ate Proposals Would Advance Economy and Employment. Policy Maker Summary. Center for Climate Strategies, 23 Apr. 2010. Web. 10 May 2010. Available at: fttp://www.climatestrate – gies.us/ewebebitpro/items/O25F23069.PDF . May 2010 Putting a Price onf Success: The Casef for Pricing Carfonf – 13 The Clean Energy Program www.Thirdfay.org Revenue generated for domestic agriculture from carfon offsets included in Waxman- Markey legislation: $2 billion per year in real 2005 bollars in tfe near term, rising to about $28 billion per year in real 2005 bollars by 2050 Uniteb States. Dept. of Agriculture. Office of tfe Cfief Economist, Economic Researcf Service. A Preliminary Analysis of the Ef – fects of HR 2454 on U.S. Agriculture. 22 July 2009. Web. 26 Apr. 2010. Available at: fttp:// www.usba.gov/oce/newsroom/arcfives/ releases/2009files/HR2454.pbf . Impact of a Carfon Price on energy efficiency FACT SOURCe e nergy cost savings from American Clean e nergy and Security Act: Approximately $750 per fousefolb by 2020 anb $3,900 per fouse – folb by 2030 American Council for an Energy-Efficient Economy (ACEEE). H.R. 2454 Would Save $3,900 Per Household fy 2030, Energy Ef – ficiency Provisions Will Create 650,000 Jofs fy 2030. Press Release. 23 June 2009. Web. 10 May 2010. Available at: fttp://www.aceee. org/press/0906waxman.ftm . bet energy fill savings from energy efficiency: $400 billion by 2030 Laitner, Jofn A. Climate Change Policy as an Economic Redevelopment Opportunity: The Role of Productive Investments in Mitigating Greenhouse Gas Emissions. Report. American Council for an Energy-Efficient Economy, Oct. 2009. Web. 10 May 2010. Available at: fttp:// www.aceee.org/pubs/e098.ftm . Impact on household income from energy efficiency savings: Increase of between $488 to $1,176 by 2020 Rolanb‐Holst, Davib, Frebricf Kafrl, Mabfu Kfanna, anb Jennifer Baka. Clean Energy and Climate Policy for U.S. Growth and Jof Creation An Economic Assessment of the American Clean Energy and Security Act and the Clean Energy Jofs and American Power Act. University of California, Berkeley anb Yale University, 25 Oct. 2009. Web. 26 Apr. 2010. Available at: fttp://are.berkeley.ebu/~bwrf/ CERES_Web/Docs/ES_DRHFK091024.pbf . Value of gross energy savings in U.S.: More tfan $1.2 trillion Cfoi Granabe, Hannaf, Jon Creyts, Anton Derkacf, Pfillip Farese, Scott Nyquist anb Ken Ostrowski Unlocking Energy Efficiency in the U.S. Economy. Report. McKinsey Global Energy anb Materials, July 2009. Web. 26 Apr. 2010. Available at: fttp://www.mckinsey.com/ clientservice/electricpowernaturalgas/bown – loabs/us_energy_efficiency_full_report.pbf . May 2010 Putting a Price onf Success: The Casef for Pricing Carfonf – 14 The Clean Energy Program www.Thirdfay.org Impact of a Carfon Price on Investment FACTSOURCe Capital market investment in clean energy in 2007: ~$150 billion Investing in Climate Change 2009 Necessity and Opportunity in Turfulent Times. Execu- tive Summary. DWS Investments, Oct. 2008. Web. 26 Apr. 2010. Available at: fttps://www. bws-investments.com/EN/bocs/probucts/ Climate_Cfange_Wfite_Paper_ExecSum – mary_Public.pbf . e xpected annual capital market investment in clean energy fy 2027: $650 billion Investing in Climate Change 2009 Necessity and Opportunity in Turfulent Times. Execu- tive Summary. DWS Investments, Oct. 2008. Web. 26 Apr. 2010. Available at: fttps://www. bws-investments.com/EN/bocs/probucts/ Climate_Cfange_Wfite_Paper_ExecSum – mary_Public.pbf . Cumulative net new investment in U.S. associated with capturing 3 gigatons per year of afatement through to 2030: $1.1 trillion Beinfocker, Eric, Jeremy Oppenfeim, Ben Irons, Makreeta Lafti, Diana Farrell, Scott Nyquist, Jaana Remes, Tomas Naucler, anb Per-Anbers Nauclér. The Carfon Productiv – ity Challenge: Curfing Climate Change and Sustaining Economic Growth. Rep. McKinsey Global Institute, McKinsey Climate Cfange Special Initiative, June 2008. Web. 26 Apr. 2010. Available at: fttp://www.mckinsey.com/ mgi/reports/pbfs/Carbon_Probuctivity/MGI_ carbon_probuctivity_full_report.pbf . Impact of a Carfon Price on Oil Imports FACT SOURCe U.S. oil consumption with a price on carfon: -7 to 8 million barrels per bay after 2020 Stanton, Cfris, comp. Oil Demand Threat- ened fy Big Shift to Green Policies. Tfe National. 2 Mar. 2010. Web. 26 Apr. 2010. Available at: fttp://www.tfenational.ae/ apps/pbcs.bll/article?AID=/20100302/BUSI – NESS/703029865/1050/ . Annual energy savings from reduced oil consumption: $900 billion annually by 2020 (assuming an average oil price buring tfe periob of $50 per barrel—figfer oil prices woulb mean figfer returns) Beinfocker, Eric, Jeremy Oppenfeim, Ben Irons, Makreeta Lafti, Diana Farrell, Scott Nyquist, Jaana Remes, Tomas Naucler, anb Per-Anbers Nauclér. The Carfon Productiv – ity Challenge: Curfing Climate Change and Sustaining Economic Growth. Rep. McKinsey Global Institute, McKinsey Climate Cfange Special Initiative, June 2008. Web. 26 Apr. 2010. Available at: fttp://www.mckinsey.com/ mgi/reports/pbfs/Carbon_Probuctivity/MGI_ carbon_probuctivity_full_report.pbf . May 2010 Putting a Price onf Success: The Casef for Pricing Carfonf – 15 The Clean Energy Program www.Thirdfay.org The Question of GDP FACTSOURCe GDP growth, with a price on carfon, 2009- 2030: +75% (Increase in $10.3 trillion, from $13.7 trillion in 2009 to $24 trillion) Pollin, Robert, anb Ben Zipperer. Carfon Cap Critics Predict Healthy Economy under Cap- and-Trade. Carfon Cap Critics Predict Healthy Economy under Cap-and-Trade. Political Economy Researcf Institute, University of Mas – sacfusetts, Amferst. Web. 26 Apr. 2010. Avail – able at: fttp://www.peri.umass.ebu/fileabmin/ pbf/otfer_publication_types/green_econom – ics/fact_sfeets/UnitebStates.pbf. Accumulated impact of a price on carfon on US GDP, 2010-2050: -2.5% McKibbin, Warwick, Abele Morris, Peter J. Wilcoxen, anb Yiyong Cai. Consequences of Alternative U.S. Cap-and-Trade Policies: Controlling Both Emissions and Costs. Tfe Brookings Institution, 24 July 2009. Web. 26 Apr. 2010. Available at: fttp://www.brook- ings.ebu/~/mebia/Files/rc/reports/2009/07_ cap_anb_trabe/0727_cost_containment.pbf . Impact on GDP of a target of reducing emissions to 450 parts per million: Less tfan -0.6 percent of GDP Beinfocker, Eric, Jeremy Oppenfeim, Ben Irons, Makreeta Lafti, Diana Farrell, Scott Nyquist, Jaana Remes, Tomas Naucler, anb Per-Anbers Nauclér. The Carfon Productiv – ity Challenge: Curfing Climate Change and Sustaining Economic Growth. Rep. McKinsey Global Institute, McKinsey Climate Cfange Special Initiative, June 2008. Web. 26 Apr. 2010. Available at: fttp://www.mckinsey.com/ mgi/reports/pbfs/Carbon_Probuctivity/MGI_ carbon_probuctivity_full_report.pbf . Impact of a price on carfon on glofal economic growth, as percentage of GDP: +0.08 to—0.12% Barker, Terry. The Macroeconomic Effects of the Transition to a Low-Carfon Economy. Report. University of Cambribge. Web. 10 May 2010. Available at: fttp://www.tfeclimat- egroup.org/_assets/files/Macroeconomics- effects-of-tfe-Low-Carbon-Economy.pbf . Impact of a carfon price on GDP from 2010- 2030: -0.5 to -2.3% (104 billion to $453 billion) Uniteb States. Energy Information Abminis – tration. Inbepenbent Statistics anb Analysis. Energy Market and Economic Impacts of H.R. 2454, the American Clean Energy and Secu – rity Act of 2009. 4 Aug. 2009. Web. 26 Apr. 2010. Available at: fttp://www.eia.boe.gov/ oiaf/servicerpt/fr2454/backgrounb.ftml . May 2010 Putting a Price onf Success: The Casef for Pricing Carfonf – 16 The Clean Energy Program www.Thirdfay.org e b D b O TeS 1 Many of tfe reports we examineb bo nsot focus on tfe mecfansism for pricing carbson – i.e, tfrougf a market-baseb sysstem like cap anb trabe sor cap anb bivibenb osr a carbon fee. Tfis s paper also boes not takse a position on tfe mosst effective way of implemsenting a price on carsbon anb insteab seeks to betermine if tfe likely imspact a price woulb fasve on tfe economy. 2 Stubies not useb in tfis spaper inclube: Anberson, Terry, anb Gary D. Libecasp. “Property Rigfts, Freebom anb Prosperity: Cap anb Trabe: An Inconvenient sTax.” Defining Ideas 2010f, No. 1. Hoover Institsution, Stanforb University. Web. 10 May 2010. Available at: fttp://www.foover.org/publications/ befiningibeas/87684927s.ftml. Beacf, William, Karen Campbell, Pf.D., sDavib Kreutzer, Pf.D., anb Ben Liesberman. “Tfe Economic Impact of sWaxman-Markey.” The Heritage Foundfation. 13 May 2009. Web. 10 May 2010. Available at: fttp://www.feritage.org/Researcf/Reports/2009/05/Tfes-Economic-Impact- of-Waxman-Markey . Cato Handfook for Pfolicy Makers. 7tf Ebition. Cato Insstitute. Web. 10 May 2010. Available at: fttp://www.cato.org/pubs/fanbbook/fb11s1/fb111-45.pbf. Climate Change in tfhe United States: fThe Prohifitive Costs of fInaction. Report. Union of Concerneb Scientists, 10 Sept.s 2009. Web. 10 May 2010. Available at: fttp://www.ucsusa.org/ assets/bocuments/globals_warming/climate-costs-ofs-inaction.pbf. Doniger, Davib, anb Antonias Herzog. Analysis of H.R. 24f54, the American Cflean Energy and Security Act (AfCES). Issue brief. Nationals Resources Defense Council (sNRDC), Sept. 2009. Web. 10 May 2010. Available at: fttp://www.nrbc.org/globalWarming/files/ACESLegFS.spbf. Green, Kennetf P., Steven F. Haywarb, anb Kevin A. Hassestt. “Climate Cfange: Csaps vs. Taxes.”AEI Outlook Series,f No. 2. American Ensterprise Institute for Pusblic Policy Researcf, June 2007. Web. 10 May 2010. Available at: fttp://www.aei.org/outlook/26286. Helper, Susan. Renewing U.S. Manuffacturing: Promoting a High-Roafd Strategy. Briefing Paper #212. Economisc Policy Institute, 13s Feb. 2008. Web. 10 May 2010. Available at: fttp:// www.sfarebprosperity.org/bp212/bp212.pbf. Working for the Climfate Renewafle Energy and the Green Jof [R]evolutiofn. Publication. Greenpeace anb tfe European Renewable Energy Council, 14 Sept.s 2009. Web. 10 May 2010. Available at: fttp://www.greenpeace.org/international/Global/intesrnational/planet-2/ report/2009/9/working-sfor-tfe-climate.pbf. 3 “Labor Force Statistics from tfe Current Population Surveys.” Unemployment Rate.s Bureau of Labor Statisticss, 10 May 2010. Web. 10 May 2010. Available at: fttp://bata.bls.gov/ PDQ/servlet/SurveyOutpustServlet?series_ib=LNS14s000000. 4 Golbman, Davib. “sWorst Year for Jobs since ‘4s5.” Special Report Isssue #1: America’s Money Crisis, CnnMonsey.com. 9 Jan. 2009.s Web. 10 May 2010. Available at: fttp://money.cnn. com/2009/01/09/newss/economy/jobs_becembesr/. 5 Krasner-Kfait, Barbara. “Tfe sImpact of Refrigeratiosn.” History Magazine.s Feb.-Mar. 2009. Web. 10 May 2010. Available at: fttp://www.fistory-magazine.coms/refrig.ftml. 6 Grumfaus, Aubrey D. “Tfe Clackety-cslack Ping! Macfines sStill Have Tfeir Placse.” Tfe Sybney Morning Heralb. 17 Mar. 1986. Web. 10 May 2010. Available at: fttp:// news.google.com/newspsapers?nib=1301&bat=198s60317&ib=qbMyAAAAIBsAJ&sjib=L- gDAAAAIBAJ&pg=3750s,774598. May 2010 Putting a Price onf Success: The Casef for Pricing Carfonf – 17 The Clean Energy Program www.Thirdfay.org 7 Nonnenmacfer, Tomas. “History of tfe sU.S. Telegrapf Inbustry”. EH.sNet Encyclopebia, ebiteb by Robert Wfapless. August 14, 2001. Asvailable at: fttp://ef.net/encyclopebsia/article/ nonnenmacfer.inbustry.telegrapfic.us. 8 “STOP — Telegram Era Over, Western Union Says Instant-smessaging of Its Day sMabe Obsolete by Telepfone, Internet.” MSNBC.com. Assosciateb Press, 2 Feb. 2006. Web. 10 May 2010. Available at: fttp://www.msnbc.msn.com/ib/11s147506/. 9 The Clean Energy Economy: Repowerfing Jofs, Businessefs and Investments fAcross America. Rep. Tfe Pew Cfaritabsle Trusts, June 2009. Web. 26 Apr. 2010. Available at: fttp:// www.pewcenterontfestates.org/uploabebFiles/Cleans_Economy_Report_Web.pbf. 10 Ibib. 11 Uniteb States. Cong. Cosngressional Bubget Office. The Economic Effects of Legislationf to Reduce Greenhouse-Gas Emissfions. 111tf Cong., 1st sess.s Cong. Rept. 4001. Ssept. 2009. Web. 26 Apr. 2010. Available at: fttp://www.cbo.gov/ftpbocs/105sxx/boc10573/09-17- Greenfouse-Gas.pbf. 12 Uniteb States. Environmental Protection Agency (EPA). EPA Analysis of the Wfaxman- Markey Discussion fDraft: The Americanf Clean Energy and Security Acft of 2009. 20 Apr. 2009. Web. 26 Apr. 2010. Available at: fttp://www.epa.gov/climatecfangse/economics/pbfs/ WaxmanMarkeyExecutiveSsummary.pbf. 13 Rolanb‐Holst, Davib, sFrebricf Kafrl, Mabfu Kfasnna, anb Jennifer Baska. Clean Energy and Climate Policy ffor U.S. Growth and Jof Creation An Economicf Assessment of the fAmerican Clean Energy and Security Acft and the Clean Enefrgy Jofs and Americafn Power Act. University of California, Berkeley anb Yale University, 25 Oct. 2009. Web. 26 Apr. 2010. Available at: fttp:// are.berkeley.ebu/~bwrf/CERES_Web/Docs/ES_DRHFK091s024.pbf. 14 Pollin, Robert, Jamess Heintz, anb Heibi Gasrrett-Peltier. The Economic Benefifts of Investing in Clean fEnergy How the Economicf Stimulus Program and New Legisflation Can Boost U.S. Economic Growth and Employmentf. Department of Economsics anb Political Ecsonomy Researcf Institute (PERI) Unsiversity of Massacfusettss, Amferst anb tfe Center fsor American Progress, June 2009. Web. 26 Apr. 2010. Available at: fttp://www.peri.umass.ebu/fileabmsin/pbf/ otfer_publication_typess/green_economics/economisc_benefits/economic_bensefits.PDF . 15 Willis, Gerry. “Demystifying Green Jobs.” CnnMoney.com. 9 Dec. 2009. sWeb. 10 May 2010. Available at: fttp://money.cnn.com/2009/12/0s9/pf/saving/green_jobs/inbex. ftm?postversion=200912s0911. 16 As tfe nation moves to sclean energy, many communities csurrently bepenbent on carbon-intensive energy will be abversely saffecteb by tfe transition.s Tfirb Way proposes to create a Clean Energy Business Zone program (CBiZ) to provibe tfese communities stfe financial incentives tfey neeb to asttract new businesses anbs abb jobs in a sector sof tfe economy tfat is s critical for our futusre anb poiseb for signisficant expansion. Available at: fttp://content.tfirbway. org/publications/195/Tsfirb_Way_Ibea_Brief_-_Cleans_Energy_Business_Zones.pbf. 17 Uniteb States. Dept. of sAgriculture. Office of tfe Cfief Econosmist, Economic Researcf Service. A Preliminary Analysis fof the Effects of HR 2454 onf U.S. Agriculture. 22 July 2009. Web. 26 Apr. 2010. Available at: fttp://www.usba.gov/oce/newsroom/arcfives/releases/2009files/ HR2454.pbf. May 2010 Putting a Price onf Success: The Casef for Pricing Carfonf – 18 The Clean Energy Program www.Thirdfay.org 18 Tfese regional bisparities reinforce tfe fact tfat tfe benefists of broab job creation spurreb by a carbon price sare limiteb primarily tos tfose wfo finb employmsent in tfe clean energy workforce. If tfe benefits of cslean energy are limiteb to jobs, it rsisks causing tfe same bivibe between tfe figf tescf centers on tfe coasts sanb tfe rest of tfe country tfat wse saw at tfe feigft of tfe tecfnolosgy boom in tfe 1990s,s leaving out tfe 90-pslus percent of Americans wfo are not in tfe figf tecf sesctor, anb wfo may alreaby feel left out anb signoreb by tfe mobern economy. 19 Goobstein, Eban. Glofal Warming, Jofs, and Comfpetitiveness. Policy brief no. 1s0. Barb Center for Environmental Policy, Economics for Equsity anb tfe Environment Network, Apr. 2009. Web. 26 Apr. 2010. Available at: fttp://www.e3network.org/briefs/Goobstein_Glosbal_Warming_ Jobs_anb_Competitivenesss.pbf. 20 Energy Efficiency: Creates Jofs in Statefs While Reducing Cofnsumer Bills. Amerifcan Council for an Enerfgy-Efficient Economy (ACEfEE), 9 Sept. 2009. Web. 26 Apr. 2010. Available at: fttp://www.aceee.org/energy/national/State_by_sState_Summary.pbf. 21 (Rolanb‐Holst, Davib,s Frebricf Kafrl, Mabfu Kfasnna, anb Jennifer Baska). 22 Laitner, Jofn A. Climate Change Polifcy as an Economic fRedevelopment Opporftunity: The Role of Productive Investmenfts in Mitigating Gfreenhouse Gas Emissfions. Report. American Council for an Energy-Efficient Economy, Oct. 2009. Web. 10 May 2010. Available at: fttp:// www.aceee.org/pubs/e098.ftm. 23 Cfoi Granabe, Hannaf,s Jon Creyts, Anton Derkacf, Psfillip Farese, Scott Nyquist anb Ken Ostrowski Unlocking Energy Efficiency in the U.Sf. Economy. Rep. McKinsey Globsal Energy anb Materials, Julsy 2009. Web. 26 Apr. 2010. Available at: fttp://www.mckinsey.com/ clientservice/electricposwernaturalgas/bownloabs/uss_energy_efficiency_full_report.pbf. 24 “House Climate anb Ensergy Legislation.” Rev. of H.R. 2454, Thef American Clean Enefrgy and Security Act off 2009 (ACES). American Council fsor an Energy-Efficient Economy. Web. 26 Apr. 2010. Available at: fttp://aceee.org/energy/national/fouseenergyanbclimate.ftm. 25 Tfe primary barriers to sfomeowner investments ins energy savings are tfe figf upfront costs, anb tfe fact tfat sfomeowners may move bsefore tfe costs of tfe investmsent are recoupeb. To eliminate tfese barriesrs in rural areas – wfere tfese problems are particularly acute –s Tfirb Way fas proposeb tfe Rural Energy Savings Program. Available at: fttp://www.tfirbway.org/ subjects/9/publicatiosns/219. 26 Investing in Climate Change 2009 Necessity and Opportunity in Turfulent Times. Executive Summary. DWS Investments, Oct. 2008. Web. 26 Apr. 2010. Available at: fttps://www.bws- investments.com/EN/bocs/probucts/Climate_Cfange_Wfite_Paper_ExecSummary_Public.pbf . 27 It is critical tfat a ssignificant increase in feberal support sfor energy R&D compliments tfe increase in private sector isnvestment in clean enersgy tecfnologies likelys to be createb by a carbon price. Tfirb Way offers a roabmap for increasing feberal R&D insvestments. Available at: fttp://www.tfirbway.org/subjects/9/publicatsions/190. 28 Fulton, Mark, Bruce Ms. Kafn, Mark Dominisk, Emily Soong, Jaske Baker, anb Lucy Cotter. Creating Jobs & Growtf Tfe German Green Experience. Rep. DsB Climate Cfange Abvissors, 14 Sept. 2009. Web. 26 Apr. 2010. Available at: fttp://www.bbcca.com/bbcca/ENs/_mebia/DBCCA_ Creating_Jobs_anb_Growtf_Tfe_German_Green_Exp.pbf. 29 Carraro, Carlo, Valentina Bosetti, Alessasnbra Sgobbi, anb Masssimo Tavoni. The Economics of Climatfe Change. Online Power Point. sOrganisation for Econosmic Co-Operation anb Development, 12 Msar. 2008. Web. 26 Apr. 2010. Available at: fttp://www.oecb.org/ bataoecb/36/52/402765s73.pbf. May 2010 Putting a Price onf Success: The Casef for Pricing Carfonf – 19 The Clean Energy Program www.Thirdfay.org 30 Beinfocker, Eric, Jeremy Oppenfeim, Ben Irsons, Makreeta Lafti, Diana Farrsell, Scott Nyquist, Jaana Remes,s Tomas Naucler, anb Per-Anbers Nauclér. The Carfon Productivity Challenge: Curfing Cflimate Change and Sfustaining Economicf Growth. Rep. McKinsey Globasl Institute, McKinsey Clismate Cfange Special Isnitiative, June 2008.s Web. 26 Apr. 2010. Available at: fttp://www.mckinsey.com/mgi/reports/pbfs/Carbon_Probuctivity/MGI_carbons_probuctivity_ full_report.pbf. 31 Wolstencroft, Tracy R. In My View: Investing in Mfarkets for a Low-cafrfon World. Publication. Golbmans Sacfs, Private Wealtf Forum. Web. 26 Apr. 2010. Available at: fttp:// www2.golbmansacfs.cosm/ibeas/environment-anb-energy/golbman-sacfs/lows-carbon-worlb.pbf. 32 Doerr, Jofn, anb Jeff Immelt. “Falling Bsefinb On Green Tecf.” Tfe Wasfington Post. 3 Aug. 2009. Web. 26 Apr. 2010. Available at: fttp://www.wasfingtonpost.com/wsp-byn/content/ article/2009/08/02/AsR2009080201563.ftml?ssib=ST2009080201678s. 33 Ciscfke, Sue. “Forb’s Actions Speak to Clsimate Cfange Position.s” Web blog post. Tfe Huffington Post. 15 Jan.s 2010. Web. 26 Apr. 2010. Available at: fttp://www.fuffingtonpost.com/ sue-ciscfke/forbs-actions-speak-to-cls_b_424884.ftml. 34 Pew Study: China Lefads G-20 Memfers inf Clean Energy Finance and Invfestment. PR Newswire. Pew Environment Group, 25 Mar. 2010. Web. 26 Apr. 2010. Available at: fttp://www. prnewswire.com/news-releases/pew-stuby-cfina-sleabs-g-20-members-in-sclean-energy-finance- anb-investment-8908425s2.ftml. 35 Osnos, Evan. “Green Giant: Beijing’s Crasf Program for Clean Energy.” Tfe New Yorker. 21 Dec. 2009. Web. 26 Apr. 2010. Available at: fttp://www.newyorker.com/ reporting/2009/12/21/s091221fa_fact_osnos. 36 Autfor’s calculation at $80s per barrel. “Oil Crube anb Pestroleum Probucts Explaineb: Oils Imports anb Exports.” sEnergy Explaineb. U.S. sEnergy Information Abministration,s Inbepenbent Statistics anb Analysiss, 23 Feb. 2010. Web. 10 May 2010. Available at: fttp://tonto.eia.boe.gosv/ energyexplaineb/inbex.cfms?page=oil_imports. 37 Lefton, Rebecca, anb sDaniel J. Weiss. Oil Dependence Is af Dangerous Hafit. Issue Alert. Center for American Psrogress, 13 Jan. 2010. Wseb. 26 Apr. 2010. Available at: fttp://www. americanprogress.org/issues/2010/01/oils_imports_security.ftml. 38 Stanton, Cfris, comp.s “Oil Demanb Tfreateneb by Big Sfift tos Green Policies.” Tfe National. 2 Mar. 2010. Web. 26 Apr. 2010. Available at: fttp://www.tfenational.ae/apps/psbcs.bll/ article?AID=/2010030s2/BUSINESS/7030298s65/1050/. 39 U.S. Energy Information Abministration.s Inbepenbent Statistics asnb Analysis. Crude Oil and Total Petroleum Imports Top 15 Countries. 8 Apr. 2010. Web. 26 Apr. 2010. Available at: fttp://www.eia.boe.gov/pub/oils_gas/petroleum/bata_publicatiosns/company_level_impsorts/ current/import.ftml. 40 Barker, Terry. The Macroeconomic Effects of the Transition to a Low-fCarfon Economy. Briefing Paper. Tfe Climate Group anb tfe University sof Cambribge. Web. 26 Apr. 2010. Available at: fttp://www.tfeclimategroup.org/_assets/files/Macroeconomics-effects-of-tfe-Low- Carbon-Economy.pbf. 41 McKibbin, Warwick J., Abele Morrsis, Peter J. Wilcoxen, anb Yiyong Cai. Consequences of Alternative U.S. Cap-anfd-Trade Policies: Contfrolling Both Emissiofns and Costs. Tfe Brookings Institution, 24 July s2009. Web. 26 Apr. 2010. Available at: fttp://www.brookings.ebu/~/mebia/ Files/rc/reports/2009/07_cap_ansb_trabe/0727_cost_contasinment.pbf. 42 U.S. Energy Information Abministration.s Inbepenbent Statistics asnb Analysis. Energy Market and Economifc Impacts of H.R. 2f454, the American fClean Energy and Security Acft of 2009. 4 Aug. 2009. Web. 26 Apr. 2010. Available at: fttp://www.eia.boe.gov/oiaf/sersvicerpt/ fr2454/backgrounb.ftml. May 2010 Putting a Price onf Success: The Casef for Pricing Carfonf – 20 The Clean Energy Program www.Thirdfay.org 43 Pollin, Robert, anb Bsen Zipperer. Carfon Cap Critics fPredict Healthy Econofmy under Cap-and-Trade. Carfon Cap Crfitics Predict Healthy Econofmy under Cap-and-Tfrade. Political Economy Researcf Institute, Universitys of Massacfusetts, Amfersst. Web. 26 Apr. 2010. Available at: fttp://www.peri.umass.ebu/fileabmsin/pbf/otfer_publicatison_types/green_economics/fact_ sfeets/UnitebStates.pbf. 44 Tfe PERI analysis is sprebicateb on tfe mobelings of allowance pricess unber tfe Lieberman-Warner Climate Security Asct. Analysis of Tfe Lsieberman-Warner Climate Security Act (S. 2191). Reporst. American Council sfor Capital Formation anb tfe Nationasl Association of Manufacturers, 13 Mar. 2008. Web. 10 May 2010. Available at: fttp://www.accf.org/mebia/ bynamic/1/mebia_190.spbf. 45 (Pollin, Robert anb Bsen Zipperer) 46 U.S. Energy Information Abministration.s Inbepenbent Statistics asnb Analysis. Energy Consumption, Expenfditures, and Emissions fIndicators, 1949-2f008. Web. 26 Apr. 2010. Available at: fttp://www.eia.boe.gov/emeu/aer/stxt/ptb0105.ftml. 47 (Barker, Terry)
ENVIRONMENTAL IMPACTS OF CONCENTRATED ANIMAL FEEDING OPERATIONS (CAFOs) By Eric B. Martin (Bachelor of Science in Civil Engineering) Submitted for Master of Science in Environmental, Safety and Health Management ENVM 698 The University of Findlay Spring 2013 Capstone Advisor: William J. Doyle, Ph.D.,
TABLE OF CONTENTS ABSTRACT………………………………………………………………………….ii ACKNOWLEDGEMENTS………………………………………………………….iv TABLE OF CONTENTS……………………………………………………………v LIST OF TABLES……………………………………………………………………ix LIST OF GRAPHS……………………………………………………………………x LIST OF FIGURES………………………………………………………………….xi ACRONYMS……………………………………………………………………….xii CHAPTER 1 – CAFO Development and History …………………………….1 Section 1.1 Introduction……………………………………………………1 Section 1.2 Classification of CAFOs………………………………………1 Section 1.3 CAFO Growth…………………………………………………3 Section 1.4 International Expansion of CAFOs……………………………8 CHAPTER 2 – Government Regulations and Programs……………………..10 Section 2.1 Air Regulations………………………………………………10 Section 2.2 Water Regulations……………………………………………11 Section 2.3 Regulation Issues……………………………………………..12 Section 2.4 Government Subsidies………………………………………..13 CHAPTER 3 – Waste Management Practices…………………………………15 Section 3.1 Manure Management…………………………………………15 Section 3.2 Interstate Relations……………………………………………19 Section 3.3 Spread of Contamination in Ohio Related to…………………21 Manure Management CHAPTER 4 – Environmental Impacts / Issues………………………………23 Section 4.1 Introduction…………………………………………………..23 Section 4.2 Pollutants of Concern…………………………………………23 Section 4.3 Rural Property Value Losses…………………………………28 Section 4.4 Antibiotic Resistant Pathogens……………………………….29 Section 4.5 Bacteria……………………………………………………….29 Section 4.6 Biodiversity…………………………………………………..29 Section 4.7 Greenhouse Gases…………………………………………….30 Section 4.8 Air Pollution Sources / Issues…………………………………31 Section 4.9 Water Pollution Sources / Issues……………………………..33 CHAPTER 5 – Human Health Issues…………………………………………38 Section 5.1 Introduction…………………………………………………..38 Section 5.2 Impacts to Man……………………………………………….38 Section 5.3 Air and Water Health Impacts………………………………..41 CHAPTER 6 – Human Health Effects………………………………………..43 Section 6.1 Introduction…………………………………………………..43 Section 6.2 Documentation of Human Health Effects………….. ………..47 Section 6.3 Direct Links to Human Health Effects From…………………47 Air Pollutants Section 6.4 Direct Links to Human Health Effects From…………………49 Water Pollutants Section 6.5 Indirect Links to Environmental Impacts or Human…………51 Health Effects Section 6.6 Measurement Studies That Identified Environmental………..51 Impacts Section 6.7 No Link Impact Studies ………….…………………………..52 Section 6.8 Detailed Study That Identified CAFO Pollutants……………..52 With Fatalities Section 6.9 Additional Air Studies With Links to CAFO…………………53 Pollutants Section 6.10 Additional Water Studies With Links to CAFO………………55 Pollutants Section 6.11 Additional Health Impacts From Pollutants……………………57 Linked to Animal Wastes CHAPTER 7 – Summary/Conclusions…………………………………………59 Section 7.1 Restated Hypothesis……………………………………………59 Section 7.2 Conclusion……………………………………………………..59 Section 7.3 Recommendations……………………………………………..60 APPENDIX A………………………………………………………………………….62 BIBLIOGRAPHY……………………………………………………………………..65
CAPSTONE APPLICATION MASTER OF SCIENCE IN ENVIRONMENTAL, SAFETY AND HEALTH MANAGEMENT CAPSTONE APPPLICATION PLAN ENVM 698: INTEGRATED PROJECT PURPOSE: The Integrated Project (Capstone Project) is intended to bring together all previous course work and link the student to the working world. The capstone project is also an assessment of whether the goals of the program have been accomplished. The Capstone Project must be selected from an Environmental, Safety and Health or closely related topic area to appropriately judge the program goals. METHOD: The Capstone is accomplished through an independent study project. Students: (1) select an appropriate topic and faculty advisor, and (2) complete the project and accompanying report for grading by the advisor and program review. Part 1. Students shall select an area of interest within the ES&H arena. The student will complete the Capstone Prospectus, which describes the area interest and outlines the research envisioned, as well as the evaluation criteria. The student at this time may reference the advisor with whom they wish to work. The Program Director shall review the topic and assure that the referenced advisor is appropriate for the nature of the project and willing to work with the student. The capstone may be taken for 1 or 2 credit hours. The number of credit hours will be determined based upon the amount of work involved for the project. Part 2. Each student shall perform a project consisting of one of the following: empirical research, case study, modeling, instrument development, or a descriptive research paper. The faculty adviser shall assist the student by directing the student in completing the work. The finished work shall consist of a written document, described below in “Guidelines”. Copies shall be provided as described in the Guidelines. Although less rigorous than a formal thesis, the finished product shall require approval from both the supervising faculty member and the Program Director. Students lacking substantial work experience in the fields of environmental, safety and health management may serve an internship as the basis for their project or seek direction from their faculty advisor. The faculty member shall supervise an internship project or work closely with an industry representative familiar with the work. The student shall be required to prepare a written report based upon his/her internship. The supervisor and faculty advisor shall review the written product. FACULTY CREDIT: All faculty qualified for this program and related fields are eligible to supervise student research for this class. The individual faculty member will receive teaching load credit appropriate for the nature of the project. GRADING: Grading will be conducted on a point system with letter grade assigned. The attached form will be used to evaluate grading and document assessment for the goals of the program. COMPLETION TIME: Students may not register for the capstone project until 20 credit hours of program study have been completed. This allows the student to meet different faculty and determine an interest area. Students shall communicate with their advisor during this period to remain active. GUIDELINES: The following guidelines shall be used to complete the capstone project: The student will decide upon an area of interest in the Environmental or Safety and Health disciplines. The area should be compatible with the electives taken in order to strengthen that knowledge OR an area compatible with the student’s general skills and interests. The following research classifications are suggested as recommended types of projects. Empirical Research: A research project that includes a statement of hypothesis, data collection, statistical inference and a summary/conclusions or data reduction. Case Studies: A research project that includes a statement of problems, data collection, analysis and either statistical or subjective inference, and should include conclusions and a plan of action. Modeling: A project that involves developing a creative model that contributes something original to the area under consideration. The model should illustrate developed theory and practice and contribute to further learning. For this type of project to be acceptable, there should be a review of theory and practice in the area under consideration and at least one trial experience. For example, a typical project might include the following steps (this is not the same as the required methodology for the total paper): -Theory Exploration -Literature Review -Identification & Discussion of Relevant, Related Models. -Model Design -Trial Experience -Conclusions Instrument Development: A project that involves developing an instrument for the measurement of some dimension, unit or construct. The instrument should support developed theory and contribute to its further development and/or application. -Theory Application -Identification of Other Relevant Instruments -Instrument Design -Testing of Instruments -Conclusion Descriptive Paper: A research project that includes a statement of problem, or hypothesis, utilizing secondary research and that contributes an original conclusion that integrates material or data, in a manner that has not been previously expressed. It is our recommendation that a descriptive paper that does not include a formal hypothesis statement as defined above and serves primarily as a descriptive summary of an area, issue, etc., not be considered an acceptable ENVM 698 project. In summary, our program believes that the descriptive paper is a legitimate academic endeavor but needs careful supervision by the advisor to ensure a quality project. Training Manuals/ Comprehensive Program Development and Auditing Protocols/ or Expert Systems Software AnalysisThis type of project allows for the flexibility of the student to produce original work that may benefit their employer. The final work product may be structured as a work product which is the result of research rather than a summary of research. 2) The student shall complete the prospectus form on the proposed topic and designate an advisor. The student must select an Advisor by One of Two Ways. Identify a faculty member in the department to which the topic is most clearly related. Discuss the topic with the faculty member, and after agreement with an advisor then proceed to step 4 below. Contact the MSESH office for assistance in identifying faculty appropriate for the topic of interest, or assignment of faculty by the Program Director. 3) Discuss important aspects of paper with a prospective advisor. These may include: Time frame for completion and weighting of grading criteria Mechanical aspects such as level of detail, length, style. Special problems or constraints Research methods, testing, computer analysis, etc. 4) Do primary and/or secondary research as needed. Analyze data as appropriate for the research method(s) used. NOTE:All research which involves human subjects, such as when people are asked to participate in experiments, simulations, training programs, questionnaire surveys, or interviews, must have approval from The University of Findlay Human Subjects Review Board (HSRB) prior to the conduct of the study. No project involving human subjects is to proceed without the explicit approval of the board. This applies to research whether conducted solely by a faculty member, by a student under the guidance of a faculty member, or independently by the student. Guidelines for such research are available at the Office of the Graduate Studies. A copy of the HSRB’S approval must be in the student’s file prior to completion of the ENVM 698 paper. 5) Write a rough draft and submit to the advisor. Most advisors want to review the rough draft of the entire paper. Check with the advisor to determine proper procedure. Your paper, as a minimum, shall include: -Title Page -Table of Contents -List of Tables (if applicable) -List of Appendices (if applicable) -Introduction – describe project, background research -Body of Paper – in chapter form -Documentation of Sources – following style selected -Conclusion, Summary, Recommendations or Implications -Appendices (if applicable) -Bibliography 6) Incorporating the Capstone Advisor’s suggestions, revise the rough draft. The Capstone shall follow the requirements found in the Environmental, Safety and Health Management Student Handbook, Appendix D, Capstone Document Instructions. 7) After the Capstone Advisor approves the Capstone, he/she shall complete the grading/assessment form and forward the paper to the MSESHM Program Office for the Program Director’s Approval. The graded copy will be retained in the student’s file for 3 years after graduation. HELPFUL HINTS Be sure to consult with you advisor about the schedule for approval of your Capstone. You should be considerate of your advisor’s efforts regarding turn-around time. He/she most probably will not be able to review your paper overnight, so do not expect it. This may be crucial if you are nearing an agreed upon deadline for paper completion. Many professors have other commitments at the end of a semester and may not be available. Be sure to check with your advisor well in advance regarding his/ her availability. It is the student’s responsibility to arrange a time table for completion that is compatible with the advisor’s schedule. Preplan your work, including likely tasks and the weighting you choose with your advisor to evaluate your project work and report. CAPSTONE 698 – INTEGRATED PROJECT PROSPECTUS FORM STUDENT NAME: ID# CONTACT ADDRESS PHONE # DATE: PROJECT TITLE: DESCRIPTION OF RESEARCH: Problem Statement: Research Effort: Does the Project involve human or animal research? Y / N , if yes attach approval memorandum from Research Review Committee Final Product Envisioned: Estimated Completion Time (person hours): Credit Hours: Advisor Preference: PROGRAM GOALS – EVALUATION CRITERIA: The student and faculty advisor should predetermine the weighting of the following program goals as they apply to the nature of the capstone project. In general, each area should be evaluated to some extent, however it is recognized due to the variability of projects that each individual area may have a different emphasis. BUSINESS KNOWLEDGE – Ability to incorporate cost counting and finance data into recommendations or decisions and/or address regulatory issues in business. ANALYTICAL SKILLS – Ability to employ analytical tools to assess data from production, research, quality control or administrative operations. MANAGERIAL SKILLS – Ability to manage project time and coordinate with the advisor and other project associates. TECHNICAL SKILLS – Ability to integrate technical and regulatory knowledge of subject area into problem-solving techniques for compliance in ES&H fields. INTEGRATIVE SKILLS – Ability to effectively integrate the above goals into a cohesive written document or presentation package (PowerPoint, training manual, etc.) Business Skills Analytical Skills Managerial Skills Technical Skills Integrative Skills DATE REVIEW: Student Signature Advisor Signature Program Director Signature: APPENDIX D CAPSTONE DOCUMENT INSTRUCTIONS 1. One copy of the Capstone shall be submitted in final form to the Capstone Advisor. The copy must be prepared on white bond paper, of at least 12-pound weight, measuring 8 1/2 by 11 inches. Because the Capstone is deposited in the Environmental, Safety and Health Management Library, it should be on archival quality, acid-free paper sufficiently durable to withstand expected handling and use. Continuous feed perforated paper is not acceptable. 2. The white paper used for the Capstone must be of uniform brand, weight, and texture throughout the thesis to ensure a professional-appearing bound copy. 3. Submission of the original copy of the Capstone is not required; a photo duplicated copy of the original is acceptable if it is clean and on white, archival quality, acid-free paper of at least 24-pound weight. 4. Candidates with any doubts about the quality of either the paper or the duplication process should bring in a copied page (or, preferably, several pages) to be checked by the Capstone Advisor before having the entire document copied. Word Processing: 1. The Capstone that is submitted to the Capstone Advisor must be printed on one side of the page only. 2. Standard 12 point font size and Times New Roman font is preferred, but non-standard fonts and size may be used if they are fully legible and acceptable to the Capstone Advisor. Under no circumstances may script fonts be used except as a demonstration of something relating to the script; italics may be used for special emphasis, foreign words, and in the citation of titles. Ten- or twelve characters per inch spacing will ensure copy that is clearly microfilmable. Once selected, the font and size should be consistent throughout the document, including table numbers and captions, with the exception noted under “General Policy Issues” below and the exception that follows: if the body of the text is in 10 cpi/12 pt or another large size font, 12 cpi/10 pt or micro type may be used for extensive tables or footnotes and endnotes. 3. Typographical or other errors must be corrected. Special effort should be made to ensure that documents are free of error. 4. All thesis copy must be distinct and of uniform quality throughout the document. The Capstone Advisor will make the final decision on the legibility of type used in the Capstone. Spacing: 1. Standard double spacing for the document text is preferred, but 1.5 spacing is acceptable. 2. Single spacing must be used for long quotations, long tables, footnotes, multi line captions, and bibliographic entries. Double spacing should be used between footnotes and bibliographic entries. Margins: 1. The left margin must be at least one and on half (1 1/2) inches wide; all other margins must be at least one (1) inch wide. Adherence to these margins will leave a six-by-nine (6 x 9) inch area on each page for the text or illustrative material. 2. All page numbers must fall within marginal limits. 3. Print may extend no more than one single space below the bottom marginal line, and only then to complete a footnote or the last line of a chapter, subdivision, or figure caption. 4. The only other exceptions to the margin requirements are for the first page of each chapter or major subdivision of the document, where typing begins two (2) inches rather than one inch down from the top; for tables and figures, which may be smaller, but not larger, than overall margin requirements; and special pages, such as the ones that precede the appendix (see sample document pages below). 5. With the exception noted in item 4 above, all tables and figures, including captions, must conform to the margin requirements. Tables and figures may be reduced photographically to meet margin requirements. 6. A new paragraph begun at the bottom of a page must have at least two full lines of type before a page break occurs. If too little room remains at the bottom of the page to accommodate two lines, the entire paragraph must begin on the following page. The preceding page may be short to allow for this adjustment. A paragraph ended at the top of a page must have at least two full lines of type . 7. The last word on a page cannot be hyphenated. If too little room remains at the right side of the page to accommodate the full word, the entire word must be begun on the following page. The line on the preceding page may be short to allow for this adjustment. 8. Photocopying of these should be done with care to ensure that margins on all copies are accurate and consistent. Pagination: 1. Every page of the Capstone shall have a page number except the title page and the copyright page that follows it. If a frontispiece (usually an illustration or quotation relevant to the subject) is included before the title page, it is neither counted nor numbered. 2. Small Roman numerals (ii, iii, iv, etc.) are used for the preliminary pages: abstract, dedication, acknowledgments, and table of contents. The title page is assigned the first small Roman numeral (i) but that number does not actually appear on the title page. The page numbers begin with ii, assigned to the abstract. The copyright page is neither counted nor numbered. 3. Arabic numerals are used for the remainder of the document, including the text and the reference material (see under “Arrangement of Contents” below). The pages are numbered consecutively beginning with 1 and continuing through to the end of the document. No other numbering scheme is acceptable; the standard scheme may not be disrupted with inserted numbers, such as 10a, 10b, 10c, etc. 4. All page numbers must be placed within the six-by-nine-inch (6 x 9 inch) frame described under “Margins” above. The page number is placed in the center bottom position throughout the entire document. 5. For Capstones of sufficient length to be bound in two volumes (usually, those exceeding 400 pages), each volume has its own title page. Both title pages are identical except for the notation “Volume I” and “Volume II” just below the title to differentiate the two volumes. Both the Roman and the Arabic numbering systems begun in Volume I continue through Volume II. As with the title page of Volume I, that of Volume II is counted among the preliminary pages but does not bear a number. If “iv” is the last Roman numeral used in Volume I, for example, the title page of the second volume will count as page “v” and will be followed by preliminary pages “vi,” “vii,” etc. Volume I contains a comprehensive table of contents listing the contents of all volumes. Volume II (and subsequent volumes if more than two) contains a partial table of contents listing the contents of that volume only. See below under “Multi-Volume Documents”. Notation (Footnotes and Endnotes): Notation practices differ widely among publications in the sciences, the humanities, and the social sciences. Candidates should confer with their advisers regarding accepted practice in their individual disciplines. That advice coupled with frequent and careful reference to general style manuals will offer the most reliable guidance. 1. Use Arabic numerals to indicate a note in the text. 2. Notes may be numbered in one of two ways: a) either consecutively throughout the entire manuscript, or b) consecutively within each chapter. 3. Notes can be placed at the bottom of the page (footnotes), or at the end of a chapter or at the end of the document (endnotes). Once chosen, the notation style must be consistent throughout the document. 4. Notes to information within tables should be placed directly below the table to which they apply, not at the bottom of the page along with notes to the text. 5. Because notes to table information often follow numerals, lower-case letters (a, b, c) are used rather than the Arabic numerals used for text notes. Illustrations: Typical illustrations appearing in Capstones include tables, diagrams, drawings, charts, graphs, schemes, maps, and photographs. In order to help readers follow such illustrations in a logical fashion, it is necessary that they be placed systematically in relationship to the text and be numbered sequentially throughout the entire document, including the appendices. Sequences may be numbered consecutively by chapter using a decimal numbering system, i.e., the first table in Chapter 3 would be Table 3.1, the second would be Table 3.2, and so on. Do not use dashes or other symbols instead of decimals. Sequences may not be numbered according to subsections within chapters. If the decimal numbering system is used, the figures or tables must be located physically within the chapter, not merely discussed or referred to there. If the illustration will be at the end of the document in an appendix, it should be numbered according to the appendix numbering system if the decimal numbering system is used Placement and types of illustrations: 1. Illustrations may be interspersed throughout the text, or clustered in sections at the end of a chapter, or at the end of the manuscript, in Appendices. Capstone candidates are encouraged to use the linking feature of PDF documents to join figures and text references to those figures in the text. 2. Some graduate degree documents use several types of illustrations, and might use more than one method of associating the illustrations with the text. For example, a document might have a series of Tables that occurs sporadically throughout the text and a series of photographs grouped at the end of the manuscript. In such a case, two numbering systems should be used (Table 1, Table 2, Table 3, and so on, and Figure 1, Figure 2, Figure 3, and so on). 3. For each separate numbering system, a separate List (of Tables, Maps, Figures, etc.) must be included among the preliminary pages preceding the beginning of the text. 4. If illustrations are of a mixed variety, including, for example, diagrams, maps, photographs, and tables, and if they appear in a consistent position in relationship to the text (such as interspersed with the text or clustered at the end of the manuscript), they should be referred to as figures and should be numbered in a single sequence from beginning to end. A single List of Figures must then be provided among the preliminary pages preceding the text. 5. As a concept, the Plate, which once had technical relevance in the publication process, is obsolete. However, if a student, with the agreement of the Capstone Adviser, chooses to use Plates, this will be acceptable. Plates are numbered with capital Roman numerals, with one number per page. Plate numbers appear at the top right. Plates may have one or more illustration on them, and these should be numbered using a separate sequential system, such as Figure numbers. For example, Plate III might include an illustration of Figure 5, while Plate IV might include illustrations of Figure 6 and Figure 7. Appropriate lists of Figures and Plates must then be provided among the preliminary pages preceding the text. 6. A page-length illustration must not be split to appear on two pages. However, an illustration that will not fit on one page may be continued onto subsequent pages with the appropriate notation, e.g., “Table 1 (continued),” placed at the left margin two lines above the continuation of the illustration. A line should not be drawn below an unfinished table that is continued onto the next page. If an illustration is continued onto a subsequent page, this should be indicated near the lower right of the illustration but still within the page margin. 7. When size and format require horizontal (i.e., “landscape”) placement of an illustration, the bottom appears parallel with the outer (or right) edge of the page. 8. Illustrations of one half page or less in length may appear on the same page with the text, separated from the text above and below by triple spacing; illustrations longer than one-half page are better placed on a separate sheet. If an illustration is too large to appear on a single page with its legend, the illustration number and legend are placed on the preceding page slightly above center. The page number on this half title page is placed at the bottom center. 9. Two or more small illustrations may be grouped together on a single page. Each shall be numbered individually according to the relevant system. 10.Illustrations that cannot be reduced to fit within the six-by-nine-inch frame may be expanded to the right by means of a fold-out sheet. The material to be folded should be mounted on a sheet of standard 8 1/2 x 11-inch paper, with the required 1 1/2-inch margin on the left side and the fold placed 1 1/4 inches from the right side of the page. 11.The use of color is encouraged, as these are maintained in the PDF document. It must be remembered that Capstones may be photocopied and microfilmed in black and white, so that the text must adequately clarify any information dependent on color. 12.Photographs and any other illustrations that need to be mounted must be permanently mounted on a standard 8 1/2 x 11-inch page, preferably through the use of dry-mount tissue or dry-mount spray, which can be purchased at commercial stores in the University area. Photo corners, tape, and staples are not acceptable as mounting devices. Rubber cement may not be used. Photographic slides are not acceptable. Captions: 1. Captions for illustrations are placed two lines below the last line or bottom of the illustration. 2. Every illustration must have a caption that indicates the illustration number (e.g., Figure 7, Diagram 6, and so on). In addition, captions may include a description of the illustration. For example: Figure 9. Photograph of a leopard in the wild. Conventions for capitalization of words and punctuation within such descriptive captions vary from discipline to discipline. Whatever style is chosen must be consistent throughout the document. 3. A descriptive label may be included within the illustration itself, but a caption giving the illustration number must also be provided. For example, within the borders of a map of Asia, there might be a label saying “Map of Asia during the time of Genghis Khan.” In addition, below the map there must be a caption indicating the illustration number (e.g., Map 6, or, alternatively, Figure 9, if the map is numbered in a series of figures, not maps). 4. A caption that is too long to be placed below an illustration without violating margin restrictions may be placed alone slightly above center on the preceding page. With this practice the illustration number must appear with both the caption and with the illustration. Multi-Volume Documents (Capstone): For very long documents, binding in two or more volumes is necessary. If the entire unbound document pressed down slightly measures no more than two and one half (2.5) inches, it will fit into one volume. If binding in more than one volume is necessary, careful consideration should be given to logical dividing points in the text. Generally, the division into volumes should come at the end of the last chapter that falls within the 2.5 inch limit; individual chapters are never divided between two volumes. See above under “Pagination” in this publication for multi-volume page numbering. Arrangement of Contents: Every graduate degree document has three major parts: 1) the preliminary pages, 2) the text, and 3) the back matter. Each major part may have several sub-sections, which shall be arranged in the order given below. Preliminary Pages The preliminary pages may consist of a frontispiece, the title page, copyright page, abstract, dedication, acknowledgments, vita, table of contents, lists of illustrations (such as a list of tables, a list of figures, or a list of plates), and a list of symbols, abbreviations, and nomenclature. Although not all of these preliminary pages are required parts of the document, specifications are given below for their preparation. Optional pages are identified as such. Specifications for preparing each of the preliminary pages follow; where practicable, samples of each kind of page have been included in the appendices and are referred to below. Each element is given in the order in which it should appear in the finished document. Frontispiece (Optional) Title Page (Required) Copyright Page or Blank Page (Required) Abstract (Required) Dedication (Optional) Acknowledgments (Optional but suggested) Table of Contents (Required) Lists of Illustrations (Required if document contains any illustrations) Lists of Symbols/Abbreviations/Nomenclature. (Required if used but not explained in the text in an easily accessible place.) Title Page: 1. The title is intended to provide a meaningful description of the content of the graduate degree document. The information retrieval systems consulted by many scholars to locate theses and dissertations relating to their own work use the key words in the title. Consequently, oblique references and cryptic quotations should be avoided; word substitutes should be found for formulas, symbols, superscripts, subscripts, foreign alphabet letters, and the like. 2. The title page shows the candidate’s full legal name and degree(s) previously earned. 3. The names of the Capstone Advisor shall appear in the lower left corner of the title page. The Capstone Advisers shall be identified with a comma after the name, followed by the words “Capstone Adviser.” Copyright: 1. For documents to be copyrighted, notice of copyright is centered in the following form on the sheet immediately after the title page: Copyright by Mary Jane Doe 2004 2. Documents not being copyrighted must include a blank sheet of paper in place of the copyright page. This copyright page/blank page is neither numbered nor counted in the preliminary pages – it simply fills space. See under “Submitting Documents” below in this publication for further information on copyrighting graduate degree documents. Abstract: 1. An abstract is a required part of the graduate degree document. The heading ABSTRACT (in all capital letters) is centered without punctuation two inches from the top of the page. The actual abstract begins four spaces below the heading. 2. An abstract is a summary of the thesis/dissertation to inform prospective readers about its contents. As a brief summary of the candidate’s principal research findings, the abstract should state the problem being investigated and outline the method of investigation, the results obtained, and the conclusions reached. In writing the abstract, candidates should keep in mind that it functions chiefly as a guide to students and scholars surveying research in their field. As such, it should provide a concise guide to the entire study it represents. 3. The abstract should not include internal headings or parenthetical citations of items listed in the bibliography/list of references. Figures and tables should not appear in the abstract. Dedication: A dedication is optional. If used, the dedication must be brief and centered on the page. Acknowledgments: 1. Like the dedication, acknowledgments are optional. However, because it is unlikely that any Capstone can be completed without the assistance and courtesy of many individuals, it is strongly suggested that such help be acknowledged. The acknowledgment is a record of the author’s indebtedness and includes notice of permission to use previously copyrighted materials which appear extensively in the text. 2. The heading ACKNOWLEDGMENTS (in all capital letters, and without an “e” after the “g”) appears centered without punctuation two inches from the top of the page; the text begins four spaces below the heading. Table of Contents: 1. The table of contents is a required part of the graduate degree document. The heading TABLE OF CONTENTS (in all capital letters) appears without punctuation centered two inches from the top of the page. The listing of actual contents begins at the left margin four spaces below the heading. The titles of all parts, sections, or chapters and chapter numbers are listed and must be worded exactly as they appear in the body of the document. The table of contents gives the page number on which each subdivision begins. 2. Due to the likelihood that last-minute changes to the document may alter pagination, it is important to recheck the pages given in the Table of Contents just prior to turning in the document to the Capstone Advisor. Lists of illustrations: 1. Lists of illustrations are required parts of the graduate degree document if it contains illustrations. The heading LIST OF TABLES, LIST OF FIGURES, or LIST OF PLATES, or other appropriate title (in all capital letters) appears centered without punctuation two inches from the top of the page; the listing begins at the left margin four spaces below the heading. Illustrations should be identified by the same numbers and captions in their respective lists as they have been assigned in the document itself. The Text: The candidate and adviser will have devoted most of their attention to the text, or body, of the graduate degree document. The style must be appropriate to the subject and discipline; punctuation, spelling, and general format should be accurate and consistent; and the body itself is generally divided into titled chapters or other large divisions. Division into Chapters: In addition to general titles like INTRODUCTION and CHAPTER 1, the chapters need substantively descriptive titles as well. In establishing this mechanical feature of the document, the author should think of the reader attempting to understand the research problem and solutions presented. The words INTRODUCTION and CONCLUSION and descriptive titles should be in all capitals. Chapters should be numbered in Arabic numerals. Preface: A preface is optional. Normally there is no need to include a preface to the document unless the genesis of the project is important for an understanding of the work or unless the method of research is so unusual as to require some explanation. 1. The introduction to the graduate degree document may precede the first chapter (or other large division), or it may be the first chapter. 2. If the introduction precedes the first chapter, the heading INTRODUCTION in all capitals is centered without punctuation two inches from the top of the page; any supplementary descriptive title goes on the next line, in all capitals and lower case letters, and the text begins four spaces below. In this arrangement, the next large division following the introduction is CHAPTER 1, which may or may not have a title of its own (although a title is preferable for clarity). The remaining chapters are numbered consecutively in Arabic numerals and capital letters: CHAPTER 2, etc. 3. If the introduction is the first chapter, the heading CHAPTER 1 in all capitals is centered two inches from the top of the page; the word INTRODUCTION goes two spaces below. Generally, in this arrangement the introduction does not itself have a descriptive title. The text begins four spaces below. The remaining chapters are numbered consecutively in Arabic numerals and capital letters: CHAPTER 2, etc. Back Matter: The back matter for graduate degree documents consists of endnotes, if this is the selected style of notation, a glossary (if warranted), appendices which are optional, and a bibliography or list of references, which is required. An index, even a brief one, is beneficial to future readers, but is optional. Endnotes: The recommended citation style is found in the Publication Manual of the American Psychological Association: 5th Edition . Glossary (if used): Terms in the glossary should be listed alphabetically. Proper nouns should be capitalized, but other terms should not be. Italics should be used to indicate if glossary terms are foreign words not found in the English dictionary. Appendices: Reference materials, such as tables, charts, illustrative documents, folklore interview transcriptions, and other addenda which are not integrated with the text, but which supplement and clarify the text, are often grouped in an appendix or in appendices. If used, an appendix generally immediately follows the last chapter of the text, or the endnotes, if endnotes are used. However, the bibliography may precede the appendix 1. If the information to be appended dictates more than one appendix, the multiple appendices are identified as APPENDIX A, APPENDIX B, etc., in all capital letters. 2. Each appendix with its title must be listed separately in the table of contents as a subdivision under the heading APPENDICES. 3. Any illustrations appearing in the appendices are handled in the same manner as those in the text; that is, they are identified and numbered consecutively with those in the text, and appear in the list(s) of illustrations in the preliminary pages. Bibliography or List of References: 1. Any document making use of other works either in direct quotation or by reference must contain a bibliography listing these sources. The Bibliography should also include references used in the research but not specifically cited in the document. Although individual chapters may have their own bibliographies, these do not take the place of a general bibliography at the end of the document, which should be comprehensive for the whole document. 2. Bibliography format guidelines can be obtained from standard guides or from the adviser. Like footnotes, bibliographic entries should be in a form acceptable to the Capstone Advisor. 3. The heading BIBLIOGRAPHY or LIST OF REFERENCES (in all capital letters) is centered without punctuation two inches from the top of the page; the list begins four spaces below, with the page number in the bottom center. 4. Double spacing is used between each bibliographic entry, with single spacing within each entry. Manuscript Preparation Checklist: Margins: left: 1.5 inches right: 1 inch bottom: 1 inch top: 1 inch with the exception of first pages of major sections where it is 2 inches (includes preliminary pages and back matter) All page numbers are centered one inch above the bottom of the page and are consecutive throughout the document Roman numerals are used for numbering the preliminary pages, Arabic numbers are used for all other page numbers Chapters and Illustrations are numbered with Arabic numerals and are consecutive throughout the document All illustrations are numbered and identified two line spaces below the illustration Appendices are labeled alphabetically, not numerically Print is distinct and of uniform quality with no stray smudges or blurs Paper must be white, acid free and of at least 12-pound weight Required sections: Abstract Table of Contents List of Tables, List of Figures, etc. Major bibliography covering entire document 8/14/2019 Page 25 of 25 First Edition
TABLE OF CONTENTS ABSTRACT………………………………………………………………………….ii ACKNOWLEDGEMENTS………………………………………………………….iv TABLE OF CONTENTS……………………………………………………………v LIST OF TABLES……………………………………………………………………ix LIST OF GRAPHS……………………………………………………………………x LIST OF FIGURES………………………………………………………………….xi ACRONYMS……………………………………………………………………….xii CHAPTER 1 – CAFO Development and History …………………………….1 Section 1.1 Introduction……………………………………………………1 Section 1.2 Classification of CAFOs………………………………………1 Section 1.3 CAFO Growth…………………………………………………3 Section 1.4 International Expansion of CAFOs……………………………8 CHAPTER 2 – Government Regulations and Programs……………………..10 Section 2.1 Air Regulations………………………………………………10 Section 2.2 Water Regulations……………………………………………11 Section 2.3 Regulation Issues……………………………………………..12 Section 2.4 Government Subsidies………………………………………..13 CHAPTER 3 – Waste Management Practices…………………………………15 Section 3.1 Manure Management…………………………………………15 Section 3.2 Interstate Relations……………………………………………19 Section 3.3 Spread of Contamination in Ohio Related to…………………21 Manure Management CHAPTER 4 – Environmental Impacts / Issues………………………………23 Section 4.1 Introduction…………………………………………………..23 Section 4.2 Pollutants of Concern…………………………………………23 Section 4.3 Rural Property Value Losses…………………………………28 Section 4.4 Antibiotic Resistant Pathogens……………………………….29 Section 4.5 Bacteria……………………………………………………….29 Section 4.6 Biodiversity…………………………………………………..29 Section 4.7 Greenhouse Gases…………………………………………….30 Section 4.8 Air Pollution Sources / Issues…………………………………31 Section 4.9 Water Pollution Sources / Issues……………………………..33 CHAPTER 5 – Human Health Issues…………………………………………38 Section 5.1 Introduction…………………………………………………..38 Section 5.2 Impacts to Man……………………………………………….38 Section 5.3 Air and Water Health Impacts………………………………..41 CHAPTER 6 – Human Health Effects………………………………………..43 Section 6.1 Introduction…………………………………………………..43 Section 6.2 Documentation of Human Health Effects………….. ………..47 Section 6.3 Direct Links to Human Health Effects From…………………47 Air Pollutants Section 6.4 Direct Links to Human Health Effects From…………………49 Water Pollutants Section 6.5 Indirect Links to Environmental Impacts or Human…………51 Health Effects Section 6.6 Measurement Studies That Identified Environmental………..51 Impacts Section 6.7 No Link Impact Studies ………….…………………………..52 Section 6.8 Detailed Study That Identified CAFO Pollutants……………..52 With Fatalities Section 6.9 Additional Air Studies With Links to CAFO…………………53 Pollutants Section 6.10 Additional Water Studies With Links to CAFO………………55 Pollutants Section 6.11 Additional Health Impacts From Pollutants……………………57 Linked to Animal Wastes CHAPTER 7 – Summary/Conclusions…………………………………………59 Section 7.1 Restated Hypothesis……………………………………………59 Section 7.2 Conclusion……………………………………………………..59 Section 7.3 Recommendations……………………………………………..60 APPENDIX A………………………………………………………………………….62 BIBLIOGRAPHY……………………………………………………………………..65
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