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19 - NB-3 - Adopt Resolution 19-XX and Approve - 12/17/2019
Attachment 6 1 CITY COUNCIL AGENDA REPORT MEETING DATE: DECEMBER 17, 2019 ITEM NUMBER: NB-3 SUBJECT: ADOPT RESOLUTION 19-XX AND APPROVE A LETTER OF SUPPORT FOR HOUSE RESOLUTION 763, THE ENERGY INNOVATION AND CARBON DIVIDEND ACT OF 2019 DATE: DECEMBER 11, 2019 FROM: LEGISLATIVE REVIEW TEAM: KATRINA FOLEY, MAYOR JOHN STEPHENS, MAYOR PRO TEM LORI ANN FARRELL HARRISON, CITY MANAGER PRESENTATION BY: CONNOR A. LOCK, CHIEF OF STAFF FOR FURTHER INFORMATION CONTACT: CONNOR LOCK (714) 754-5192 RECOMMENDATION: The Legislative Review Team recommends that the City Council consider the adoption of Resolution 19-xx (Attachment 1) and approve a letter in support of House Resolution 763 (H.R. 763), The Energy Innovation and Carbon Dividend Act of 2019 (Attachment 2). BACKGROUND: H.R. 763 imposes a fee on the carbon content of fuels, including crude oil, natural gas, coal, and any other product derived from those fuels that contributes to increasing greenhouse gas (GHG) emissions. The bill would also apply a fee to the Carbon Dioxide (CO2) content of fluorinated greenhouse gases that are typically used in air conditioning and refrigerants. The fee begins at $15 per ton of CO2 in 2020, increasing by $10 or $15 each subsequent year depending on whether that year’s emissions targets have been met. Fees are imposed on the producers of fuels and are equal to the GHG content of the fuels multiplied by the carbon fee rate above. Border adjustment provisions, which can include taxes and tariffs, among other mechanisms, would balance costs between the United States and foreign countries so as best to avoid disadvantaging domestic producers. As several foreign countries already have some form of carbon fee, and others may impose such a fee in future years, these border adjustments would vary by product and by country of origin. 2 Fees would be deposited into a Carbon Dividend Trust Fund and used for administrative expenses and dividend payments to citizens and lawful residents. For the first five years of the bill’s enactment, no more than 8% of the fund shall be used for the administration of the dividend payments, and 2% for the subsequent five-year period. These expenses are to ensure that the Department of Treasury develops and implements protocols for the disbursement of dividend payments. 270 days after enactment of this program, funding would be distributed by check from the Department of Treasury to all that are eligible. An eligible individual is person who has a valid Social Security number or taxpayer identification number and is a citizen or lawful resident of the United States. Children receive half the rate of a payment per adult and families receive payment for their first two children. In years 1-5, no less than 92% of fees collected would be paid out as dividends. In years 6-10, no less than 98% of fees collected would be paid out as dividends. Dividend payments would begin 270 days, approximately 9 months, after the enactment of the bill. The frequency of dividend payments has not yet been set, though monthly payments seem likely to be included in the bill. H.R. 763 also suspends certain regulations that limit greenhouse gas emissions. The suspensions expire if the emissions targets established by this bill are not met by March 2030. The carbon fee will be decommissioned when GHG emissions are 10% of 2016 levels, or if monthly dividend payments for eligible adults falls below $20 for three consecutive years. CO-SPONSORS, SUPPORT AND OPPOSITION: Introduced on January 24, 2019, the bill was referred to the House Committees on Ways and Means, Energy and Commerce, and Foreign Affairs. On January 25, 2019, the House Energy and Commerce Committee referred the bill to the Subcommittee on Energy, where it remains. Since then, the bill has taken on a number of co-sponsors, supporters, and opponents. CONGRESSIONAL CO-SPONSORSHIP Costa Mesa Congressional Representative Harley Rouda is one of 73 co-sponsors of the bill. There are other noteworthy Orange County Congressional co-sponsors, including: Gil Cisneros Katie Porter Lou Correa Mike Levin 3 LOCAL AND NEIGHBORING SUPPORT H.R. 763 has received support from 13 local governments in the state, including the cities of Santa Ana, Carlsbad, Del Mar, Encinitas and the County of Los Angeles. On June 4, 2019, the Santa Ana City Council passed a resolution to support H.R. 763. Supporters of the bill argue that a carbon fee is vital for reducing emissions and creating a healthier environment independent of carbon-intense products. The dividend payment will be used to neutralize the cost increase in gas, electricity, and consumer goods to which consumers would otherwise be subject. They argue that while several other bills have been introduced that reduce carbon in some way, H.R. 763 is the only one that gives money directly to individuals impacted by increases, thereby neutralizing the costs. Some proponents estimate that in the first 12 years of the program, emissions are expected to be reduced by 40%. Supporters argue that limiting the EPA by removing their ability to set further emissions reduction targets is necessary to allow this new market mechanism to regulate emissions, and that the bill simply freezes current EPA limits until emissions targets are achieved via the carbon fee. The bill would initially put a $15 fee per ton of CO2 emitted beginning in 2020, when no specific emissions target is set. In 2022, the bill would require that “the emissions target for each year thereafter shall be the previous year’s target emissions minus” 5% of 2016 emissions every year between 2025 – 2034, and 2.5% between 2035 – 2050. If the target is met for a given year, the fee would increase by $10/ton CO2 to remain on course for projected emissions reductions. However, if targets are not met for a given year, the fee will increase by $15 instead of $10. OPPOSITION AND CONCERNS The Center for Biological Diversity is the only known opposition at this time. In a press release published in January 2019, the Center asserted that H.R. 763 would undo the Clean Air Act and strip the Environmental Protection Agency (EPA) of most authority to address climate change (Attachment 6). Similarly, while the Natural Resources Defense Council (NRDC) applauds the goals and market-mechanisms introduced by the bill, they share a similar concern. Specifically, the Center and NRDC are cautious of the bill’s restriction on the EPA to impose carbon pollution limits. ANALYSIS: In 2013, the Congressional Budget Office (CBO) released a report titled Effects of a Carbon Tax on the Environment and the Economy (Attachment 4). They concluded that a carbon tax would lead to higher prices on certain goods and fuels, with costs falling on low-income households. 4 Other studies indicate that households could see an annual cost increase of between $173 to $381 for goods, depending on income levels, with gasoline and utilities bearing most of the cost. H.R. 763 addresses this concern via the Carbon Dividend Trust Fund. This fund would be used to make direct payments to citizens and lawful permanent residents. This would likely offset the costs associated with a tax on carbon, as the aforementioned findings by the CBO indicate. A 2019 report by the Columbia University’s Center on Global Energy Policy (Attachment 5) made the following findings relating to increased expenditures per household and for gas and utilities, including: National Averages of Gas and Electricity Rates after H.R. 763 (in 2019 dollars): o Gas: $3.14/gal in 2020 and $4.41/gal in 2030 o Electricity: $.12/kWh in 2020 and $.15kWh in 2030, kWh=Kilowatt Hour 2020 average annual household expenditures: $548 o 2020 average annual dividend payment: $605 2030 average annual household expenditures: $3,239 o 2030 average annual dividend payment: $3,333 Regarding dividend payments, the study indicates that individuals could potentially receive the following: 2020 Annual Dividend Payments: o $250 – $260 per adult o $125 – $130 per child By 2030, these payments could increase to: o $1,410 – $1,470 per adult o $705 – $735 per child COUNCIL POLICY ON LEGISLATIVE REVIEW: Council Policy 000-8 (Attachment 3) details the City’s existing program for consideration of legislative issues. This Council Policy was last revised on September 20, 1999. Below are some pertinent sections of the policy. 2. A Legislative Review Team, consisting of the Mayor, Mayor Pro Tem, and the City Manager, shall periodically review legislation and formulate the City’s position. 3. The Mayor is authorized to execute position letters on behalf of the City Council when the position is in concurrence with that of the National League of Cities, State League of Cities, the Orange County Division of the League of Cities, or the Orange County Council of Governments. At the direction of the Legislative Review Team, position letters may also be executed by the City Manager, or his/her designee, as appropriate. 5 4. Formal Council approval is required in instances in which the City’s position may differ from that of the National League of Cities, the State League of Cities, the Orange County Division of the League of Cities, or the Orange County Council of Governments. 5. Formal Council approval is required in instances in which the National League of Cities, the State League of Cities, the Orange County Division of the League of Cities, or the Orange County Council of Governments have not taken a formal position. 7. All City Council members shall receive a copy of all legislative position letters written on city letterhead. A quarterly activity report of the City’s legislative positions, and the status of such legislation, will be provided to the City Council. The City of Costa Mesa currently works with the Association of California Cities - Orange County (ACC-OC) as a legislative partner in addition to the partners listed in Council Policy 000-8. While ACCOC is not on the Council Policy 000-8 list of legislative partners, Costa Mesa is currently a member of ACC-OC in the same capacity as it is with the League of California Cities, and has treated ACC-OC’s legislative positions similarly. For each bill on which a legislative position is taken by the Legislative Review Team or City Council as provided in Council Policy 000-8, staff will draw up a legislative position letter on city letterhead for signature by the Mayor and submittal to the Legislature. As it is still early in the legislative process, H.R. 763 is still eligible to be amended at the discretion of the author, and at this time none of the City’s legislative partners have yet taken a position. ALTERNATIVES CONSIDERED: 1. The City Council may direct changes be made to the proposed resolution and/or letter. FISCAL REVIEW: The fiscal impacts to the City of H.R. 763 are unknown at this time. While local governments are exempt from excise and sales taxes, the ability to track at-source fees on carbon so as to offset the impacts to the budget are unknown at this time. LEGAL REVIEW: The City Attorney’s Office has reviewed and approved this report as to form. CONCLUSION: The Legislative Review Team recommends that the City Council adopt a resolution and approve a letter in support of H.R. 763. 6 ___________________________ __________________________ CONNOR A. LOCK KELLY A. TELFORD, CPA Chief of Staff Finance Director ____________________________ __________________________ LORI ANN FARRELL-HARRISON KIMBERLY HALL BARLOW City Manager City Attorney ATTACHMENTS: 1 2 3 4 5 6 Proposed Resolution in Support of H.R. 763 H.R. 763 Text City Council Policy 000-8 CBO 2013 Carbon Tax Analysis Columbia University 2019 H.R. 763 Assessment Center for Biological Diversity Opposition RESOLUTION NO. 19-xx A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF COSTA MESA, CALIFORNIA, IN SUPPORT OF H.R. 763 THE ENERGY INNOVATION AND CARBON DIVIDEND ACT OF 2019 THE CITY COUNCIL OF THE CITY OF COSTA MESA DOES HEREBY FIND, DECLARE AND DETERMINE AS FOLLOWS: WHEREAS, according to the Environmental Protection Agency (EPA), global carbon emissions from fossil fuels have significantly increased since 1900. Since 1970, carbon dioxide emissions have increased by about 90%; and WHEREAS, the United States is one of the top global carbon dioxide emitters; and WHEREAS, the continued release of greenhouses gases into the atmosphere is a real and growing concern; and WHEREAS, failing to reduce and/ or limit the amount of greenhouse gas emissions into the atmosphere could have severe ramifications for the world' s environment; and WHEREAS, in January 2019, Representative Deutch introduced HR 763 a bill to create a Carbon Dividend Trust Fund for the American people in order to encourage market-driven innovation of clean energy technologies and market efficiencies which will reduce harmful pollution and leave a healthier, more stable, and more prosperous nation for future generations; and WHEREAS, HR 763, also called the Energy Innovation and Carbon Dividend Act of 2019, enjoys bipartisan support in the United States House of Representatives; and WHEREAS, HR 763 aims to reduce carbon emissions in the United States by 33% in 10 years and 90% by the year 2050; and WHEREAS, HR 763 would impose a fee for the carbon content in covered fuels including crude oil, natural gas, coal, or any other product derived from crude oil, natural gas, or coal, which shall be used to emit greenhouse gases to the atmosphere. The fee is equal to the greenhouse gas content of the fuel multiplied by the carbon fee rate. The rate would begin at $15 in 2019 and increase $10 yearly; and WHEREAS, the fee would apply to covered entities including refineries, importers of any petroleum or petroleum product, any coal mining operation, any importer of coal, any entity entering pipeline quality natural gas into the natural gas transmission system, Attachment 1 and any importer of natural gas, any entity required to report the emission of a fluorinated gas and any entity or class of entities which, as determined by the Secretary of State, is transporting, selling or otherwise using a covered fuel in a manner which emits a greenhouse gas to the atmosphere and which is not covered by the carbon fee, the fluorinated greenhouse gas fee, or the carbon border fee adjustment; and WHEREAS, the fees are to be deposited into a Carbon Dividend Trust Fund and used for expenses and dividend payments to U.S. citizens and permanent residents; and WHEREAS, HR 763 is co -sponsored by several Orange County Representatives including Representative Harley Rouda, Representative Gil Cisneros, and Representative Katie Porter. NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Costa Mesa that: Section 1. The City Council of the City of Costa Mesa hereby finds, determines, and declares that the City of Costa Mesa supports the adoption of H.R. 763, the Energy Innovation and Carbon Dividend Act of 2019. PASSED AND ADOPTED this 17th day of December, 2019. _____________________________ Katrina Foley, Mayor ATTEST: APPROVED AS TO FORM: ________________________ _____________________________ Brenda Green, City Clerk Kimberly Hall Barlow, City Attorney THIS PAGE IS RESERVED FOR THE CITY CLERK’S OFFICE. STATE OF CALIFORNIA ) COUNTY OF ORANGE ) ss CITY OF COSTA MESA ) I, BRENDA GREEN, City Clerk of the City of Costa Mesa, DO HEREBY CERTIFY that the above and foregoing is the original of Resolution No. 19-xx and was duly passed and adopted by the City Council of the City of Costa Mesa at a regular meeting held on the 7th day of May, 2019, by the following roll call vote, to wit: AYES: COUNCIL MEMBERS: NOES: COUNCIL MEMBERS: ABSENT: COUNCIL MEMBERS: IN WITNESS WHEREOF, I have hereby set my hand and affixed the seal of the City of Costa Mesa this 7th day of May, 2019. ___________________________ Brenda Green, City Clerk I 116TH CONGRESS 1ST SESSION H. R. 763 To create a Carbon Dividend Trust Fund for the American people in order to encourage market-driven innovation of clean energy technologies and market efficiencies which will reduce harmful pollution and leave a healthier, more stable, and more prosperous nation for future genera- tions. IN THE HOUSE OF REPRESENTATIVES JANUARY 24, 2019 Mr. DEUTCH (for himself, Mr. LIPINSKI, Mr. CRIST, Mr. PETERS, Ms. ESHOO, Ms. JUDY CHU of California, and Mr. ROONEY of Florida) intro- duced the following bill; which was referred to the Committee on Ways and Means, and in addition to the Committees on Energy and Commerce, and Foreign Affairs, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned A BILL To create a Carbon Dividend Trust Fund for the American people in order to encourage market-driven innovation of clean energy technologies and market efficiencies which will reduce harmful pollution and leave a healthier, more stable, and more prosperous nation for future gen- erations. Be it enacted by the Senate and House of Representa-1 tives of the United States of America in Congress assembled, 2 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 2 •HR 763 IH SECTION 1. SHORT TITLE. 1 This Act may be cited as the ‘‘Energy Innovation and 2 Carbon Dividend Act of 2019’’. 3 SEC. 2. FINDINGS. 4 The Congress finds that— 5 (1) efficient markets strengthen our economy 6 and benefit our Nation by encouraging competition, 7 innovation, and technological progress; 8 (2) efficient markets should reflect all costs of 9 goods to ensure that they advance America’s pros-10 perity and national interests; 11 (3) emissions of carbon pollution and other 12 harmful pollutants into our Nation’s air impose sub-13 stantial costs on all Americans and on future gen-14 erations; and 15 (4) creation of a Carbon Dividend Trust Fund, 16 to be distributed to the American people, will make 17 markets more efficient, create jobs, and stimulate 18 competition, innovation, and technological progress 19 that benefit all Americans and future generations. 20 SEC. 3. CARBON DIVIDENDS AND CARBON FEE. 21 (a) IN GENERAL.—The Internal Revenue Code of 22 1986 is amended by adding at the end the following new 23 subtitle: 24 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00002 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 3 •HR 763 IH ‘‘Subtitle L—CARBON DIVIDENDS 1 AND CARBON FEE 2 ‘‘CHAPTER 101. CARBON FEES. ‘‘CHAPTER 102. CARBON BORDER FEE ADJUSTMENT. ‘‘CHAPTER 101—CARBON FEES 3 ‘‘Sec. 9901. Definitions. ‘‘Sec. 9902. Carbon fee. ‘‘Sec. 9903. Emissions reduction schedule. ‘‘Sec. 9904. Fee on fluorinated greenhouse gases. ‘‘Sec. 9905. Decommissioning of Carbon Administration. ‘‘Sec. 9906. Carbon Capture and Sequestration. ‘‘Sec. 9907. Administrative authority. ‘‘SEC. 9901. DEFINITIONS. 4 ‘‘For purposes of this subtitle: 5 ‘‘(a) ADMINISTRATOR.—The term ‘Administrator’ 6 means the Administrator of the Environmental Protection 7 Agency. 8 ‘‘(b) CARBON DIOXIDE EQUIVALENT OR CO2-E.— 9 The term ‘carbon dioxide equivalent’ or ‘CO2-e’ means the 10 number of metric tons of carbon dioxide emissions with 11 the same global warming potential as one metric ton of 12 another greenhouse gas. 13 ‘‘(c) CARBON-INTENSIVE PRODUCT.—The term ‘car-14 bon-intensive product’ means, as identified by the Sec-15 retary by rule— 16 ‘‘(1) any manufactured or agricultural product 17 which the Secretary in consultation with the Admin-18 istrator determines is emissions-intensive and trade- 19 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 4 •HR 763 IH exposed, except that no covered fuel is a carbon-in-1 tensive product, and 2 ‘‘(2) until such time that the Secretary promul-3 gates rules identifying carbon-intensive products, the 4 following shall be considered carbon-intensive prod-5 ucts: iron, steel, steel mill products (including pipe 6 and tube), aluminum, cement, glass (including flat, 7 container, and specialty glass and fiberglass), pulp, 8 paper, chemicals, or industrial ceramics. 9 ‘‘(d) CARBON LEAKAGE.—The term ‘carbon leakage’ 10 means an increase of global greenhouse gas emissions 11 which are substantially due to the relocation of greenhouse 12 gas sources from the United States to jurisdictions which 13 lack comparable controls upon greenhouse gas emissions. 14 ‘‘(e) COST OF CARBON OR CARBON COSTS.—The 15 term ‘cost of carbon’ or ‘carbon costs’ means a national 16 or sub-national government policy which explicitly places 17 a price on greenhouse gas pollution and shall be limited 18 to either a tax on greenhouse gases or a system of cap- 19 and-trade. The cost of carbon is expressed as the price 20 per metric ton of CO2-e. 21 ‘‘(f) COVERED ENTITY.—The term ‘covered entity’ 22 means— 23 ‘‘(1) in the case of crude oil— 24 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 5 •HR 763 IH ‘‘(A) a refinery operating in the United 1 States, and 2 ‘‘(B) any importer of any petroleum or pe-3 troleum product into the United States, 4 ‘‘(2) in the case of coal— 5 ‘‘(A) any coal mining operation in the 6 United States, and 7 ‘‘(B) any importer of coal into the United 8 States, 9 ‘‘(3) in the case of natural gas— 10 ‘‘(A) any entity entering pipeline quality 11 natural gas into the natural gas transmission 12 system, and 13 ‘‘(B) any importer of natural gas into the 14 United States, 15 ‘‘(4) in the case of fluorinated gases any entity 16 required to report the emission of a fluorinated gas 17 under part 98 of title 40, Code of Federal Regula-18 tions, and 19 ‘‘(5) any entity or class of entities which, as de-20 termined by the Secretary, is transporting, selling, 21 or otherwise using a covered fuel in a manner which 22 emits a greenhouse gas to the atmosphere and which 23 has not been covered by the carbon fee, the 24 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00005 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 6 •HR 763 IH fluorinated greenhouse gas fee, or the carbon border 1 fee adjustment. 2 ‘‘(g) COVERED FUEL.—The term ‘covered fuel’ 3 means crude oil, natural gas, coal, or any other product 4 derived from crude oil, natural gas, or coal which shall 5 be used so as to emit greenhouse gases to the atmosphere. 6 ‘‘(h) CRUDE OIL.—The term ‘crude oil’ means 7 unrefined petroleum. 8 ‘‘(i) EXPORT.—The term ‘export’ means to transport 9 a product from within the jurisdiction of the United States 10 to persons outside the United States. 11 ‘‘(j) FLUORINATED GREENHOUSE GAS.—The term 12 ‘fluorinated greenhouse gas’ means sulfur hexafluoride 13 (SF6), nitrogen trifluoride (NF3), and any fluorocarbon 14 except for controlled substances as defined in subpart A 15 of part 82 of title 40, Code of Federal Regulation, and 16 substances with vapor pressures of less than 1 mm of Hg 17 absolute at 25 degrees. With these exceptions, ‘fluorinated 18 greenhouse gas’ includes but is not limited to any 19 hydrofluorocarbon, any perfluorocarbon, any fully 20 fluorinated linear, branched or cyclic alkane, ether, ter-21 tiary amine or aminoether, any perfluoropolyether, and 22 any hydrofluoropolyether. 23 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00006 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 7 •HR 763 IH ‘‘(k) FOSSIL FUEL.—The term ‘fossil fuel’ means 1 coal, coal products, petroleum, petroleum products, or nat-2 ural gas. 3 ‘‘(l) FULL FUEL CYCLE GREENHOUSE GAS EMIS-4 SIONS.—The term ‘full fuel cycle greenhouse gas emis-5 sions’ means the greenhouse gas content of a covered fuel 6 plus that covered fuel’s upstream greenhouse gas emis-7 sions. 8 ‘‘(m) GLOBAL WARMING POTENTIAL.—The term 9 ‘global warming potential’ means the ratio of the time- 10 integrated radiative forcing from the instantaneous release 11 of one kilogram of a trace substance relative to that of 12 one kilogram of carbon dioxide. 13 ‘‘(n) GREENHOUSE GAS.—The term ‘greenhouse gas’ 14 means carbon dioxide (CO2), methane (CH4), nitrous 15 oxide (N2O), sulfur hexafluoride (SF6), 16 hydrofluorocarbons (HFCs), perfluorocarbon (PFCs), and 17 other gases as defined by rule of the Administrator. 18 ‘‘(o) GREENHOUSE GAS CONTENT.—The term 19 ‘greenhouse gas content’ means the amount of greenhouse 20 gases, expressed in metric tons of CO2-e, which would be 21 emitted to the atmosphere by the use of a covered fuel 22 and shall include, nonexclusively, emissions of carbon diox-23 ide (CO2), nitrous oxide (N2O), methane (CH4), and other 24 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00007 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 8 •HR 763 IH greenhouse gases as identified by rule of the Adminis-1 trator. 2 ‘‘(p) GREENHOUSE GAS EFFECT.—The term ‘green-3 house gas effect’ means the adverse effects of greenhouse 4 gases on health or welfare caused by the greenhouse gas’s 5 heat-trapping potential or its effect on ocean acidification. 6 ‘‘(q) IMPORT.—Irrespective of any other definition in 7 law or treaty, the term ‘import’ means to land on, bring 8 into, or introduce into any place subject to the jurisdiction 9 of the United States. 10 ‘‘(r) PETROLEUM.—The term ‘petroleum’ means oil 11 removed from the earth or the oil derived from tar sands 12 or shale. 13 ‘‘(s) PRODUCTION GREENHOUSE GAS EMISSIONS.— 14 The term ‘production greenhouse gas emissions’ means 15 the quantity of greenhouse gases, expressed in metric tons 16 of CO2-e, emitted to the atmosphere resulting from, non-17 exclusively, the production, manufacture, assembly, trans-18 portation, or financing of a product. 19 ‘‘(t) UPSTREAM GREENHOUSE GAS EMISSIONS.— 20 The term ‘upstream greenhouse gas emissions’ means the 21 quantity of greenhouse gases, expressed in metric tons of 22 CO2-e, emitted to the atmosphere resulting from, non-23 exclusively, the extraction, processing, transportation, fi-24 nancing, or other preparation of a covered fuel for use. 25 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00008 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 9 •HR 763 IH ‘‘SEC. 9902. CARBON FEE. 1 ‘‘(a) CARBON FEE.—There is hereby imposed a car-2 bon fee on any covered entity’s emitting use, or sale or 3 transfer for an emitting use, of any covered fuel. 4 ‘‘(b) AMOUNT OF THE CARBON FEE.—The carbon 5 fee imposed by this section is an amount equal to— 6 ‘‘(1) the greenhouse gas content of the covered 7 fuel, multiplied by 8 ‘‘(2) the carbon fee rate. 9 ‘‘(c) CARBON FEE RATE.—For purposes of this sec-10 tion— 11 ‘‘(1) IN GENERAL.—The carbon fee rate, with 12 respect to any use, sale, or transfer during a cal-13 endar year, shall be— 14 ‘‘(A) in the case of calendar year 2019, 15 $15, and 16 ‘‘(B) except as provided in paragraph (2), 17 in the case of any calendar year thereafter— 18 ‘‘(i) the carbon fee rate in effect 19 under this subsection for the preceding cal-20 endar year, plus 21 ‘‘(ii) $10. 22 ‘‘(2) EXCEPTIONS.— 23 ‘‘(A) INCREASED CARBON FEE RATE 24 AFTER MISSED ANNUAL EMISSIONS REDUCTION 25 TARGET.—In the case of any year immediately 26 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00009 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 10 •HR 763 IH following a year for which the Secretary deter-1 mines under 9903(b) that the actual emissions 2 of greenhouse gases from covered fuels exceeded 3 the emissions reduction target for the previous 4 year, paragraph (1)(B)(ii) shall be applied by 5 substituting ‘$15’ for the dollar amount other-6 wise in effect for the calendar year under such 7 paragraph. 8 ‘‘(B) CESSATION OF CARBON FEE RATE IN-9 CREASE AFTER CERTAIN EMISSION REDUCTIONS 10 ACHIEVED.—In the case of any year imme-11 diately following a year for which the Secretary 12 determines under 9903(b) that actual emissions 13 of greenhouse gases from covered fuels is not 14 more than 10 percent of the greenhouse gas 15 emissions from covered fuels during the year 16 2016, paragraph (1)(B)(ii) shall be applied by 17 substituting ‘$0’ for the dollar amount other-18 wise in effect for the calendar year under such 19 paragraph. 20 ‘‘(3) INFLATION ADJUSTMENT.—In the case of 21 any calendar year after 2019, each of the dollar 22 amounts in paragraphs (1)(A), (1)(B)(ii), and 23 (2)(A) shall be increased by an amount equal to— 24 ‘‘(A) such dollar amount, multiplied by 25 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00010 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 11 •HR 763 IH ‘‘(B) the cost-of-living adjustment deter-1 mined under section 1(f)(3) for the calendar 2 year, determined by substituting ‘calendar year 3 2018’ for ‘calendar year 2016’ in subparagraph 4 (A)(ii) thereof. 5 ‘‘(d) EXEMPTION AND REFUND.—The Secretary 6 shall prescribe such rules as are necessary to ensure the 7 fee imposed by this section is not imposed with respect 8 to any nonemitting use, or any sale or transfer for a non-9 emitting use, including rules providing for the refund of 10 any carbon fee paid under this section with respect to any 11 such use, sale, or transfer. 12 ‘‘(e) EXEMPTIONS.— 13 ‘‘(1) AGRICULTURE.— 14 ‘‘(A) FUEL.—If any covered fuel or its de-15 rivative is used on a farm for a farming pur-16 pose, the Secretary shall pay (without interest) 17 to the ultimate purchaser of such covered fuel 18 or its derivative, the total amount of carbon 19 fees previously paid upon that covered fuel or 20 its derivative, as specified by rule of the Sec-21 retary. 22 ‘‘(B) FARM, FARMING USE, AND FARMING 23 PURPOSE.—The terms ‘farm’, ‘farming use’, 24 and ‘farming purpose’ shall have the respective 25 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00011 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 12 •HR 763 IH meanings given such terms under section 1 6420(c). 2 ‘‘(C) OTHER GREENHOUSE GASES EMIS-3 SIONS FROM AGRICULTURE.—The carbon fee 4 shall not be levied upon non-fossil fuel green-5 house gas emissions which occur on a farm. 6 ‘‘(2) ARMED FORCES OF THE UNITED 7 STATES.—If any covered fuel or its derivative is 8 used by the Armed Forces of the United States as 9 supplies for vessels of war, vehicles, or electrical 10 power generation equipment, the Secretary shall pay 11 (without interest) to the ultimate purchaser of such 12 covered fuel or its derivative, the total amount of 13 carbon fees previously paid upon that covered fuel or 14 its derivative, as specified by rule of the Secretary. 15 ‘‘SEC. 9903. EMISSIONS REDUCTION SCHEDULE. 16 ‘‘(a) IN GENERAL.—An emissions reduction schedule 17 for greenhouse gas emissions from covered fuels is hereby 18 established, as follows: 19 ‘‘(1) REFERENCE YEAR.—The greenhouse gas 20 emissions from covered fuels during the year 2016 21 shall be the reference amount of emissions and shall 22 be determined from the ‘Inventory of U.S. Green-23 house Gas Emissions and Sinks: 1990–2016’ pub-24 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00012 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 13 •HR 763 IH lished by the Environmental Protection Agency in 1 April of 2018. 2 ‘‘(2) EMISSIONS REDUCTION TARGET.—The 3 first emission reduction target shall be for the year 4 2022. The emission target for each year thereafter 5 shall be the previous year’s target emissions minus 6 a percentage of emissions during the reference year 7 determined in accordance with the following table: 8 ‘‘Year Emissions Reduction Target 2016 Reference year 2020 to 2024 No emissions reduction target 2025 to 2034 5 percent of 2016 emissions per year 2035 to 2050 2.5 percent of 2016 emissions per year ‘‘(b) ADMINISTRATIVE DETERMINATION.—Not later 9 than 60 days after the beginning of each calendar year 10 beginning after the enactment of this section, the Sec-11 retary, in consultation with the Administrator, shall deter-12 mine whether actual emissions of greenhouse gases from 13 covered fuels exceeded the emissions reduction target for 14 the preceding calendar year. The Secretary shall make 15 such determination using the same greenhouse gas ac-16 counting method as was used to determine the greenhouse 17 gas emissions in the ‘Inventory of U.S. Greenhouse Gas 18 Emissions and Sinks: 1990–2016’ published by the Envi-19 ronmental Protection Agency in April of 2018. 20 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00013 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 14 •HR 763 IH ‘‘SEC. 9904. FEE ON FLUORINATED GREENHOUSE GASES. 1 ‘‘(a) FLUORINATED GAS FEE.—A fee is hereby im-2 posed upon any fluorinated greenhouse gas which is re-3 quired to be reported under part 98 of title 40, Code of 4 Federal Regulations. 5 ‘‘(b) AMOUNT.—The fee to be paid by the covered 6 entity required to so report shall be an amount equal to— 7 ‘‘(1) the total amount, in metric tons of CO2- 8 e, of emitted fluorinated greenhouse gases (or, in the 9 case of a supplier, emissions that would result deter-10 mined under the rules of such part), multiplied by 11 ‘‘(2) an amount equal to 10 percent of the car-12 bon fee rate in effect under section 9902(d)(1) for 13 the calendar year of such emission. 14 ‘‘SEC. 9905. DECOMMISSIONING OF CARBON FEE. 15 ‘‘(a) IN GENERAL.—At such time that— 16 ‘‘(1) the Secretary determines under 9903(b) 17 that actual emissions of greenhouse gases from cov-18 ered fuels is not more than 10 percent of the green-19 house gas emissions from covered fuels during the 20 year 2016, and 21 ‘‘(2) the monthly carbon dividend payable to an 22 adult eligible individual has been less than $20 for 23 3 consecutive years, 24 the Secretary shall decommission in an orderly manner all 25 bureaus and programs associated with administering the 26 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00014 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 15 •HR 763 IH carbon fee, the carbon border fee adjustment, and the Car-1 bon Dividend Trust Fund. 2 ‘‘(b) INFLATION ADJUSTMENT.—In the case of any 3 calendar year after 2020, the $20 amount under sub-4 section (a)(2) shall be increased by an amount equal to— 5 ‘‘(1) such dollar amount, multiplied by 6 ‘‘(2) cost-of-living adjustment determined under 7 section 1(f)(3) for the calendar year, determined by 8 substituting ‘calendar year 2017’ for ‘calendar year 9 2016’ in subparagraph (A)(ii) thereof. 10 ‘‘SEC. 9906. CARBON CAPTURE AND SEQUESTRATION. 11 ‘‘(a) IN GENERAL.—The Secretary, in consultation 12 with the Administrator and the Secretary of Energy, shall 13 prescribe regulations for making payments as provided in 14 subsection (b) to qualified facilities which capture and se-15 quester qualified carbon dioxide. 16 ‘‘(b) PAYMENT AMOUNTS.— 17 ‘‘(1) IN GENERAL.—The Secretary shall make 18 payments to a qualified facility in the same manner 19 as if such payment was a refund of an overpayment 20 of the carbon fee imposed by section 9902, in cases 21 in which such qualified facility— 22 ‘‘(A) uses any covered fuel— 23 ‘‘(i) with respect to which the carbon 24 fee has been paid, and 25 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00015 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 16 •HR 763 IH ‘‘(ii) which results in the emission of 1 qualified carbon dioxide, 2 ‘‘(B) captures such emitted qualified car-3 bon dioxide, and 4 ‘‘(C)(i) sequesters such qualified carbon di-5 oxide in a manner which is safe, permanent, 6 and in compliance with any applicable local, 7 State, and Federal laws, or 8 ‘‘(ii) utilizes such qualified carbon dioxide 9 in a manner provided in paragraph (3)(C). 10 ‘‘(2) AMOUNT OF REFUND.—The payment de-11 termined under this section shall be an amount 12 equal to the lesser of— 13 ‘‘(A)(i) the adjusted metric tons of quali-14 fied carbon dioxide captured and sequestered or 15 utilized, multiplied by 16 ‘‘(ii) the carbon fee rate during the year in 17 which the carbon fee was imposed by section 18 9902 upon the covered fuel to which such car-19 bon dioxide relates, or 20 ‘‘(B) the amount of the carbon fee imposed 21 by section 9902 with respect to such covered 22 fuel. 23 ‘‘(3) DEFINITIONS AND SPECIAL RULES.—For 24 purposes of this section— 25 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00016 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 17 •HR 763 IH ‘‘(A) QUALIFIED CARBON DIOXIDE; QUALI-1 FIED FACILITY.— 2 ‘‘(i) QUALIFIED CARBON DIOXIDE.— 3 The term ‘qualified carbon dioxide’ has the 4 same meaning given such term under sec-5 tion 45Q(b). 6 ‘‘(ii) QUALIFIED FACILITY.—The term 7 ‘qualified facility’ means any industrial fa-8 cility at which carbon capture equipment is 9 placed in service. 10 ‘‘(B) ADJUSTED TOTAL METRIC TONS.— 11 The adjusted total metric tons of qualified car-12 bon dioxide captured and sequestered or utilized 13 shall be the total metric tons of qualified carbon 14 dioxide captured and sequestered or utilized, re-15 duced by the amount of any carbon dioxide like-16 ly to escape and be emitted into the atmosphere 17 due to imperfect storage technology or other-18 wise, as determined by the Secretary in con-19 sultation with the Administrator. 20 ‘‘(C) UTILIZATION.—The Secretary, in 21 consultation with the Administrator, shall es-22 tablish regulations providing for the methods 23 and processes by which qualified carbon dioxide 24 may be utilized so as to remove that qualified 25 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00017 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 18 •HR 763 IH dioxide safely and permanently from the atmos-1 phere. Utilization may include the production of 2 substances such as but not limited to plastics 3 and chemicals. Such regulations shall minimize 4 the escape or further emission of the qualified 5 carbon dioxide into the atmosphere. 6 ‘‘(D) SEQUESTRATION.—Not later 540 7 days after the date of the enactment of this sec-8 tion, the Secretary, in consultation with the Ad-9 ministrator, shall prescribe regulations identi-10 fying the conditions under which carbon dioxide 11 may be safely and permanently sequestered. 12 ‘‘(4) COORDINATION WITH CREDIT FOR CARBON 13 DIOXIDE SEQUESTRATION.—At such time that the 14 Secretary prescribes regulations implementing this 15 section, no payment under this section shall be al-16 lowed to a taxpayer to whom a credit has been al-17 lowed for any taxable year under section 45Q. 18 ‘‘SEC. 9907. ADMINISTRATIVE AUTHORITY. 19 ‘‘(a) IN GENERAL.—The Secretary in consultation 20 with the Administrator shall prescribe such regulations, 21 and other guidance, as may be necessary to carry out the 22 purposes of this subtitle and assess and collect the carbon 23 fee imposed by section 9902 and the fluorinated green-24 house gas fee imposed by section 9904. 25 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00018 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 19 •HR 763 IH ‘‘(b) SPECIFICALLY.—Such regulations and guidance 1 shall include— 2 ‘‘(1) the identification of an effective point in 3 the production, distribution, or use of a covered fuel 4 or fluorinated greenhouse gas for collecting such car-5 bon fee or fluorinated greenhouse gas fee, in such a 6 manner so as to minimize administrative burden and 7 maximize the extent to which full fuel cycle green-8 house gas emissions from covered fuels or 9 fluorinated greenhouse gases have the carbon fee or 10 fluorinated greenhouse gas fee levied upon them, 11 ‘‘(2) the identification of covered entities which 12 shall be liable for the payment of the carbon fee or 13 the fluorinated greenhouse gas fee, 14 ‘‘(3) requirements for the monthly payment of 15 such fees, 16 ‘‘(4) as may be necessary or convenient, rules 17 for distinguishing between different types of covered 18 fuels, 19 ‘‘(5) as may be necessary or convenient, rules 20 for distinguishing between a covered fuel’s green-21 house gas content and its upstream greenhouse gas 22 emissions, 23 ‘‘(6) rules to ensure that no covered fuel or 24 fluorinated greenhouse gas has the carbon fee, 25 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00019 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 20 •HR 763 IH fluorinated greenhouse gas fee, or carbon border fee 1 adjustment imposed upon it more than once, and 2 ‘‘(7) rules to ensure that the domestic imple-3 mentation of the carbon fee and the fluorinated 4 greenhouse gas fee coordinate with the implementa-5 tion of the carbon border fee adjustment of chapter 6 102. 7 ‘‘CHAPTER 102—CARBON BORDER FEE 8 ADJUSTMENT 9 ‘‘Sec. 9908. Carbon border fee adjustment. ‘‘Sec. 9909. Administration of the carbon border fee adjustment. ‘‘Sec. 9910. Allocation of carbon border fee adjustment revenues. ‘‘SEC. 9908. CARBON BORDER FEE ADJUSTMENT. 10 ‘‘(a) IN GENERAL.—The fees imposed by, and re-11 funds allowed under, this section shall be referred to as 12 ‘the carbon border fee adjustment’. 13 ‘‘(b) PURPOSE.—The purpose of the carbon border 14 fee adjustment is to protect animal, plant, and human life 15 and health, to conserve exhaustible natural resources by 16 preventing carbon leakage, and to facilitate the creation 17 of international agreements. 18 ‘‘(c) IMPORTED COVERED FUELS FEE.—In the case 19 of any person that imports into the United States any cov-20 ered fuel, there shall be imposed a fee equal to the excess 21 (if any) of— 22 ‘‘(1) an amount equal to— 23 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00020 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 21 •HR 763 IH ‘‘(A) the amount of full fuel cycle green-1 house gas emissions of such fuel, multiplied by 2 ‘‘(B) the carbon fee rate in effect for the 3 year in which such fuel is imported, over 4 ‘‘(2) the total foreign cost of carbon carried by 5 such fuel. 6 ‘‘(d) IMPORTED CARBON-INTENSIVE PRODUCTS 7 FEE.—In the case of any person that imports into the 8 United States any carbon-intensive products, there shall 9 be imposed a fee equal to the excess (if any) of— 10 ‘‘(1) an amount equal to— 11 ‘‘(A) production greenhouse gas emissions 12 of such product, multiplied by 13 ‘‘(B) the carbon fee rate in effect for the 14 year in which the production greenhouse gas 15 emissions of such product were emitted into the 16 atmosphere, over 17 ‘‘(2) the total foreign cost of carbon carried by 18 such product. 19 ‘‘(e) REFUND ON EXPORTS FROM UNITED 20 STATES.— 21 ‘‘(1) CARBON-INTENSIVE PRODUCTS.—Under 22 regulations prescribed by the Secretary, there shall 23 be allowed a credit or refund (without interest) to 24 exporters of carbon-intensive products manufactured 25 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00021 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 22 •HR 763 IH or produced in the United States an amount equal 1 to the excess (if any) of— 2 ‘‘(A) an amount equal to— 3 ‘‘(i) the production greenhouse gas 4 emissions of the exported carbon-intensive 5 product, multiplied by 6 ‘‘(ii) the carbon fee rate during the 7 year in which the carbon fee or fluorinated 8 greenhouse gas fee was paid upon the pro-9 duction greenhouse gas emissions of the 10 exported carbon-intensive product, over 11 ‘‘(B) any total cost of carbon to be levied 12 upon the carbon-intensive product by any juris-13 diction to which the carbon-intensive product is 14 to be imported. 15 Any such credit or refund shall be allowed in the 16 same manner as if it were an overpayment of the fee 17 imposed by section 9902 or 9904. The Secretary 18 shall establish fair, timely, impartial, and as nec-19 essary confidential procedures by which any exporter 20 of any product from the United States may petition 21 the Secretary to include that exported product on 22 the list of carbon-intensive products. 23 ‘‘(2) COVERED FUELS.—Under regulations pre-24 scribed by the Secretary, in the case of a covered 25 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00022 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 23 •HR 763 IH fuel produced in the United States with respect to 1 which the fee under section 9902 was paid, there 2 shall be allowed as a credit or refund (without inter-3 est) to any exporter of such covered fuels an amount 4 equal to the excess (if any) of— 5 ‘‘(A) an amount equal to— 6 ‘‘(i) the full fuel cycle greenhouse gas 7 emissions of the covered fuel, multiplied by 8 ‘‘(ii) the carbon fee rate at the time 9 the carbon fee was paid upon the full fuel 10 cycle greenhouse gas emissions of the ex-11 ported covered fuel, over 12 ‘‘(B) any total cost of carbon to be levied 13 upon the covered fuel by a jurisdiction to which 14 the carbon-intensive product is to be imported. 15 Any such credit or refund shall be allowed in the 16 same manner as if it were an overpayment of tax 17 imposed by section 9902. 18 ‘‘(f) DEFINITIONS.—For purposes of this section— 19 ‘‘(1) FOREIGN COST OF CARBON; FOREIGN CAR-20 BON COSTS.—The term ‘foreign cost of carbon’ or 21 ‘foreign carbon cost’ means the cost of any laws of 22 a foreign jurisdiction which impose a system of cap- 23 and-trade with respect to, or a tax or fee on, green-24 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00023 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 24 •HR 763 IH house gas. Such cost shall be determined and ex-1 pressed as a price per metric ton of CO2-e. 2 ‘‘(2) TOTAL COST OF CARBON CARRIED.—The 3 term ‘total cost of carbon carried’ means an amount 4 equal to— 5 ‘‘(A) the production greenhouse gas emis-6 sions of a carbon-intensive product or the full 7 fuel cycle greenhouse gas emissions of a covered 8 fuel, multiplied by 9 ‘‘(B) the cost of carbon with respect to 10 such product or fuel, reduced by any amount 11 refunded with respect to such product or fuel 12 by a foreign jurisdiction. 13 The total cost of carbon carried shall be expressed 14 as price in United States dollars. 15 ‘‘(3) TOTAL FOREIGN COST OF CARBON CAR-16 RIED.—The term ‘total foreign cost of carbon car-17 ried’ means an amount equal to— 18 ‘‘(A) the production greenhouse gas emis-19 sions of a carbon-intensive product, or the full 20 fuel cycle greenhouse gas emissions of a covered 21 fuel, multiplied by 22 ‘‘(B) the foreign cost of carbon with re-23 spect to such product or fuel, reduced by the 24 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00024 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 25 •HR 763 IH amount refunded with respect to such product 1 or fuel by a foreign jurisdiction. 2 The total foreign cost of carbon carried shall be ex-3 pressed as price in United States dollars. 4 ‘‘SEC. 9909. ADMINISTRATION OF THE CARBON BORDER 5 FEE ADJUSTMENT. 6 ‘‘(a) GENERALLY.—The Secretary in consultation 7 with the Administrator shall prescribe regulations and 8 guidance which implement the carbon border fee adjust-9 ment under section 9908. 10 ‘‘(b) COLLABORATION.—In determining the produc-11 tion greenhouse gas emissions of an imported carbon-in-12 tensive product, the upstream greenhouse gas emissions 13 of an imported covered fuel, the full fuel cycle greenhouse 14 gas emissions of an imported covered fuel, or the foreign 15 cost of carbon, or otherwise administering the carbon bor-16 der fee adjustment, it is the sense of Congress that the 17 Secretary should collaborate with authorized officers of 18 any jurisdiction, including sub-national governments, af-19 fected by the carbon border fee adjustment. 20 ‘‘(c) METHODOLOGY.—In determining the production 21 greenhouse gas emissions of an imported carbon-intensive 22 product, the upstream greenhouse gas emissions of an im-23 ported covered fuel, the full fuel cycle greenhouse gas 24 emissions of an imported covered fuel, or the foreign cost 25 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00025 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 26 •HR 763 IH of carbon, the Secretary shall use reliable methodologies, 1 which— 2 ‘‘(1) as may be necessary or convenient— 3 ‘‘(A) distinguish between different types of 4 covered fuels, 5 ‘‘(B) distinguish between a covered fuel’s 6 greenhouse gas content and that covered fuel’s 7 upstream greenhouse gas emissions, 8 ‘‘(C) distinguish between the different 9 types of greenhouse gas emissions which com-10 pose a covered fuel’s upstream greenhouse gas 11 emissions or greenhouse gas content, as well as 12 the various processes which produced those 13 emissions, and 14 ‘‘(D) distinguish between the different 15 types of greenhouse gas emissions which com-16 pose a carbon-intensive product’s production 17 greenhouse gas emissions, as well as the various 18 processes which produced those emissions, 19 ‘‘(2) ensure that no covered fuel, covered 20 fluorinated greenhouse gas, or carbon-intensive prod-21 uct has the carbon fee, the fluorinated greenhouse 22 gas fee, or the border fee adjustment imposed upon 23 it more than once, 24 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00026 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 27 •HR 763 IH ‘‘(3) ensure that the implementation of the bor-1 der carbon adjustment aligns with the carbon fee 2 and the fluorinated gas fee, 3 ‘‘(4) in the case of incomplete data, rely upon 4 the best available methodologies for interpolating 5 data gaps, and 6 ‘‘(5) are consistent with international treaties 7 and agreements. 8 ‘‘(d) SCHEDULE.—The Secretary shall determine— 9 ‘‘(1) not later than 3 years after the date of the 10 enactment of this section, the production greenhouse 11 gas emissions of imported carbon-intensive products, 12 ‘‘(2) not later than 180 days after the date of 13 the enactment of this section, the full fuel cycle 14 greenhouse gas emissions and the upstream green-15 house gas emissions of every imported covered fuel, 16 and 17 ‘‘(3) not later than 3 years after the date of the 18 enactment of this section, the foreign cost of carbon 19 in all jurisdictions. 20 ‘‘(e) PROCEDURE.—The Secretary shall establish 21 fair, timely, impartial, and as necessary confidential proce-22 dures by which the importer of any carbon-intensive prod-23 uct or any covered fuel may petition the Secretary to re-24 vise the Secretary’s determination of the production green-25 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00027 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 28 •HR 763 IH house gas emissions, full fuel cycle greenhouse gas emis-1 sions, or upstream greenhouse gas emissions of that im-2 porter’s imported covered fuel or imported carbon-inten-3 sive product, or the foreign cost of carbon carried by that 4 importer’s imported carbon-intensive product. 5 ‘‘(f) SHIPMENTS FROM THE UNITED STATES TO THE 6 TERRITORIES OF THE UNITED STATES.—Notwith-7 standing any other treaty, law, or policy, shipments of cov-8 ered fuels or carbon-intensive products from the United 9 States to Guam, the United States Virgin Islands, Samoa, 10 Puerto Rico, and the Northern Mariana Islands shall be 11 eligible for a refund of the carbon fee under section 12 9908(e). 13 ‘‘(g) IMPORTS TO THE TERRITORIES OF THE UNITED 14 STATES.—Notwithstanding any other treaty, law, or pol-15 icy, imports of covered fuels or carbon-intensive products 16 to Guam, the United States Virgin Islands, Samoa, Puerto 17 Rico, and the Northern Mariana Islands shall not be sub-18 ject to Section 9908(c) or 9908(d).’’ 19 ‘‘SEC. 9910. ALLOCATION OF CARBON BORDER FEE ADJUST-20 MENT REVENUES. 21 ‘‘The revenues collected under this chapter may be 22 used to supplement appropriations made available in fiscal 23 years 2020 and thereafter— 24 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00028 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 29 •HR 763 IH ‘‘(1) to U.S. Customs and Border Protection, in 1 such amounts as are necessary to administer the 2 carbon border fee adjustment, then 3 ‘‘(2) to the Department of Treasury, in such 4 amounts as are necessary to allow refunds under 5 section 9908(e) to exporters of carbon-intensive 6 products and exporters of covered fuels.’’. 7 (b) COORDINATION WITH CARBON OXIDE SEQUES-8 TRATION CREDIT.—Section 45Q(f) is amended by adding 9 at the end the following new paragraph: 10 ‘‘(8) COORDINATION WITH CARBON CAPTURE 11 AND SEQUESTRATION PAYMENTS.—No credit shall 12 be allowed under this section to a taxpayer which 13 has received any payment under section 9906.’’. 14 (c) TREATIES AND INTERNATIONAL NEGOTIA-15 TIONS.— 16 (1) CONFORMANCE WITH INTERNATIONAL 17 TREATIES.—In the case that the Appellate Body of 18 the World Trade Organization, or any other authori-19 tative international treaty interpreter, shall find any 20 portion of the carbon border fee adjustment under 21 chapter 102 of the Internal Revenue Code of 1986 22 to violate any treaty to which the United States is 23 a party, the Secretary of the Treasury is authorized 24 to alter any aspect of such carbon border fee adjust-25 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00029 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 30 •HR 763 IH ment so as to bring the carbon border fee adjust-1 ment into conformance with international law. 2 (2) INTERNATIONAL NEGOTIATIONS.—The Con-3 gress finds the international mitigation of green-4 house gas emissions to be of national importance. 5 Therefore, the Congress encourages the Secretary of 6 State, or the Secretary’s designee, to commence and 7 complete negotiations with other nations with the 8 goal of forming treaties, environmental agreements, 9 accords, partnerships or any other instrument that 10 effectively reduces global greenhouse gas emissions 11 to 10 percent of 2016 levels by 2050 and which re-12 spect the principle of common but differentiated re-13 sponsibilities and respective capabilities. 14 (3) SUSPENSION OF THE CARBON BORDER FEE 15 ADJUSTMENT.—Any part of the carbon border fee 16 adjustment shall be suspended, in whole or in 17 part,— 18 (A) by treaty or other international agree-19 ment which includes provisions for the suspen-20 sion of the carbon border fee adjustment, in 21 whole or in part, with any party signatory to 22 the treaty or other international agreement, or 23 (B) by a finding of the Secretary that a ju-24 risdiction of importation has implemented poli-25 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00030 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 31 •HR 763 IH cies which, in the case of high emitting coun-1 tries, reduce greenhouse gas emissions at a rate 2 at least equivalent to United States greenhouse 3 gas emission reductions, or, in the case of low 4 emitting countries, prevent the increase in 5 greenhouse gas emissions. 6 Any such finding shall be reviewed at least every 3 7 years and amended or revoked as required. 8 SEC. 4. ESTABLISHMENT OF THE CARBON DIVIDEND TRUST 9 FUND. 10 (a) IN GENERAL.—Subchapter A of chapter 98 of the 11 Internal Revenue Code of 1986 is amended by adding at 12 the end the following: 13 ‘‘SEC. 9512. CARBON DIVIDEND TRUST FUND. 14 ‘‘(a) ESTABLISHMENT AND FUNDING.—There is 15 hereby established in the Treasury of the United States 16 a trust fund to be known as the ‘Carbon Dividend Trust 17 Fund’, consisting of such amounts as may be appropriated 18 to such trust fund as provided for in this section. 19 ‘‘(b) TRANSFERS TO THE CARBON DIVIDEND TRUST 20 FUND.—There is hereby appropriated to the Carbon Divi-21 dend Trust Fund amounts equal to the fees received into 22 the Treasury less any amounts refunded or paid under 23 section 9902(d) or 9906 of chapter 101 for each month. 24 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00031 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 32 •HR 763 IH ‘‘(c) EXPENDITURES.—Amounts in the trust fund 1 shall be available for the following purposes: 2 ‘‘(1) ADMINISTRATIVE EXPENSES.—So much of 3 the expenses necessary to administer the Carbon 4 Dividend Trust Fund for each year, as does not ex-5 ceed— 6 ‘‘(A) in the case of the first 5 calendar 7 years ending after the date of the enactment of 8 this section, the administrative expenses for any 9 year may not exceed 8 percent of amounts ap-10 propriated to the Carbon Dividend Trust Fund 11 during such year, and 12 ‘‘(B) in the case of any calendar year 13 thereafter, 2 percent of the 5-year rolling aver-14 age of the amounts appropriated to the Carbon 15 Dividend Trust Fund, and 16 ‘‘(2) OTHER ADMINISTRATIVE EXPENSES.—So 17 much of the expenses as are necessary to administer 18 chapter 101 for any year as does not to exceed 0.60 19 percent of the amounts appropriated to the Carbon 20 Dividend Trust Fund for the previous year, and fur-21 ther limited as follows: 22 ‘‘(A) The Department of the Treasury. 23 ‘‘(B) The Social Security Administration. 24 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00032 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 33 •HR 763 IH ‘‘(C) The Environmental Protection Agen-1 cy. 2 ‘‘(D) Department of State. 3 ‘‘(3) CARBON DIVIDEND PAYMENTS.— 4 ‘‘(A) IN GENERAL.—From the amounts in 5 the Carbon Dividend Trust Fund made avail-6 able under paragraphs (1) and (2) of this sub-7 section for any year, the Secretary shall for 8 each month beginning more than 270 days after 9 the date of the enactment of the Energy Inno-10 vation and Carbon Dividend Act of 2019, make 11 carbon dividend payments to each eligible indi-12 vidual. 13 ‘‘(B) PRO-RATA SHARE.—A carbon divi-14 dend payment is one pro-rata share for each 15 adult, and half a pro-rata share for each child 16 under 19 years old, of amounts available for the 17 month in the Carbon Dividend Trust Fund. 18 ‘‘(C) ELIGIBLE INDIVIDUAL.—The term 19 ‘eligible individual’ means, with respect to any 20 month, any natural living person who has a 21 valid Social Security number or taxpayer identi-22 fication number and is a citizen or lawful resi-23 dent of the United States (other than any indi-24 vidual who is a citizen of any possession of the 25 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00033 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 34 •HR 763 IH United States and whose bona fide residence is 1 outside of the United States). The Secretary is 2 authorized to verify an individual’s eligibility to 3 receive a carbon dividend payment. 4 ‘‘(D) FEE TREATMENT OF PAYMENTS.— 5 Amounts paid under this subsection shall be in-6 cludible in gross income. 7 ‘‘(E) FEDERAL PROGRAMS AND FEDERAL 8 ASSISTED PROGRAMS.—The carbon dividend 9 amount received by any individual shall not be 10 taken into account as income and shall not be 11 taken into account as resources for purposes of 12 determining the eligibility of such individual or 13 any other individual for benefits or assistance, 14 or the amount or extent of benefits or assist-15 ance, under any Federal program or under any 16 State or local program financed in whole or in 17 part with Federal funds. 18 ‘‘(F) ADVANCE PAYMENT.—The Secretary 19 shall transfer to the Carbon Dividend Trust 20 Fund such amounts as are necessary for the 21 disbursement of an advanced carbon dividend to 22 all eligible individuals as follows: 23 ‘‘(i) An advanced carbon dividend 24 shall be the same as the anticipated first 25 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00034 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 35 •HR 763 IH carbon dividend required to be distributed 1 under subparagraph (A) and shall be dis-2 tributed the month prior to the first collec-3 tion of the carbon fee. 4 ‘‘(ii) Total amounts disbursed as ad-5 vanced carbon dividends shall be deducted 6 from the carbon dividends on a pro-rata 7 basis over the first 3 years after the dis-8 bursement of the first carbon dividends. 9 ‘‘(d) ADMINISTRATIVE AUTHORITY.—The Secretary 10 shall promulgate rules, guidance, and regulations useful 11 and necessary to implement the Carbon Dividend Trust 12 Fund.’’. 13 (b) CLERICAL AMENDMENT.—The table of sections 14 for subchapter A of chapter 98 of such Code is amended 15 by adding at the end the following new item: 16 ‘‘Sec. 9512. Carbon Dividend Trust Fund.’’. SEC. 5. LIMITED DISCLOSURE OF INFORMATION. 17 Section 6103(l) of the Internal Revenue Code of 1986 18 is amended by adding at the end the following new para-19 graphs: 20 ‘‘(23) LIMITED DISCLOSURE OF IDENTITY IN-21 FORMATION RELATING TO CARBON DIVIDEND PAY-22 MENTS.— 23 ‘‘(A) DEPARTMENT OF TREASURY.—Indi-24 vidual identity information shall, without writ-25 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00035 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 36 •HR 763 IH ten request, be open to inspection by or disclo-1 sure to officers and employees of the Depart-2 ment of the Treasury whose official duties re-3 quire such inspection or disclosure for purposes 4 of administering section 9512 (relating the Car-5 bon Dividend Trust Fund). 6 ‘‘(B) COMMISSIONER OF SOCIAL SECU-7 RITY.—The Commissioner of Social Security 8 shall, on written request, disclose to officers 9 and employees of the Department of the Treas-10 ury individual identity information which has 11 been disclosed to the Social Security Adminis-12 tration as is necessary to administer section 13 9512. 14 ‘‘(C) RESTRICTION ON DISCLOSURE.—In-15 formation disclosed under this paragraph shall 16 be disclosed only for purposes of, and to the ex-17 tent necessary in, carrying out section 9512.’’. 18 SEC. 6. NATIONAL ACADEMY OF SCIENCES REVIEW OF CAR-19 BON FEE AND EMISSIONS REDUCTION 20 SCHEDULE. 21 (a) IN GENERAL.—Not later than 10 years after the 22 date of the enactment of this Act, the Secretary of Energy 23 shall enter into an agreement with the National Academy 24 of Sciences to prepare a report relating to the carbon fee 25 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00036 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 37 •HR 763 IH imposed by section 9902 of the Internal Revenue Code of 1 1986 and the emissions reductions schedule established 2 under section 9903 of such Code. 3 (b) REPORT REQUIREMENTS.—Such report shall— 4 (1) assess the efficiency and effectiveness of the 5 carbon fee in achieving the emissions reduction tar-6 gets set forth in section 9903 of such Code; 7 (2) describe and make recommendations on 8 whether the carbon fee rate and annual increases 9 prescribed by section 9902(c) of such Code should 10 be adjusted in order to optimize the efficiency and 11 effectiveness of this Act in achieving the emissions 12 reduction targets set forth in section 9903 of such 13 Code; 14 (3) describe the potential of the carbon fee to 15 achieve future emissions targets set forth in section 16 9903(a) of such Code through the year 2050; 17 (4) describe and evaluate the effectiveness of 18 the carbon fee in reducing emissions from key sec-19 tors of the economy, including sectors of the econ-20 omy that have decreased their carbon emissions, sec-21 tors of the economy that have increased their carbon 22 emissions, and sectors of the economy in which car-23 bon emissions have not changed; 24 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00037 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 38 •HR 763 IH (5) make findings and recommendations to 1 Federal departments and agencies and to Congress 2 on actions that could be taken to reduce carbon 3 emissions in the sectors of the economy in which 4 carbon emissions have not decreased; 5 (6) make findings and recommendations on ad-6 justing regulations enacted under the Clean Air Act 7 and other Federal laws that affect economic sectors 8 achieving the emissions reduction targets set forth in 9 section 9903 of such Code; and 10 (7) provide an assessment of any other factors 11 determined to be material to the program’s effi-12 ciency and effectiveness in achieving the goals set 13 forth in this act. 14 (c) REPORT MADE PUBLICLY AVAILABLE.—Not later 15 than 10 years after the date of the enactment of this Act, 16 the Secretary of Energy shall submit to Congress the re-17 port required under subsection (a). Such report shall be 18 made electronically available to the public and open to 19 public comment for at least 60 days before the final sub-20 mission to Congress. 21 SEC. 7. IMPACT OF CARBON FEE ON BIOMASS USE AND 22 CARBON SINKS. 23 (a) STUDY OF BIOMASS.—The Secretary of Energy 24 shall enter into an agreement with the National Academy 25 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00038 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 39 •HR 763 IH of Sciences and the Administrator of the Environmental 1 Protection Agency to conduct a study, make recommenda-2 tions, and submit a report regarding the impact of the 3 carbon fee on the use of biomass as an energy source and 4 the resulting impacts on carbon sinks and biodiversity. 5 (b) STUDY REQUIREMENTS.—The study conducted 6 under subsection (a) by the National Academy of Sciences 7 shall include analysis, documentation, and determinations 8 on— 9 (1) the carbon fee and its impact on the use of 10 biomass as an energy source and greenhouse gas 11 emissions from the use of biomass as an energy 12 source; 13 (2) the impacts of the use of biomass as an en-14 ergy source on carbon sinks and biodiversity; and 15 (3) the various types of biomass that are being 16 used as an energy source. 17 (c) RECOMMENDATIONS.—Based on the findings and 18 conclusions of the study, the National Academy of 19 Sciences shall make recommendations to Federal depart-20 ments and agencies and to Congress. The recommenda-21 tions shall include any actions that should be taken to 22 mitigate impacts of the carbon fee on— 23 (1) increasing greenhouse gas emissions from 24 the use of biomass as an energy source; and 25 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00039 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 40 •HR 763 IH (2) degradation of carbon sinks and biodiversity 1 relating to the use of biomass as an energy source. 2 (d) REPORT.—The National Academy of Sciences 3 shall prepare a report that includes any findings and rec-4 ommendations made pursuant to this section and, not 5 later than 18 months after the date of the enactment of 6 this Act, make such report electronically available to the 7 public. 8 SEC. 8. AMENDMENTS TO THE CLEAN AIR ACT. 9 (a) IN GENERAL.—Title III of the Clean Air Act (42 10 U.S.C. 7601) is amended by adding at the end the fol-11 lowing: 12 ‘‘SEC. 330. SUSPENSION OF REGULATION OF FUELS AND 13 EMISSIONS BASED ON GREENHOUSE GAS EF-14 FECTS. 15 ‘‘(a) FUELS.—Unless specifically authorized in sec-16 tion 202, 211, 213, or 231 or this section, if a carbon 17 fee is imposed by section 9902 or 9908 of the Internal 18 Revenue Code of 1986 with respect to a covered fuel, the 19 Administrator shall not enforce any rule limiting the emis-20 sion of greenhouse gases from the combustion of that fuel 21 under this Act (or impose any requirement on any State 22 to limit such emission) on the basis of the emission’s 23 greenhouse gas effects. 24 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00040 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 41 •HR 763 IH ‘‘(b) EMISSIONS.—Unless specifically authorized in 1 section 202, 211, 213, or 231 or this section, if a fee is 2 imposed by section 9904 of the Internal Revenue Code of 3 1986 with respect to a fluorinated greenhouse gas, the Ad-4 ministrator shall not enforce any rule limiting such gas 5 under this Act (or impose any requirement on any State 6 to limit such gas) on the basis of the greenhouse gas ef-7 fects of such gas. 8 ‘‘(c) AUTHORIZED REGULATION.—Notwithstanding 9 subsections (a) and (b), nothing in this section limits the 10 Administrator’s authority pursuant to any other provision 11 of this Act— 12 ‘‘(1) to limit the emission of any greenhouse 13 gas because of any adverse impact on health or wel-14 fare other than its greenhouse gas effects; 15 ‘‘(2) in limiting emissions as described in para-16 graph (1), to consider the collateral benefits of lim-17 iting the emissions because of greenhouse gas ef-18 fects; 19 ‘‘(3) to limit the emission of black carbon or 20 any other pollutant that is not a greenhouse gas 21 that the Administrator determines by rule has heat- 22 trapping properties; or 23 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00041 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 42 •HR 763 IH ‘‘(4) to take any action with respect to any 1 greenhouse gas other than limiting its emission, in-2 cluding— 3 ‘‘(A) monitoring, reporting, and record- 4 keeping requirements; 5 ‘‘(B) conducting or supporting investiga-6 tions; and 7 ‘‘(C) information collection. 8 ‘‘(d) EXCEPTION FOR CERTAIN GREENHOUSE GAS 9 EMISSIONS.—Notwithstanding subsections (a) and (b), 10 nothing in this section limits the Administrator’s authority 11 to regulate greenhouse gas emissions from— 12 ‘‘(1) sources that— 13 ‘‘(A) are subject to subpart OOOO or 14 OOOOa of part 60 of title 40, Code of Federal 15 Regulations, as in effect or January 1, 2020; or 16 ‘‘(B) would be subject to such subpart 17 OOOO or subpart OOOOa if such subpart ap-18 plied regardless of the date on which construc-19 tion, modification, or reconstruction of the 20 source involved commenced; or 21 ‘‘(2) POTW Treatment Plants (as defined in 22 section 403.3(r) of title 40, Code of Federal Regula-23 tions). 24 ‘‘(e) SUSPENSION EXPIRATION.— 25 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00042 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 43 •HR 763 IH ‘‘(1) DETERMINATION.—The Administrator 1 shall make a determination by March 30, 2030, and 2 no less than once every five years thereafter, based 3 on the determination required by section 9903(b) of 4 the Internal Revenue Code of 1986, as to whether 5 cumulative greenhouse gas emissions from covered 6 fuels subject to taxation under section 9902 of such 7 Code during the period from calendar year 2022 8 through the calendar year preceding the determina-9 tion exceed the cumulative emissions for that period 10 that would have occurred if the emission reduction 11 targets in section 9903(a)(2) of such Code were met. 12 ‘‘(2) CONSEQUENCE OF CUMULATIVE EMIS-13 SIONS EXCEEDANCE.—If the Administrator deter-14 mines under paragraph (1) that cumulative green-15 house gas emissions from covered fuels subject to 16 tax under section 9902 of the Internal Revenue 17 Code of 1986 exceed the cumulative emissions for 18 the period covered by the determination that would 19 have occurred if the emission reduction targets in 20 section 9903(a)(2) of such Code were met, then the 21 prohibitions in subsection (a) of this section, and in 22 section 211(c)(5) of this Act, shall cease to apply. 23 ‘‘(f) ASSURING ENVIRONMENTAL INTEGRITY.— 24 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00043 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 44 •HR 763 IH ‘‘(1) AUTHORITY.—If the Administrator deter-1 mines pursuant to subsection (e)(1) of this section 2 that the emission reduction targets in section 9903 3 (a)(2) of the Internal Revenue Code of 1986 are not 4 met— 5 ‘‘(A) subsections (a) and (b) shall cease to 6 apply; and 7 ‘‘(B) the Administrator shall— 8 ‘‘(i) issue such regulations as the Ad-9 ministrator deems necessary to bring 10 greenhouse gas emissions from covered 11 fuels subject to taxation under section 12 9902 of the Internal Revenue Code of 13 1986 to levels that are at or below the 14 emission reductions targets in section 15 9903(a)(2) of such Code; and 16 ‘‘(ii) require in such regulations that 17 additional reductions in greenhouse gas 18 emissions are achieved to fully compensate 19 for any amount by which greenhouse gas 20 emissions from covered fuels subject to 21 taxation under section 9902 of such Code 22 have exceeded the targets in section 23 9903(a)(2) of such Code. 24 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00044 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 45 •HR 763 IH ‘‘(2) DEADLINE FOR FINALIZING REGULA-1 TIONS.—The Administrator shall finalize any regula-2 tions required by paragraph (1) not later than two 3 years after the Administrator makes the relevant de-4 termination pursuant to such paragraph. 5 ‘‘(3) ACHIEVEMENT OF ADDITIONAL REDUC-6 TIONS.—Regulations issued pursuant to paragraph 7 (1) shall ensure that any additional reductions re-8 quired by paragraph (1)(B)(ii) are fully achieved by 9 no later than eight years after the Administrator 10 makes the determination pursuant to subsection 11 (e)(1) described in paragraph (1). 12 ‘‘(g) DEFINITIONS.—In this section, the terms 13 ‘greenhouse gas’ and ‘greenhouse gas effects’ have the 14 meanings given to those terms in section 9901 of the In-15 ternal Revenue Code of 1986.’’. 16 (b) NEW MOTOR VEHICLES AND NEW MOTOR VEHI-17 CLE ENGINES.—Section 202(b) of the Clean Air Act (42 18 U.S.C. 7521(b)) is amended— 19 (1) by redesignating the second paragraph (3) 20 (as redesignated by section 230(4)(C) of Public Law 21 101–549 (104 Stat. 2529)) as paragraph (4); and 22 (2) by adding at the end the following: 23 ‘‘(5) Notwithstanding subsections (a) and (b) of 24 section 330, the Administrator may— 25 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00045 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 46 •HR 763 IH ‘‘(A) limit the emission of any greenhouse 1 gas (as defined in section 9901 of the Internal 2 Revenue Code of 1986) on the basis of the 3 emission’s greenhouse gas effects (as defined in 4 section 9901 of the Internal Revenue Code of 5 1986) from any class or classes of new motor 6 vehicles or new motor vehicle engines subject to 7 regulation under subsection (a)(1); and 8 ‘‘(B) grant a waiver under section 9 209(b)(1) for standards for the control of 10 greenhouse gas emissions.’’. 11 (c) FUELS.—Section 211(c) of the Clean Air Act (42 12 U.S.C. 7545(c)) is amended by adding at the end the fol-13 lowing new paragraph: 14 ‘‘(5) The Administrator shall not, pursuant to this 15 subsection, impose on any manufacturer or processor of 16 fuel any requirement for the purpose of reducing the emis-17 sion of any greenhouse gas (as defined in section 9901 18 of the Internal Revenue Code of 1986) produced by com-19 bustion of the fuel on the basis of the emission’s green-20 house gas effects (as defined in section 9901 of the Inter-21 nal Revenue Code of 1986).’’. 22 (d) NONROAD ENGINES AND VEHICLES EMISSIONS 23 STANDARDS.—Section 213 of the Clean Air Act (42 24 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00046 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 47 •HR 763 IH U.S.C. 7547) is amended by adding at the end the fol-1 lowing: 2 ‘‘(e) GREENHOUSE GAS EMISSIONS.—Notwith-3 standing section 330(a), the Administrator may limit the 4 emission of any greenhouse gas (as defined in section 5 9901 of the Internal Revenue Code of 1986) on the basis 6 of the emission’s greenhouse gas effects (as defined in sec-7 tion 9901 of the Internal Revenue Code of 1986) from 8 any nonroad engines and nonroad vehicles subject to regu-9 lation under this section.’’. 10 (e) AIRCRAFT EMISSION STANDARDS.—Section 231 11 of the Clean Air Act (42 U.S.C. 7571) is amended by add-12 ing at the end the following new subsection: 13 ‘‘(d) Notwithstanding subsections (a) and (b) of sec-14 tion 330, the Administrator may limit the emission of any 15 greenhouse gas (as defined in section 9901 of the Internal 16 Revenue Code of 1986) on the basis of the emission’s 17 greenhouse gas effects (as defined in section 9901 of the 18 Internal Revenue Code of 1986) from any class or classes 19 of aircraft engines, so long as any such limitation is not 20 more stringent than the standards adopted by the Inter-21 national Civil Aviation Organization.’’. 22 SEC. 9. EFFECTIVE DATE. 23 The amendments made by this Act shall take effect 24 on the date of the enactment of this Act, except the carbon 25 VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00047 Fmt 6652 Sfmt 6201 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS 48 •HR 763 IH fee under section 9902 of the Internal Revenue Code of 1 1986 shall apply to uses, sales, or transfers more than 2 270 days after the date of the enactment of this Act. 3 SEC. 10. PRINCIPLE OF INTERPRETATION. 4 In the case of ambiguity, the texts of this statute and 5 its amending texts shall be interpreted so as to allow for 6 the most effective abatement of greenhouse gas emissions. 7 SEC. 11. NO PREEMPTION OF STATE LAW. 8 Nothing in this legislation shall preempt or super-9 sede, or be interpreted to preempt or supersede, any State 10 law or regulation. 11 Æ VerDate Sep 11 2014 22:19 Feb 05, 2019 Jkt 089200 PO 00000 Frm 00048 Fmt 6652 Sfmt 6301 E:\BILLS\H763.IH H763pbinns on DSK79D2C42PROD with BILLS Attachment 3 CONGRESS OF THE UNITED STATES CONGRESSIONAL BUDGET OFFICE CBO Effects of a Carbon Tax on the Economy and the Environment MAY 2013 © ShutterstockAttachment 4 CBO Note The photographs on the cover, which come from Shutterstock, were taken by M. Cornelius (coal), Olmarmar (pouring oil), Hetman Bohdan (gas burner), Pedrosek (oil barrels), and Ingvar Tjostheim (derrick flame). Pub. No. 4532 Contents CBO Summary 1 How Much Revenue Could a Carbon Tax Raise? 1 How Would a Carbon Tax Directly Affect the Economy? 1 How Would Various Uses of the Revenues From a Carbon Tax Alter Its Economic Effects? 2 How Would a Carbon Tax Affect the Environment? 2 The Revenue Implications of Taxing Carbon Dioxide Emissions or Fossil Fuels 2 Some Key Issues in Administering a Carbon Tax 3 Point of Implementation 3 Exemptions and Credits 4 Effects of a Carbon Tax on the Economy 5 Economic Effects Without Accounting for the Use of the Tax Revenues 5 Economic Effects Related to the Use of the Tax Revenues 9 Effects of a Carbon Tax on the Environment 13 The Impact of CO2 Emissions 13 The International Context 13 Assessing the Value of Incremental Reductions in CO2 Emissions 14 Determining the Tax Rate That Best Balances the Benefits and Costs of a Carbon Tax 17 The Timing of Action 18 About This Document 20 Figure 1. Effects of a Carbon Tax on Labor, Investment, and Output 7 Table 1. The Interagency Working Group’s Estimates of the Average Social Cost of Carbon, by Discount Rate 15 CBO Effects of a Carbon Tax on the Economy and the Environment Summary Lawmakers could increase federal revenues and encourage reductions in emissions of carbon dioxide (CO2) by establishing a carbon tax, which would either tax those emissions directly or tax fuels that release CO2 when they are burned (fossil fuels, such as coal, oil, and natural gas). Emissions of CO2 and other greenhouse gases accumulate in the atmosphere and contribute to climate change—a long-term and potentially very costly global problem. The effects of a carbon tax on the U.S. economy would depend on how the revenues from the tax were used. Options include using the revenues to reduce budget deficits, to decrease existing marginal tax rates (the rates on an additional dollar of income), or to offset the costs that a carbon tax would impose on certain groups of people. This study examines how a carbon tax, combined with those alternative uses of the revenues, might affect the economy and the environment. How Much Revenue Could a Carbon Tax Raise? Neither the Congressional Budget Office (CBO) nor the staff of the Joint Committee on Taxation has published an estimate of how much revenue a carbon tax might pro- duce. However, CBO has extensively analyzed policies, known as cap-and-trade programs, that would similarly set a price on CO2 emissions. Those analyses suggest that a carbon tax that covered the bulk of CO2 emissions or the carbon content of most fossil fuel consumed in the United States could generate a substantial amount of rev- enue. For example, in 2011, CBO estimated that a cap- and-trade program that would have set a price of $20 in 2012 to emit a ton of CO2 (and increased that price by 5.6 percent each year thereafter) would raise a total of nearly $1.2 trillion during its first decade.1 In addition, total U.S. emissions of CO2 would be about 8 percent lower over that period than they would be without the policy, CBO estimated. How Would a Carbon Tax Directly Affect the Economy? By raising the cost of using fossil fuels, a carbon tax would tend to increase the cost of producing goods and services—especially things, such as electricity or transpor- tation, that involve relatively large amounts of CO2 emis- sions. Those cost increases would provide an incentive for companies to manufacture their products in ways that resulted in fewer CO2 emissions. Higher production costs would also lead to higher prices for emission-intensive goods and services, which would encourage households to use less of them and more of other goods and services. Without accounting for how the revenues from a carbon tax would be used, such a tax would have a negative effect on the economy. The higher prices it caused would diminish the purchasing power of people’s earnings, effectively reducing their real (inflation-adjusted) wages. Lower real wages would have the net effect of reducing the amount that people worked, thus decreasing the over- all supply of labor. Investment would also decline, further reducing the economy’s total output. The costs of a carbon tax would not be evenly distributed among U.S. households. For example, the additional costs from higher prices would consume a greater share of income for low-income households than for higher- income households, because low-income households 1. See Congressional Budget Office, Reducing the Deficit: Spending and Revenue Options (March 2011), pp. 205–206, www.cbo.gov/ publication/22043. That revenue estimate accounts for the fact that the policy would have the effect of reducing income tax collections. 2 EFFECTS OF A CARBON TAX ON THE ECONOMY AND THE ENVIRONMENT MAY 2013 CBO generally spend a larger percentage of their income on emission-intensive goods. Similarly, workers and inves- tors in emission-intensive industries, who would see the largest decrease in demand for their products, would be likely to bear relatively large burdens as the economy adjusted to the tax. Finally, areas of the country where electricity is produced from coal—the most emission- intensive fossil fuel per unit of energy generated—would tend to experience larger increases in electricity prices than other areas would. How Would Various Uses of the Revenues From a Carbon Tax Alter Its Economic Effects? Lawmakers’ choices about how to use the revenues from a carbon tax would help determine the tax’s ultimate impact on the economy. Some uses of those revenues could substantially offset the total economic costs result- ing from the tax itself, whereas other uses would not. Using the Revenues to Reduce Deficits Would Decrease the Tax’s Total Costs to the Economy. At least part of the negative economic effect of a carbon tax would be offset if the tax revenues were used for deficit reduction. Federal budget deficits tend to result in lower economic output over the long run than would otherwise be the case, by crowding out private-sector investment. Thus, policies that reduce deficits generally have a positive effect on the economy in the long run (although they can have a nega- tive effect in the short term when the economy is weak). Using the Revenues to Cut Marginal Tax Rates Would Also Decrease Total Costs. Lawmakers could also offset some of the negative economic effects of a carbon tax by using the revenues to reduce the existing marginal rates of income or payroll taxes—a policy known as a tax swap. Existing taxes on individual and corporate income decrease people’s incentives to work and invest by lower- ing the after-tax returns they receive from those activities. Consequently, reducing those marginal tax rates would have positive effects on the economy. Using the Revenues to Reduce Adverse Effects on Selected Groups Would Not Decrease Total Costs. Targeting revenues toward people who would be likely to bear a disproportionate burden under a carbon tax would provide them with relief, but such a policy would tend not to reduce the total economic costs of the tax. Thus, lawmakers would face a trade-off between the goals of helping those households most hurt by the tax and help- ing the economy in general. Lawmakers could use the revenues in more than one way to try to balance those goals. How Would a Carbon Tax Affect the Environment? Climate change resulting from an increase in average temperatures is a long-term problem with global causes and consequences, including effects on humans and ecosystems. Significantly limiting the extent of future warming would require a concerted effort by countries that are major emitters of greenhouse gases. Nonetheless, U.S. efforts to decrease emissions would produce incre- mental benefits, in the form of incremental reductions in the expected damage from climate change. Researchers have attempted to estimate the monetary value of the future damage from climate change associ- ated with an increase in CO2 emissions in a given year— and thus the value of the benefits from a commensurate reduction in emissions—a measure referred to as the social cost of carbon (SCC). An interagency working group of the federal government estimated the SCC associated with a 1-ton reduction in CO2 emissions in 2010 at about $21 (in 2007 dollars). Estimates of the SCC are highly uncertain, and researchers have produced a wide range of values. Those values are highest when researchers attach significant weight to long-term out- comes and when they incorporate a small probability that damage from climate change could increase sharply in the future—causing very large, or even catastrophic, losses. Delaying efforts to reduce emissions increases the risk of such losses. Given the inherent uncertainty of predicting the effects of climate change, and the possibility that it could trigger catastrophic effects, lawmakers might view a carbon tax as a reflection of society’s willingness to pay to reduce the risk of potentially very expensive damage in the future. The Revenue Implications of Taxing Carbon Dioxide Emissions or Fossil Fuels Interest has been growing internationally and in the United States in taxing the carbon that is released into the atmosphere in the form of carbon dioxide when fossil fuels are burned. Advocates of a carbon tax in the United States cite two potential benefits from such a tax: It could serve as an important source of federal revenues, and it would reduce CO2 emissions by setting a price on carbon dioxide—the most prevalent of the greenhouse gases that MAY 2013 EFFECTS OF A CARBON TAX ON THE ECONOMY AND THE ENVIRONMENT 3 CBO trap heat in the Earth’s atmosphere. Such a price would ensure that the costs of products and activities that involve CO2 emissions incorporate some of the potential costs of damage from climate change. The amount of revenues that a U.S. carbon tax might raise would depend on the rate of the tax, how broadly it was applied, and the extent to which it led to declines in CO2 emissions. Those revenues could be significant. For example, CBO estimated in 2011 that setting a price of $20 per metric ton on greenhouse gas emissions in the United States in 2012 and raising that price at a nominal rate of 5.6 percent per year would yield a total of $1.2 trillion in revenues over the 2012–2021 period. 2 Nearly 96 percent of that amount—or an average of $115 billion a year during that period—would come from the charge levied on CO2 emissions (with the rest coming from the charge on emissions of other greenhouse gases). Such revenues would be roughly equivalent to the total amount that the U.S. government collects each year from excise taxes (including taxes on gasoline, tobacco, and alcohol) and would be much greater than annual receipts from estate and gift taxes or customs duties. That $20 emission charge would reduce total U.S. emis- sions of CO2 between 2012 and 2021 by about 8 percent, CBO estimated.3 Because rising tax rates would lead to a decline in emissions, the amount of revenues generated by a carbon tax would eventually decline as well (the effect on emissions during the 2012–2021 period is incorporated in the revenue estimate above). However, if the tax rate grew slowly, it could produce rising revenues for many decades and allow the economy to adjust gradu- ally to less-emission-intensive ways of producing goods and services. The particulars of that 2011 analysis (including the initial price that companies would pay to emit a ton of green- house gases and the rate at which the price would increase) stemmed from the illustrative policy that CBO was analyzing; the policy was not meant to represent the price on emissions that would best balance the costs and benefits of reducing emissions. The policy that CBO analyzed involved a cap-and-trade program similar to legislation that the House of Representatives passed in 2009. Under that policy, firms would pay the federal gov- ernment for rights (or allowances) to emit greenhouse gases and could trade those allowances in a secondary market. In such a system, the price of allowances and the rate at which that price increased would depend on firms’ actions.4 Some Key Issues in Administering a Carbon Tax Carbon becomes part of the U.S. economy when coal, oil, and natural gas are extracted or imported. It enters the atmosphere, in the form of carbon dioxide, when those fossil fuels are burned. Analysts have tried to deter- mine the point in that process at which it would be most cost-effective to levy a carbon tax. The tax could apply either to the carbon content of each fuel or to the CO2 emissions released when the fuel is burned. (A ton of CO2 contains 0.27 tons of carbon, so a price of $20 per ton on CO2 emissions, as in the previous example, would be equivalent to a price of $73 per ton on the carbon content of fossil fuels.) In addition to deciding where to apply the tax, designers of a carbon tax would need to consider what entities or uses of fossil fuels, if any, would be exempt from the tax and whether certain activities would qualify for credits under the tax. In general, the cost to the economy of achieving any given reduction in emissions could be minimized by limiting the number of entities that were exempt from paying the tax and by allowing tax credits for activities that capture and permanently store emissions before they are released. Point of Implementation The point at which a carbon tax was levied would have little bearing on the tax’s ultimate effects on the economy and the environment. Thus, the decision about where to impose the tax could be based on the objective of 2. Congressional Budget Office, Reducing the Deficit: Spending and Revenue Options (March 2011), pp. 205–206, www.cbo.gov/ publication/22043. That revenue estimate accounts for the effect that setting a price on emissions would have in reducing profits and wages (as discussed later in this report), thus lowering the revenues collected from income taxes. 3. That particular policy did not cover all CO2 emissions (for exam- ple, it excluded emissions from small electricity generators). The policy would reduce covered CO2 emissions over the 2012–2021 period by 10 percent, CBO estimated. 4. For more about estimating the price of emission allowances, see Congressional Budget Office, How CBO Estimates the Costs of Reducing Greenhouse-Gas Emissions (April 2009), www.cbo.gov/ publication/41745. 4 EFFECTS OF A CARBON TAX ON THE ECONOMY AND THE ENVIRONMENT MAY 2013 CBO covering the most emissions while minimizing the costs of implementing and complying with the tax. Achieving that goal would require identifying the points in the extraction-to-emissions path where fossil fuels are fun- neled through a relatively small number of entities and taking into account existing administrative structures that would make it easier to gather the data necessary for administering the tax. In general, levying a carbon tax relatively close to the point at which fossil fuels are extracted or imported would have the greatest likelihood of minimizing compli- ance costs and maximizing coverage.5 That point varies for different fuels: In the case of petroleum, analysts conclude that it would be cost-effective to collect a carbon tax at the point at which petroleum is refined, because nearly all petroleum is processed by a limited number of refin- ers. Imposing a tax at that point would be facilitated by the fact that each barrel of crude oil that refiners receive is currently subject to a federal excise tax, whose revenues are directed to the Oil Spill Liability Trust Fund. In the case of coal, some analysts suggest that costs could be minimized, and coverage maximized, by imposing the tax on coal when it is mined (that is, implementing the tax at the mine mouth). Collecting a tax at that point would be made easier by the fact that coal producers are already subject to a federal excise tax, whose revenues are directed to the Black Lung Disability Trust Fund. Other analysts suggest that because the bulk of coal is used to generate elec- tricity, emissions resulting from coal could be covered by taxing electricity generators on the basis of their actual emissions. Imposing the taxing at that point would be facilitated by the fact that the Environmen- tal Protection Agency (EPA) collects data on CO2 emissions by large generators. In the case of natural gas, some analysts suggest that costs could be minimized by levying the tax on operators of large natural gas wells or on natural gas processors. Alternatively, the tax could be imple- mented at the two points at which EPA collects data on natural-gas-related emissions under its Greenhouse Gas Reporting Program: when large generators use natural gas to produce electricity and when natural gas is sold to residential and commercial customers. (EPA collects data on those sales to cover emissions not related to electricity generation.) Exemptions and Credits Wherever a carbon tax was levied, subjecting all CO2 emissions to the same tax rate would help ensure that the tax motivated businesses and households throughout the economy to undertake the least costly reductions in emis- sions, regardless of where or how those cuts might be achieved. For example, a tax of $20 per ton of emissions would raise the price of gasoline by about 20 cents per gallon; it would provide an incentive for firms and house- holds to consume less gasoline, as long as the cost of doing so was less than the 20 cents per gallon saved. Exempting some sources of emissions (such as commer- cial vehicles) from the tax could prevent some low-cost reductions from being made. If the tax was levied on the carbon content of fossil fuels, however, administrators could allow certain types of exemptions or tax credits without jeopardizing the goal of minimizing the cost of reducing emissions. In particular, noncombustive uses of fossil fuels—such as using petro- leum to produce plastic or asphalt—could be exempt from the tax because they do not result in CO2 emissions. Researchers are working on technologies to capture and permanently store CO2 emissions.6 Designing a carbon tax to provide incentives for CO2 capture and storage could be important if such technologies could reduce emissions at a per-ton cost that was lower than the tax rate. If the tax was levied on the actual emissions of elec- tricity generators, for example, generators would have an incentive to reduce their tax payments by capturing and storing emissions. If the tax was levied on the carbon con- tent of fossil fuels, however, the cost of the tax would be built into the price of fuels that generators purchased, so the tax would not give generators an incentive to store emissions. Lawmakers could create such an incentive by providing generators with an income tax credit for each 5. For more details, see Gilbert E. Metcalf and David Wiesbach, “The Design of a Carbon Tax,” Harvard Environmental Law Review, vol. 33, no. 2 (2009), pp. 499–556, http://tinyurl.com/ bqgn46y; and Mandatory Reporting of Greenhouse Gases, 74 Fed. Reg. 56260 (October 30, 2009). 6. See Congressional Budget Office, Federal Efforts to Reduce the Cost of Capturing and Storing Carbon Dioxide (June 2012), www.cbo.gov/publication/43357. MAY 2013 EFFECTS OF A CARBON TAX ON THE ECONOMY AND THE ENVIRONMENT 5 CBO ton of emissions that they captured and stored, with the value of the credit equal to the rate of the carbon tax. Administering a tax credit for CO2 capture and storage would be made easier by the fact that large generators have equipment in place that continuously monitors their emissions. Administering tax credits for other activities that can capture carbon—such as preserving forests— would be much more complicated.7 Effects of a Carbon Tax on the Economy Fossil fuels currently account for roughly 90 percent of all energy used in the United States, so taxing them would impose costs on the economy. The ultimate economic effects of a carbon tax, however, would depend on how the revenues from the tax were used. Some uses, such as reducing federal budget deficits or lowering existing mar- ginal tax rates, would reduce the total costs to the econ- omy from a carbon tax. Other uses would be unlikely to lower those total costs, but they could target relief to groups that would bear a disproportionate share of the burden from a carbon tax. This report does not consider a comprehensive set of options for using the revenues from a carbon tax. Options not considered here include spending the reve- nues in ways that might also help the economy, such as investing in basic research and development or in educa- tion. Further, although this report focuses on a carbon tax, lawmakers could implement other policies that would both raise revenues and set a price on CO2—such as a cap-and-trade program in which the government sold emission allowances rather than giving them to firms at no cost. A cap-and-trade program could provide more certainty about the overall amount of CO2 emissions, which would be set by the cap, but it would provide less certainty about the price of emissions, which would depend on the cost of meeting the chosen cap.8 Economic Effects Without Accounting for the Use of the Tax Revenues On its own—that is, not accounting for how its revenues were used—a carbon tax would affect the economy in many ways. Economists typically separate those effects into two components. “Primary” (or “resource”) costs are the economic effects stemming directly from the carbon tax itself. “Tax-interaction” costs are the effects that result from the way in which a carbon tax would compound the economic costs associated with existing taxes, such as taxes on individual and corporate income. Those com- bined effects would be felt disproportionately by people in certain income groups, industries, and parts of the country. Primary Costs. A carbon tax would increase the prices of fossil fuels in direct proportion to their carbon content. Higher fuel prices, in turn, would raise production costs and ultimately drive up prices for goods and services throughout the economy.9 Prices of the most emission- intensive goods and services would rise by the largest amount. Thus, consumers would see the biggest price increases for items such as gasoline and electricity— particularly in areas where electricity is generated from coal, which produces the most CO2 emissions per unit of power generated. The changes in relative prices caused by the carbon tax (that is, the fact that some prices would increase more than others) would cause shifts in the goods and services 7. See Congressional Budget Office, Deforestation and Greenhouse Gases (January 2012), www.cbo.gov/publication/42686. 8. For a discussion of the similarities and differences between a carbon tax and a cap-and-trade program—and why either policy would generally be more efficient than setting standards that mandated the use of specific technologies or set firm-specific lim- its on emissions—see Congressional Budget Office, Policy Options for Reducing CO2 Emissions (February 2008), www.cbo.gov/ publication/41663. For a discussion of alternative approaches to reducing CO2 emissions, see Alan Krupnick and Ian W.H. Parry, “What Is the Best Policy Instrument for Reducing CO2 Emis- sions?” in Ian W.H. Parry, Ruud de Mooij, and Michael Keen, eds., Fiscal Policy to Mitigate Climate Change: A Guide for Policy- makers (International Monetary Fund, 2012), pp. 1–25, http:// tinyurl.com/cjnpaka. 9. For simplicity (unless otherwise noted), this discussion assumes that the costs of the tax would be passed on in full to consumers in the form of higher prices. If, in contrast, the Federal Reserve took actions to prevent that rise in prices, the relative prices of various goods and services would change because of the carbon tax, but the overall price level would remain constant. (Such actions by the Federal Reserve would not reduce the total long-run costs to the economy from a carbon tax; those costs would just not take the form of an increase in the overall price level.) In either case, the resulting shifts in production and consumption (and resulting changes in returns on capital and labor in various sectors of the economy) would be essentially the same in the long run. Finally, to the extent that pressure from imports prevented producers from passing price increases on to customers, the cost of the carbon tax would be directly borne by workers and investors. 6 EFFECTS OF A CARBON TAX ON THE ECONOMY AND THE ENVIRONMENT MAY 2013 CBO that people buy—and in the way in which those goods and services are produced—that would lead to lower emissions. For example, the changes in relative prices would give households throughout the nation an incentive to reduce their consumption of electricity and gasoline, such as by installing more insulation, buying more-fuel-efficient appliances or vehicles, driving less, or taking public transportation. Likewise, manufacturers would have an incentive to produce goods in ways that resulted in fewer emissions, such as by generating electric- ity from natural gas or wind rather than from coal. The primary costs of a carbon tax would consist mainly of two types of economic consequences: output effects and substitution effects. Output effects would occur when higher fossil-fuel prices reduced real wages and the profits on investment, causing the economy’s total output to be lower than it would be otherwise. Substitution effects would occur when shifts in the mix of goods and services consumed, and in the way those goods and ser- vices were produced, changed the relative demand for labor and for physical capital (such as factories and heavy equipment used to produce electricity). Those changes would further affect real wages and profits on investment. Output Effects. A carbon tax would reduce the economy’s output by decreasing two things necessary to produce goods and services: the supply of labor and the amount of investment (see Figure 1). 10 In the case of labor, increases in fossil-fuel prices, and resulting increases in prices of goods and services, would diminish the purchasing power of people’s earnings—that is, real wages would fall. The decline in real wages would have the net effect of causing people to work less, thus reducing the overall supply of labor. The impact of lower real wages on the supply of labor is the net result of two countervailing forces: On the one hand, lower wages provide an incentive for people to work less and spend more time on activities that do not generate earnings—for example, one parent might choose to stay home with children rather than work outside the home because lower earnings would no longer make outside employment worthwhile. On the other hand, because lower wages reduce people’s after-tax income, they create an incentive for people to work more to maintain the same standard of living. Research studies indicate that the first effect generally outweighs the sec- ond effect and that, overall, taxes that reduce real wages also reduce the labor supply.11 In the case of investment, increases in fossil-fuel prices because of a carbon tax would raise the cost of producing new physical capital. That increase in the cost of new capital would reduce the profits that the owners of capital earn on their investments, causing the overall level of investment to decline. (Lower returns on investment cause the same types of opposing forces described above for lower wages—they decrease the returns that people receive from saving and investing but increase the amount of saving and investing that people need to undertake to meet a given monetary goal. The first effect appears to generally outweigh the second, so taxes that reduce real returns on capital also reduce saving and investment.) The decrease in investment could be muted to the extent that a carbon tax motivated companies to replace capital equipment earlier than they would otherwise, such as replacing a coal-fired power plant with a wind or nuclear power plant. Because the new capital would replace scrapped capital, however, it would not increase the productive capacity of the economy. The generally negative impact on investment would begin when the carbon tax went into effect. Assuming that a significant delay occurred between when the tax was announced and when it took effect, anticipation of the tax might cause a slight increase in investment during the interim period if firms used that period to replace emission-intensive capital equipment. That additional investment could crowd out investment elsewhere in the economy. (Such crowding out would be greater the closer the economy was to operating at its maximum sustain- able output during that interim period.) Substitution Effects. In addition to their effects on output, increases in fossil-fuel prices caused by a carbon tax would lead consumers to switch from goods and services that involve relatively high emissions of carbon dioxide (and that would therefore experience larger price increases) to other goods and services that involve fewer 10. The reduction in output would have negative feedback effects on savings and the demand for labor, further reducing investment and real wages (not pictured in Figure 1). 11. For more details, see Congressional Budget Office, How the Supply of Labor Responds to Changes in Fiscal Policy (October 2012), www.cbo.gov/publication/43674. MAY 2013 EFFECTS OF A CARBON TAX ON THE ECONOMY AND THE ENVIRONMENT 7 CBO Figure 1. Effects of a Carbon Tax on Labor, Investment, and Output Source: Congressional Budget Office. CO2 emissions. In addition, the tax would cause manu- facturers to produce goods in ways that resulted in fewer emissions, primarily by cutting back on the use of fossil fuels in the production process. Those changes in the mix of products that people buy and in the way those prod- ucts are made would cause labor and capital to shift throughout the economy and could alter the net flow of capital into or out of the United States. For example, in an attempt to reduce their use of fossil fuels, companies might switch to production methods that required more capital, relative to the amount of labor, per unit of output (such as by installing equipment that would more closely monitor and regulate energy use). That substitution would cause profits from investment to decline less— and real wages to decline more—than they would with only the output effects described above.12 In theory, for a single factor of production, such as capi- tal, substitution effects could more than fully offset the decline in returns caused by output effects (for example, causing the profits on investment to be higher than they would be without a carbon tax). In practice, however, Tax on Carbon Content of Fossil Fuels or on Carbon Dioxide Emissions Lower Output Increase Cost of Producing Goods and Services Increase Prices of Good and Services, Lowering Real (Inflation-Adjusted) Wages Reduce Supply of Labor Reduce Profits on Investment Reduce Amount of Investment Increase Cost of Producing Physical Capital Increase Prices of Fossil Fuels Compound the Negative Economic Effects Caused by Existing Taxes on Individual and Corporate Income Changes in mix of goods and services produced and in methods of production alter relative demand for labor and physical capital = Primary Cost (Output Effect) = Primary Cost (Substitution Effect) = Tax-Interaction Cost 12. For a discussion of conditions under which real wages could rise or fall relative to the returns on capital, see Don Fullerton and Garth Heutel, “The General Equilibrium Incidence of Environ- mental Taxes,” Journal of Public Economics, vol. 91, nos. 3–4 (April 2007), pp. 571–591, http://dx.doi.org/10.1016/ j.jpubeco.2006.07.004. 8 EFFECTS OF A CARBON TAX ON THE ECONOMY AND THE ENVIRONMENT MAY 2013 CBO such an outcome is unlikely and would require an even larger reduction in the returns on the other factor of pro- duction—in this case, wages. Thus, a carbon tax (exclud- ing any use of its revenues) would be likely to reduce both real wages and profits on investment to some extent, but the relative changes in wages and profits would be uncertain. A carbon tax would cause a smaller reduction in output if the cost of the tax fell on types of labor or capital that respond relatively little to changes in their prices. In par- ticular, the decline in output would be lessened to the extent that the cost of the tax was borne by owners of existing stocks of fossil fuels (such as oil reserves and coal deposits) and by owners of existing fixed capital in emission-intensive industries (such as coal-fired power plants). Those owners would receive lower profits as a result of the tax, but because such resources were already in place, the supply of them would not change signifi- cantly in response to the carbon tax. Consequently, the effect on output would be diminished. Although such an outcome would lessen the loss in out- put caused by the tax, it would also reduce the tax’s impact on CO2 emissions. Because part of the cost of the tax would be absorbed by owners of existing supplies of fossil fuels and fixed capital (in the form of lower profits), the price increases caused by the tax would be smaller than they would be if the full cost of the tax was passed on to consumers. As a result, businesses and households would have less incentive to reduce their emissions.13 Tax-Interaction Costs. The reductions in labor supply and investment caused by a carbon tax would compound the effects of current taxes that already discourage labor and investment (depicted in the lower portion of Figure 1 on page 7), thereby increasing the negative effects on output. Existing taxes on income—such as the corporate income tax, the individual income tax, and payroll taxes—create a gap between the amounts that companies pay for labor and capital and the after-tax amounts that workers and investors receive in the form of wages and returns on cap- ital. The bigger that gap, the bigger the loss in output that would result from each additional increase in the tax rates on labor and investment. Such tax-interaction costs of a carbon tax could be large relative to the tax’s primary costs.14 Burdens on Certain Groups. The burden of a carbon tax—that is, the hardship caused by price increases for fossil fuels and emission-intensive goods and services and by the reduction in wages and returns on investment— would fall disproportionately on several groups: Low-income households, Workers and investors in emission-intensive industries, and People in regions of the country that rely on emission- intensive industries for their livelihood or that use the most emission-intensive fuels to produce power. The higher prices resulting from a carbon tax would tend to be regressive—that is, they would impose a larger bur- den (relative to income) on low-income households than on high-income households. The reason is that low- income households spend a larger share of their income on goods and services whose prices would increase the most, such as electricity and transportation. For example, an earlier CBO analysis concluded that a policy that set a price of $28 per metric ton on CO2 emissions would increase costs for households by amounts that would equal about 2.5 percent of after-tax income for the aver- age household in the lowest one-fifth (quintile) of the income distribution but less than 1 percent of after-tax income for the average household in the highest 13. See Antonio M. Bento and Mark Jacobsen, “Ricardian Rents, Environmental Policy, and the ‘Double-Dividend’ Hypothesis,” Journal of Environmental Economics and Management, vol. 53, no. 1 (January 2007), pp. 17–31, http://dx.doi.org/10.1016/ j.jeem.2006.03.006. 14. See, for example, Ian W.H. Parry, Roberton C. Williams III, and Lawrence H. Goulder, “When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets,” Journal of Environmental Economics and Management, vol. 37, no. 1 (January 1999), pp. 52–84, http://dx.doi.org/ 10.1006/jeem.1998.1058; Lawrence H. Goulder, “Environmental Policy Making in a Second-Best Setting,” Journal of Applied Economics, vol. 1, no. 2 (1998), pp. 279–328; and A. Lans Bovenberg, “Green Tax Reforms and the Double Dividend: An Updated Reader’s Guide,” International Tax and Public Finance, vol. 6, no. 3 (August 1999), pp. 421–443, http://dx.doi.org/ 10.1023/A:1008715920337. MAY 2013 EFFECTS OF A CARBON TAX ON THE ECONOMY AND THE ENVIRONMENT 9 CBO quintile.15 Other analysts reached similar conclusions using a different method for allocating the cost of a car- bon tax among households.16 They estimated that the burden imposed by a tax of $20 per ton on CO2 emis- sions would amount to 1.8 percent of before-tax income for households in the lowest quintile and about 0.7 per- cent of before-tax income for households in the highest quintile. A carbon tax would still be regressive, although less so, if the cost of the tax was measured relative to households’ lifetime income rather than their annual income.17 Workers 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. Specifically, CBO previously concluded that setting a price on CO2 emissions would have the following effects on industries: Coal mining would be likely to experience the largest percentage decline in employment. Employment in oil and gas extraction and natural gas utilities would probably also decline—though to a smaller extent, in percentage terms, than employment in coal mining. Other types of mining, construction, transportation, and the industries that produce metals, nonmetallic mineral products (such as glass), and chemicals—all of which use relatively large amounts of energy directly or indirectly—would probably also see their employment decrease, although the percentage declines would be relatively small.18 Declines in such industries would be offset, over time, by increases in employment in industries and sectors (such as services) whose products are less emission-intensive to produce and result in fewer emissions when used. Employment would also increase in industries that man- ufacture equipment to produce energy from low-emission sources, such as nuclear, solar, and wind power. The effects of a carbon tax would vary by region as well. Parts of the country that rely on fossil fuels or energy- intensive production for income would experience larger losses than other regions. Likewise, households in places where electricity is generated from coal would probably see larger increases in electricity prices than their counter- parts in other regions. For example, analysts have esti- mated that a tax of about $21 per metric ton on CO2 emissions would raise the price of electricity by an average of 16 percent for the United States as a whole, but that increase would vary widely in different parts of the coun- try.19 Households in Illinois, Indiana, Kentucky, Michi- gan, Missouri, Ohio, West Virginia, and Wisconsin would see the biggest rise in electricity prices (27 per- cent), and households in California would see the small- est rise (7 percent). Including all of the price increases associated with a carbon tax, not just increases in electric- ity prices, would imply a somewhat different geographic pattern, because areas that have relatively few emissions from electricity generation may have sizable emissions from other sources, such as vehicles. Economic Effects Related to the Use of the Tax Revenues Lawmakers could use the revenues from a carbon tax in numerous ways, including to reduce federal budget defi- cits, to decrease existing marginal tax rates, or to compen- sate people who would bear a disproportionate share of 15. See Congressional Budget Office, The Estimated Costs to Households From the Cap-and-Trade Provisions of H.R. 2454 (attachment to a letter to the Honorable Dave Camp, June 19, 2009), www.cbo.gov/publication/41194. Also see Terry Dinan, Offsetting a Carbon Tax’s Costs on Low-Income Households, Working Paper 2012-16 (Congressional Budget Office, November 13, 2012), www.cbo.gov/publication/43713. 16. See Donald Marron and Eric Toder, Carbon Taxes and Corporate Tax Reform (Urban-Brookings Tax Policy Center, February 11, 2013), http://tinyurl.com/ctg57nv. 17. See Kevin A. Hasset, Aparna Mathur, and Gilbert E. Metcalf, “The Incidence of a U.S. Carbon Tax: A Lifetime and Regional Analysis,” Energy Journal, vol. 30, no. 2 (2009), pp. 155–178, http://dx.doi.org/10.5547/ISSN0195-6574-EJ-Vol30-No2-8. That study used a proxy for households’ lifetime income. 18. See Congressional Budget Office, How Policies to Reduce Greenhouse Gas Emissions Could Affect Employment (May 2010), www.cbo.gov/publication/41257, and The Economic Effects of Legislation to Reduce Greenhouse-Gas Emissions (September 2009), www.cbo.gov/publication/41266. 19. See Dallas Burtraw, Richard Sweeney, and Margaret Walls, “The Incidence of U.S. Climate Policy: Alternative Uses of Revenues from a Cap-and-Trade Auction,” National Tax Journal, vol. 62, no. 3 (September 2009), pp. 497–518, http://ntj.tax.org. 10 EFFECTS OF A CARBON TAX ON THE ECONOMY AND THE ENVIRONMENT MAY 2013 CBO the cost of the carbon tax. Each of those uses would have different effects on the economy. In general, decisions about how to use the revenues would not affect incentives for businesses and households to make cuts in emissions that could be achieved at a cost below that of the tax. An exception would occur if firms or households received compensation that was linked to their consumption of fossil fuels. In that case, using more fossil fuels would increase their compensation, under- mining incentives to cut emissions. Using the Revenues to Reduce the Deficit. Once the economy has returned to its maximum sustainable level of output, persistent budget deficits would crowd out some private-sector investment, which would slow the growth of the economy’s output and people’s income. In addition, the mounting federal debt that would result from those deficits would require rising federal interest payments, restrict lawmakers’ ability to use fiscal policy to respond to unexpected challenges, and increase the probability of a sudden fiscal crisis.20 Policies that trimmed deficits would mitigate such adverse economic consequences by increasing national saving and investment, thus leading to an increase in out- put in the long run.21 If a carbon tax was used to reduce future budget deficits, the long-term effect on total out- put would depend on the relative sizes of two offsetting factors: the negative effects of the tax itself (which would reduce real wages, investment, and output) and the posi- tive effects of accumulating less debt than would other- wise be the case (which would increase real wages, investment, and output). CBO has not estimated how a carbon tax combined with a deficit reduction policy would affect output. However, an earlier CBO analysis concluded that eliminating vari- ous tax cuts enacted in 2001 and 2003 would have boosted output in the long term: The reduction in out- put caused by those tax changes would ultimately have been more than offset by the increase in output brought about by having smaller deficits.22 Eliminating those tax cuts would have involved raising marginal income tax rates and making a variety of other changes to the tax code, some of which would not have altered marginal income tax rates and thus would have tended to have fewer harmful effects on the economy. If a carbon tax was more costly to the economy than the package of tax changes that CBO considered, using it to reduce deficits would have a smaller positive effect—or a net negative effect—on output in the long term. Different analyses of using a carbon tax to reduce federal debt could reach different conclusions about the net economic effect.23 Using the Revenues to Reduce Existing Marginal Tax Rates. Current taxes on individual and corporate income generally decrease households’ after-tax returns from working, saving, and investing. Those lower returns reduce the overall supply of labor and capital, leading to less economic output than would otherwise be the case. As described above, a carbon tax would compound the effects of those existing taxes, potentially creating significant tax-interaction costs. Using the revenues from a carbon tax to reduce existing marginal tax rates—an approach called a tax swap— would diminish the economic costs of the tax. The net effect of a tax swap on output would depend on the rela- tive sizes of the loss in output caused by the carbon tax itself (including both the primary costs and the tax- 20. For more discussion, see Congressional Budget Office, The 2012 Long-Term Budget Outlook (June 2012), www.cbo.gov/ publication/43288. 21. See Congressional Budget Office, The Macroeconomic and Budgetary Effects of an Illustrative Policy for Reducing the Federal Budget Deficit (July 2011), www.cbo.gov/publication/41580. 22. That analysis found that cutting income tax rates and increasing deficits would lead to lower output; correspondingly, reducing deficits would increase output. See the testimony of Douglas W. Elmendorf, Director, Congressional Budget Office, before the Senate Committee on the Budget, The Economic Outlook and Fiscal Policy Choices (September 28, 2010), www.cbo.gov/ publication/21836. 23. One recent study estimated that reducing federal debt by using revenues from a carbon tax (with a rate of $15 per ton of CO2 emissions in 2012, rising by 4 percent above inflation each year) would cause output to be lower throughout the first 40 years of the policy than it would be without such a policy. See Warwick J. McKibbin and others, The Potential Role of a Carbon Tax in U.S. Fiscal Reform, Climate and Energy Economics Discussion Paper (Brookings Institution, July 24, 2012), http://tinyurl.com/ btkd5xf. That study accounted for some, but not all, of the poten- tial effects that lower federal debt could have on the economy. For example, it accounted for the fact that a smaller debt would reduce the government’s interest payments (holding the interest rate constant), but it did not include the possibility that failing to reduce the debt could increase the interest rates that the United States would face to borrow funds. MAY 2013 EFFECTS OF A CARBON TAX ON THE ECONOMY AND THE ENVIRONMENT 11 CBO interaction costs) and the gain in output caused by the reduction in existing marginal tax rates. CBO has not quantified the effects of a tax swap. How- ever, various studies that have looked at different types of tax swaps have concluded that a well-designed swap would significantly lower the economic costs of a carbon tax, and a few studies have concluded that a tax swap could lead to a net increase in output. A well-designed tax swap would cut marginal tax rates (the rates on an addi- tional dollar of income), thereby raising the after-tax returns that people receive from work or investment and leading to increases in those activities. Different studies reach different conclusions about the extent to which a tax swap would offset the costs of a car- bon tax.24 For example, one study examined the impact of using carbon tax revenues to fund several specific tax cuts—including reductions in marginal rates for payroll taxes, corporate income taxes, and individual income taxes.25 It concluded that the reduction in output caused by the carbon tax would be larger than the increase in output caused by the accompanying tax cuts, although that net reduction in output would be nearly 50 percent less than if the revenues were returned to households in a way that did not increase their incentives to work and invest. Another, more recent study concluded that using the rev- enues from a carbon tax to pay for a cut in marginal tax rates on capital (modeled as a generic tax cut on all capital rather than as a cut in a specific type of tax on capital) would cause output to be higher for several decades than it would be without the carbon tax and corresponding tax cut.26 That study also estimated that cutting marginal tax rates on labor would help limit the reduction in output caused by a carbon tax (relative to the case in which the revenues were returned to households in a manner that did not increase incentives to work or invest) but that the net effect of the carbon tax and tax swap on output would still be negative.27 Another recent study estimated that using half of the revenues from a carbon tax to reduce the deficit and the other half to reduce marginal tax rates on individual income would lead to lower output through- out the 50-year period examined.28 Thus, although many researchers agree that a tax swap could limit the economic costs of a carbon tax, they differ in their estimates of how far the tax swap would go to off- set those costs, for at least three reasons. One source of such differences is the details of the tax swaps that researchers examine. Taxes vary in terms of how they affect different types of capital and labor, so the outcomes of studies depend crucially on the details of the policies being analyzed. Another source of differences among studies is that researchers evaluate policies according to different mea- sures. Some studies, including those described above, report effects on output. Others evaluate policies relative to other measures, such as effects on “welfare” (which researchers typically define as the change in the value of consumption and leisure). One set of researchers, using welfare as a measure, concluded that using carbon tax rev- enues to fund cuts in marginal tax rates on corporate income, individual income, or wages would increase 24. To determine the extent to which a tax swap would decrease the tax-interaction costs, researchers typically compare the economic effects of a tax swap with the economic effects of a policy that would use carbon tax revenues in a way that would not increase people’s incentives to work or invest. 25. See Lawrence H. Goulder, “Effects of Carbon Taxes in an Economy With Prior Tax Distortions: An Intertemporal General Equilibrium Analysis,” Journal of Environmental Economics and Management, vol. 29, no. 3 (November 1995), pp. 271–297, http://dx.doi.org/10.1006/jeem.1995.1047. 26. See Warwick J. McKibbin and others, The Potential Role of a Carbon Tax in U.S. Fiscal Reform, Climate and Energy Economics Discussion Paper (Brookings Institution, July 24, 2012), http://tinyurl.com/btkd5xf. 27. Another recent study looked at how tax swaps would affect the discounted present value of the remaining lifetime consumption of households representing different generations. It concluded that most generations would be better off if carbon tax revenues were used to cut taxes on capital than if they were used to cut taxes on labor or consumption. See Jared C. Carbone, Richard D. Morgenstern, and Roberton C. Williams III, “Carbon Taxes and Deficit Reduction” (draft, May 2012), www.econ.gatech.edu/files/ seminars/Williams.pdf (2.3 MB). 28. See Anne E. Smith and others, Economic Outcomes of a U.S. Carbon Tax (report prepared by NERA Economic Consulting for the National Association of Manufacturers, February 17, 2013), www.nera.com/67_8014.htm. 12 EFFECTS OF A CARBON TAX ON THE ECONOMY AND THE ENVIRONMENT MAY 2013 CBO welfare over the first decade of the policy.29 That esti- mated increase in welfare does not imply that output would also be higher, because welfare and output can dif- fer; for example, increases in leisure could increase welfare but reduce output. Finally, researchers who evaluate similar policies accord- ing to similar measures can obtain different results because of differences in the models they use. Such differ- ences can involve the way in which models account for effects on international trade, the extent to which they distinguish among different types of capital, the level of detail about existing taxes, and assumptions about the degree to which labor and capital respond to changes in their after-tax prices. Using the Revenues to Offset Effects on Certain Groups. As noted above, the burden of a carbon tax would fall dis- proportionately on low-income households, workers and investors in emission-intensive industries, and people in areas where the local economy relies on such industries or on electricity generated from emission-intensive fuels. Lawmakers could partly or fully offset the burden imposed on those groups by returning some or most of the carbon tax revenues to them through tax credits or other programs. For example, carbon tax revenues could be directed to low-income households in the form of fixed (lump-sum) payments. (Households who are eligi- ble for benefits under the Supplemental Nutrition Assis- tance Program, formerly known as the Food Stamp program, could receive an additional fixed amount of benefits, for instance.) Such payments could help offset the increase in living expenses that those households would experience because of a carbon tax.30 However, unlike using carbon tax revenues to reduce def- icits or marginal tax rates, using them to provide relief from the tax’s effects on certain groups would generally not lessen the total economic costs of a carbon tax, including the reduction in total output. For example, lump-sum payments to low-income households would not provide benefits to the broader economy under nor- mal economic conditions, because those payments would not increase people’s incentives to work or invest and thus would not lead to greater economic productivity.31 Con- versely, using the revenues to cut marginal tax rates on corporate or individual income would benefit the econ- omy more broadly but would probably have limited value to low-income households, who typically owe little, if any, income tax. As a result, lawmakers could face a trade- off between using carbon tax revenues to minimize the tax’s adverse effects on the economy as a whole and using them to minimize the tax’s impact on disproportionately affected groups. Lawmakers could balance those trade-offs by choosing to use the revenues in more than one way. For instance, they could allocate some of the revenues to offsetting costs for 29. See Sebastian Rausch and John Reilly, Carbon Tax Revenue and the Budget Deficit: A Win-Win-Win Solution? Report 228 (Massachu- setts Institute of Technology Joint Program on the Science and Policy of Global Change, August 2012), http://tinyurl.com/ cvx3bl9. Other analysts have examined how changes in marginal taxes on income can affect welfare by reducing changes in con- sumption caused by tax preferences. For example, the tax deduc- tion for mortgage interest causes people to spend more on housing than they might otherwise. A reduction in marginal taxes on income would reduce the value of the mortgage interest deduction and thus the extent to which the tax system alters people’s choices about consumption. See Ian W.H. Parry and Roberton C. Williams III, “What Are the Costs of Meeting Distributional Objectives for Climate Policy?” B.E. Journal of Economic Analysis & Policy, vol. 10, no. 2 (December 2010), http://tinyurl.com/ d8frxk4. For more about the effects of tax-preferred consumption, see Ian W.H. Parry and Antonio M. Bento, “Tax Deductions, Environmental Policy, and the ‘Double Dividend’ Hypothesis,” Journal of Environmental Economics and Management, vol. 39, no. 1 (January 2000), pp. 67–96, http://dx.doi.org/10.1006/ jeem.1999.1093. 30. For more discussion of that and other options for helping house- holds who would bear relatively large costs, see Congressional Budget Office, How Policies to Reduce Greenhouse Gas Emissions Could Affect Employment (May 2010), www.cbo.gov/publication/ 41257, and Options for Offsetting the Economic Impact on Low- and Moderate-Income Households of a Cap-and-Trade Program for Car- bon Dioxide Emissions (attachment to a letter to the Honorable Jeff Bingaman, June 17, 2008), www.cbo.gov/publication/41704; testimony of Terry M. Dinan, Senior Advisor, Congressional Budget Office, before the Subcommittee on Income Security and Family Support of the House Committee on Ways and Means, The Distributional Consequences of a Cap-and-Trade Program for CO2 Emissions (March 12, 2009), www.cbo.gov/publication/ 41168; and testimony of Douglas W. Elmendorf, Director, Congressional Budget Office, before the Senate Committee on Finance, The Distribution of Revenues from a Cap-and-Trade Pro- gram for CO2 Emissions (May 7, 2009), www.cbo.gov/publication/ 41183. Households that received compensation would still have an incentive to reduce emissions only if the compensation they received was unrelated to the amount of energy they used. 31. Limiting lump-sum rebates to households below a certain income level could provide a disincentive to work. MAY 2013 EFFECTS OF A CARBON TAX ON THE ECONOMY AND THE ENVIRONMENT 13 CBO hard-hit households and the rest to reducing economy- wide costs. By one estimate, offsetting the costs of a carbon tax for households in the lowest two-fifths of the income distribution would take less than 30 percent of the gross revenues from a carbon tax; offsetting the costs for households in the lowest one-fifth of the income distribution would take roughly 12 percent.32 Effects of a Carbon Tax on the Environment Imposing a federal carbon tax would reduce the expected environmental and economic damage from climate change by lowering CO2 emissions in the United States. Calculating the value of reduced damage is fraught with scientific and economic uncertainties, and estimates of that value span a wide range. Moreover, the United States accounts for less than one-fifth of global CO2 emissions, so reductions in emissions in this country would proba- bly have only a modest effect on the Earth’s climate unless they were part of a coordinated effort with other coun- tries. Still, cuts in U.S. emissions alone would produce incremental reductions in expected damage, and coordi- nated cuts in emissions would reduce the risk of costly— potentially catastrophic—damage. The Impact of CO2 Emissions Since the onset of the industrial revolution more than two centuries ago, people have released increasing quanti- ties of greenhouse gases into the atmosphere—the main one being carbon dioxide, which is emitted when fossil fuels are burned. Global fossil-fuel-related emissions of CO2 are expected to grow substantially in the coming decades: by 35 percent between 2012 and 2035.33 Rising CO2 emissions cause concern because they, along with other greenhouse gases, accumulate in the atmo- sphere—potentially remaining there for centuries—and trap the sun’s heat, causing average temperatures on Earth to rise. The extent of that warming is unclear, but under a range of plausible alternative assumptions, many studies project that the total amount of warming that might occur during the 200 years from 1900 to 2100 would be a substantial fraction of the amount of warming that occurred over an 8,000-year period at the end of the last ice age (between 18,000 and 10,000 years ago). The consequences of rising global temperatures are highly uncertain and are projected to vary widely throughout the United States and the rest of the world. However, ris- ing temperatures are expected to be costly overall. Among the less uncertain effects on humans, some would be positive, such as reduced deaths from cold weather and improvements in agricultural productivity in certain areas; others would be negative, such as declines in the availability of fresh water in areas dependent on snow melt and loss of property from storm surges as sea levels rise.34 Among the more uncertain outcomes, of particular concern is whether warming will cause shifts in regional patterns of temperature and rainfall that are relatively sudden and unexpected, thus limiting opportunities for people and ecosystems to adjust. Sharp increases in dam- age would be particularly likely if rising temperatures triggered events—such as the release of methane, a potent greenhouse gas currently trapped in permafrost—that in turn accelerated the pace of warming. The International Context Both the causes and the consequences of climate change are global. The effects of such change would be experi- enced around the world, and significantly limiting the increase in global temperatures would require efforts by multiple countries. Many nations, including the United States, have already taken some steps to reduce greenhouse gas emissions. Those steps involve a variety of approaches, including regulations (such as fuel-efficiency standards for auto- mobiles) and incentives (such as subsidies for zero- or low-emitting technologies). A few countries have enacted policies that set a price on CO2 emissions; most notably, 27 member nations of the European Union, along with the 3 other members of the European Economic Area, have established a cap-and-trade program for greenhouse 32. See Terry Dinan, Offsetting a Carbon Tax’s Costs on Low-Income Households, Working Paper 2012-16 (Congressional Budget Office, November 2012), www.cbo.gov/publication/43713. 33. See Energy Information Administration, International Energy Outlook 2011, DOE/EIA-0484 (2011) (September 2011), www.eia.gov/forecasts/ieo/emissions.cfm. 34. See Congressional Budget Office, Potential Impacts of Climate Change in the United States (May 2009), www.cbo.gov/ publication/41180. 14 EFFECTS OF A CARBON TAX ON THE ECONOMY AND THE ENVIRONMENT MAY 2013 CBO gas emissions.35 In total, however, global efforts to date are expected to fall well short of the reductions necessary to prevent emissions from climbing to levels that would lead to significant increases in average global temperatures. The United States currently accounts for about 18 per- cent of global CO2 emissions; that share is projected to decline to about 15 percent by 2035 as emissions in other countries rise. Acting on its own, the United States could have only a modest effect on the amount of warming. In particular, efforts to limit global warming are likely to require significant reductions in emissions by rapidly growing economies, such as those of China and India. A coordinated, global approach to cutting emissions would also reduce the extent to which some of the decrease in U.S. emissions resulting from a federal carbon tax would be offset by increases in emissions overseas—a phenomenon known as carbon leakage. Analysts have estimated that in the absence of a global approach, between 1 percent and 23 percent of the reduction in U.S. emissions stemming from a U.S. carbon tax (or sim- ilar policy) could be offset through leakage, as higher prices for emission-intensive goods produced in the United States increased demand for cheaper emission- intensive goods produced elsewhere. The United States could address some types of leakage through policies, such as tariffs, that would impose the same costs on imports of emission-intensive goods that a carbon tax would impose on U.S. production of those goods; how- ever, practical and legal challenges to such policies could limit their effectiveness.36 Alternatively, in the case of a cap-and-trade program, analysts have proposed reducing the extent to which the production of emission-intensive goods would shift overseas by providing U.S. producers in those industries with free emission allowances based on their level of production. (Such a policy would limit increases in the U.S. prices of those goods and thus limit shifts in production.) That approach could also face legal challenges. Addressing the same concerns through a car- bon tax would entail providing such producers with a tax rebate that was linked to their output. Assessing the Value of Incremental Reductions in CO2 Emissions Although significantly limiting the amount of warming that might occur would require a concerted effort by major emitting countries, incremental reductions in emissions would cause incremental reductions in the expected damage from climate change. Researchers have produced estimates of the monetary value of the future damage from climate change associated with an increase of one metric ton in CO2 emissions in a given year—a measure often referred to as the social cost of carbon. That measure also approximates the expected benefit, in terms of avoided future damage, associated with a commensurate decrease in emissions. Because the SCC reflects the expected global benefit of an incremental change in CO2 emissions, it reflects the value that each 1-ton reduction in U.S. emissions would have, assuming no changes in emissions outside the United States. Estimates of the social cost of carbon are highly uncer- tain. Producing such estimates entails predicting the degree of warming that might result from rising global emissions of greenhouse gases, estimating the range of global effects (both positive and negative) that such warming might have, placing a dollar value on those effects in various years, and translating future dollar val- ues into current ones. Researchers have made such esti- mates using models that combine simplified representa- tions of the climate system, the global economy, and the way in which those two interact. Given the uncertainties involved, researchers typically calculate a range of esti- mates for the SCC using alternative assumptions about key parameters. In 2009, the U.S. government formed an interagency working group to develop estimates of the social cost of carbon to be used in analyzing potential federal regula- tions. That effort offers insights into the uncertainties underlying such estimates and the important role of par- ticular parameters. In estimating the SCC, the working group used three different models; five different scenarios about projections of global economic output, population, 35. See Richard G. Newell, William A. Pizer, and Daniel Raimi, “Carbon Markets 15 Years After Kyoto: Lessons Learned, New Challenges,” Journal of Economic Perspectives, vol. 27, no. 1 (Winter 2013), pp. 123–146, http://dx.doi.org/10.1257/ jep.27.1.123; and Jane A. Leggett and others, An Overview of Greenhouse Gas (GHG) Control Policies in Various Countries, Report for Congress R40936 (Congressional Research Service, November 30, 2009). 36. For further discussion, see Environmental Protection Agency and others, The Effects of H.R. 2454 on International Competitiveness and Emission Leakage in Energy-Intensive Trade-Exposed Industries: An Interagency Report Responding to a Request from Senators Bayh, Specter, Stabenow, McCaskill, and Brown (December 2, 2009), http://go.usa.gov/2unQ (pdf, 1 MB). MAY 2013 EFFECTS OF A CARBON TAX ON THE ECONOMY AND THE ENVIRONMENT 15 CBO Table 1. The Interagency Working Group’s Estimates of the Average Social Cost of Carbon, by Discount Rate Source: Congressional Budget Office based on Interagency Working Group on Social Cost of Carbon, Technical Support Document: Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866 (February 2010), http://go.usa.gov/2une (pdf, 847 KB). a. The discount rate is the interest rate used to compute a single number that expresses the present value of a flow of future costs in terms of an equivalent lump-sum cost today. b. Each of these numbers is an average of 15 estimates produced by applying five scenarios with different projections of global economic output, population, and emissions to three different models of the climate and the economy. and emissions; and three different discount rates to trans- late future values into present values (higher discount rates give less weight to future values than lower discount rates do).37 In total, those combinations provided 45 dif- ferent estimates of the social cost of carbon for any given year. Because the outcomes are uncertain, each of those 45 estimates was represented as a probability distribution (a range of possible outcomes with weights attached to each one). The working group reported average estimates for the SCC in a given year for each of the three discount rates. (Those estimates were averages of the 15 outcomes that resulted from applying the five scenarios to each of the three models.) For 2010, for instance, the working group concluded that the average estimate for the SCC could be as low as $5 per ton of CO2 emissions (in 2007 dollars) or as high as $35, depending on the discount rate that was applied to future outcomes (see Table 1). The working group described the average value calculated using a 3 percent discount rate as the “central estimate” for each year; for 2010, the central estimate was $21 per ton.38 Because much of the concern about climate change focuses on the potential for extreme damage, the working group also reported the potential for the social cost of carbon to be well above the average estimate indicated by the models. In particular, using the 3 percent discount rate and averaging across its three models, the working group estimated that there was a 5 percent chance that the true value of the SCC in 2010—that is, the actual global damage that would result from CO2 emissions— could exceed $65 per ton (not shown in Table 1). carbon dioxide emissions, in 2007 dollars)b 2010 5 21 35 2015 6 24 38 2020 7 26 42 2030 10 33 50 2040 13 39 58 2050 16 45 65 3.1 1.9 1.6 Discount Ratea Social Cost of Carbon (Cost per ton of Average Annual Change in the Social Cost of Carbon, 2010–2050 (Percent) 5 Percent 3 Percent 2.5 Percent 37. A present value is a single number that expresses a flow of future costs in terms of an equivalent lump-sum cost today. The present value depends on the interest rate, called the discount rate, that is used to translate future cash flows into current dollars. 38. See Interagency Working Group on Social Cost of Carbon, Technical Support Document: Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866 (February 2010), http://go.usa.gov/2une (pdf, 847 KB); and Charles Griffiths and others, “The Social Cost of Carbon: Valuing Carbon Reductions in Policy Analysis,” in Ian W.H. Parry, Ruud de Mooij, and Michael Keen, eds., Fiscal Policy to Mitigate Climate Change: A Guide for Policymakers (International Monetary Fund, 2012), pp. 69–87, http://tinyurl.com/cjnpaka. 16 EFFECTS OF A CARBON TAX ON THE ECONOMY AND THE ENVIRONMENT MAY 2013 CBO Importance of Discount Rates. The interagency working group’s average estimate of the SCC for 2010 varied by a factor of seven (from $5 to $35) depending on the rate at which future damage was discounted. Today’s emissions produce effects that will unfold over decades, even centu- ries; thus, estimates of the present value of the damage resulting from today’s emissions are highly sensitive to the weight put on future damage. The choice of a discount rate not only affects the initial value of the SCC but also helps determine the rate at which the SCC increases over time (rising SCC values reflect rising estimates of damage). Higher discount rates result in lower initial values of the SCC but, according to the working group’s models, faster subsequent growth in those values. For example, the working group estimated that with a 3 percent discount rate, the SCC would increase by roughly 2 percent a year over the first four decades, but with a 5 percent discount rate, it would grow by roughly 3 percent a year over that period. Importance of Catastrophic Effects and Adaptation. The three models used by the interagency working group illustrate the importance to the social cost of carbon of the potential for catastrophic effects—generally repre- sented as a substantial loss in global output—and of the ability of humans and ecosystems to adapt to a changing climate. Models that make different assumptions about those factors produce very different estimates of the SCC. The sensitivity of estimates to those assumptions is revealed by comparing the three models’ estimates of the expected loss in global output that would occur if average surface temperatures increased by 2.5oC from their prein- dustrial levels. One model estimated that such warming would reduce global output by 1.5 percent, with nearly 70 percent of that expected loss stemming from the small probability that the warming would trigger a catastrophic loss (defined as a 25 percent decline in global output). Another model, which did not include the potential for catastrophic effects, estimated that 2.5oC of warming would be beneficial, on net, raising global output by 0.13 percent (mainly because of increases in productivity in the agricultural and forestry sectors and decreases in heating costs). The third model assumed that humans and ecosystems would adapt to gradual warming and that damage would occur only above a “tolerable level” (defined as 2oC of warming). That model estimated that 2.5oC of warming would reduce expected global output by 1.44 percent, with roughly 30 percent of that decline caused by the small probability of a catastrophic loss.39 Non-CO2-Related Benefits and Costs. Although the social cost of carbon reflects reductions in the expected damage and risks posed by climate change, cutting CO2 emissions could have other effects as well. In particular, researchers have examined how efforts to lower CO2 emissions— such as generating electricity from natural gas rather than from coal—might also lower emissions of other gases. Reduced emissions of those pollutants would create addi- tional benefits (sometimes referred to as co-benefits, or ancillary benefits). Co-benefits could include a variety of effects, such as reduced incidences of asthma and prema- ture death. Conversely, measures taken to decrease CO2 emissions could create additional costs depending on how the emissions were reduced. Estimating the net change in damage, or the net co-benefit, that might result from a carbon tax becomes more complicated if analysts take into account the entire process of fuel production, use, and disposal. For example, to the extent that the tax caused generators to shift away from coal to nuclear power, it could decrease the damage stemming from coal mining but increase the risks associated with disposing of nuclear waste. Some analysts have estimated that certain co-benefits of a carbon tax could be significant, but those co-benefits (as well as potential additional damage) would depend on how CO2 emissions were reduced and on what standards were already in place to limit other emissions. For exam- ple, one recent study concluded that a carbon tax of $29 (rising by 5 percent more than inflation each year) would yield health-related co-benefits of about $10 per ton of CO2 emissions reduced—or more than twice that 39. The three models are the Dynamic Integrated Climate Economy (DICE) model, the Climate Framework for Uncertainty, Negotia- tions, and Distribution (FUND) model, and the Policy Analysis for the Greenhouse Effect (PAGE) model, respectively. See Charles Griffiths and others, “The Social Cost of Carbon: Valuing Carbon Reductions in Policy Analysis,” in Ian W.H. Parry, Ruud de Mooij, and Michael Keen, eds., Fiscal Policy to Mitigate Climate Change: A Guide for Policymakers (International Monetary Fund, 2012), pp. 69–87, http://tinyurl.com/cjnpaka. Different models define catastrophic outcomes in different ways. For example, the DICE model defines it as a 25 percent loss in global output as measured by gross domestic product. See William D. Nordhaus and Joseph Boyer, Warming the World: Economic Models of Global Warming (Massachusetts Institute of Technology Press, 2000), http://mitpress.mit.edu/books/warming-world. MAY 2013 EFFECTS OF A CARBON TAX ON THE ECONOMY AND THE ENVIRONMENT 17 CBO amount depending on whether the carbon tax caused electricity generators’ emissions of sulfur dioxide to decline.40 Whether that decline occurred would, in turn, depend on whether an existing regulatory cap on sulfur dioxide emissions was binding and whether regulations to tighten the cap were enacted.41 Determining the Tax Rate That Best Balances the Benefits and Costs of a Carbon Tax In theory, if there were no other taxes, no leakage from emissions elsewhere, no non-CO2-related benefits or costs (beyond the net environmental costs reflected in the social cost of carbon and the primary economic costs of a carbon tax described above), and no uncertainty about the SCC, then setting the rate of a carbon tax equal to the SCC would be “efficient” from a global economic stand- point. That is, it would ensure that the economic costs (as reflected in the primary costs) of the most expensive emission cuts prompted by the tax would equal the net environmental benefits of those cuts. For example, if law- makers chose $21 as an appropriate estimate for the SCC, setting the carbon tax at that rate would prompt firms and households to reduce emissions as long as the per-ton cost of making those reductions was less than $21—and thus, the most expensive emission cuts made as a result of a tax would cost no more than the estimated damage avoided by those cuts. In practice, however, the carbon tax rate that is economi- cally efficient depends on the way in which lawmakers use the revenues from the tax, the amount of leakage that occurs, and the amount of additional benefits and costs that result from the tax. Moreover, some analysts say that estimates of the SCC may be too uncertain to be a useful guide to setting a tax rate. (Some analysts suggest instead that the tax could be set at a rate that would be projected to keep atmospheric CO2 from exceeding a particular concentration.) In addition, economic efficiency is only one of the criteria that lawmakers might use in setting that rate. Alternative Uses of the Tax Revenues. Because a carbon tax would compound the costs associated with current taxes on individual and corporate income, the incremen- tal cost to the economy from a carbon tax would exceed the actual rate of the tax. Thus, with a tax of $21 per ton of CO2 (not counting the use of the tax revenues), the most expensive emission cuts would have a combined primary and tax-interaction cost of more than $21. If the revenues from the carbon tax were used in ways that did not offset that compounding effect—for exam- ple, if they were distributed to all U.S. residents on an equal, lump-sum basis—the economically efficient level of the tax would probably be less than the social cost of carbon. Alternatively, to the extent that lawmakers used the carbon tax revenues in ways that offset the tax’s nega- tive effects on real wages, investment, and output, the efficient level of the tax would be closer to—or perhaps even greater than—the SCC. Potential for Leakage. The benefits of a U.S. carbon tax would be reduced to the extent that decreases in emis- sions in the United States were expected to be offset by increases in emissions outside the United States. In that case, the tax rate that would be economically efficient would be lower than the social cost of carbon, to reflect offsetting increases in emissions elsewhere. For example, if 10 percent of the total decrease in U.S. emissions was expected to be offset by increases overseas, the value of each 1-ton reduction in U.S. emissions would be 10 per- cent less than the SCC (which represents the value of a 1-ton reduction in global emissions). Unless a U.S. car- bon tax was part of a coordinated global effort or was accompanied by measures to prevent leakage, increases in emissions elsewhere would offset 1 percent to 23 percent of the reduction in U.S. emissions, analysts estimate. Additional Non-CO2-Related Benefits and Costs. If a carbon tax had benefits unrelated to reducing the risk of climate change or had costs other than the primary and tax-interaction costs discussed above, the net value of those benefits and costs (the net co-benefit) could be added to estimates of the social cost of carbon when con- sidering what carbon tax rate would be economically effi- cient. Although most researchers have estimated positive values for the net co-benefit, suggesting an efficient tax rate higher than the SCC, the net co-benefit could, at 40. See Britt Groosman, Nicholas Z. Muller, and Erin O’Neill-Toy, “The Ancillary Benefits from Climate Policy in the United States,” Environmental and Resource Economics, vol. 50, no. 4 (December 2011), pp. 585–603, http://dx.doi.org/10.1007/ s10640-011-9483-9. (The estimates are in 2006 dollars.) 41. In recent years, emissions of sulfur dioxide (SO2) have fallen below the level of the cap imposed by EPA’s Acid Rain Program, so that cap does not appear to be binding at present. EPA set a more stringent cap on SO2 emissions under the Cross State Air Pollution Rule, but that rule was struck down by the D.C. Circuit Court in August 2012. EPA is currently appealing that decision. 18 EFFECTS OF A CARBON TAX ON THE ECONOMY AND THE ENVIRONMENT MAY 2013 CBO least in theory, be negative, suggesting an efficient tax rate lower than the SCC. Modifying the chosen tax rate to reflect the net co-benefit would be complicated, however, by the fact that the size of the net co-benefit would vary depending on how cuts in CO2 emissions were achieved. Some methods of reduc- ing CO2 emissions could have a significantly larger net co-benefit than others would, and the magnitude of that co-benefit would change over time as the methods used in response to the tax changed. Thus, modifying the tax to reflect the average net co-benefit could provide too much incentive for changes in some types of production and consumption and too little incentive for changes in other types. Using separate policy instruments to address separate environmental problems reflected in the net co- benefit—such as emissions of various pollutants—would generally be more efficient than addressing such problems together with climate change through a carbon tax. Uncertainty of Estimates of the Social Cost of Carbon. Estimates of the SCC have the potential to incorporate a degree of uncertainty about the environmental damage from CO2 emissions and people’s aversion to the risk of such damage.42 However, some researchers suggest that the unknown potential of climate change to trigger cata- strophic outcomes—as well as the great uncertainty asso- ciated with estimating the likelihood and magnitude of those outcomes—severely limits analysts’ ability to pro- duce meaningful estimates of the SCC. Some argue that the plausible range of incremental damage is much larger than typically presented, that little evidence exists to dis- miss very large potential values (although values below the central estimates discussed above are also possible), and that the types of models typically used to estimate the social cost of carbon do not adequately capture the extent of the underlying uncertainties.43 According to that view, estimates of the SCC that result from models such as those used by the interagency working group could be of limited use to lawmakers in setting a carbon tax rate. The Timing of Action Because the damage from climate change depends on the amount of emissions that accumulate over a long period of time, rather than the level of emissions in any one year, some analysts suggest that delaying reductions in emis- sions might be beneficial.44 In particular, they suggest that emissions could be cut more cheaply in the future, for several reasons: Technological improvements might reduce the cost of lower-emission methods of producing goods, even in the absence of policies designed to encourage fewer emissions. For example, recent improvements in hydraulic fracturing have increased the supply and use of natural gas, which has decreased the total emissions resulting from electricity production. Future generations will probably be wealthier and thus better able to afford to reduce emissions. Forcing cuts in emissions too quickly could require expensive pieces of capital equipment, such as coal- fired electricity generators, to be retired before the end of their useful life. However, delays also have the potential to increase the cost of reducing emissions, in part because of their effects on technological improvements and decisions about long-lived capital equipment: Taxing carbon later rather than sooner would post- pone giving companies an incentive to develop tech- nologies that would lower the cost of reducing CO2 emissions. Developing new zero- or low-emission technologies, and improving existing ones, would pro- ceed more quickly with a combination of federal sup- port for basic research and development and a steadily rising price on CO2 emissions.45 42. See William Nordhaus, Estimates of the Social Cost of Carbon: Background and Results from the RICE-2011 Model, Cowles Foun- dation Discussion Paper 1826 (Yale University, October 2011), http://dido.econ.yale.edu/P/cd/d18a/d1826.pdf (370 KB). 43. See, for example, Martin L. Weitzman, “Fat-Tailed Uncertainty in the Economics of Catastrophic Climate Change,” Review of Environmental Economics and Policy, vol. 5, no. 2 (Summer 2011), pp. 275–292, http://dx.doi.org/10.1093/reep/rer006; and Geoffrey Heal and Antony Millner, Uncertainty and Decision in Climate Change Economics, Working Paper 18929 (National Bureau of Economic Research, March 2013), www.nber.org/ papers/w18929. 44. See, for example, Robert P. Murphy, Carbon “Tax Swap” Deals: A Review and Critique (Institute for Energy Research, November 2012), http://tinyurl.com/cm2ra77 (pdf, 13 MB). 45. See Congressional Budget Office, Evaluating the Role of Prices and R&D in Reducing Carbon Dioxide Emissions (September 2006), www.cbo.gov/publication/18131. MAY 2013 EFFECTS OF A CARBON TAX ON THE ECONOMY AND THE ENVIRONMENT 19 CBO Delays could also lead companies that are replacing long-lived capital equipment today to install new emission-intensive equipment, thus increasing the likelihood that such equipment would have to be retired prematurely in the future if emission-cutting policies went into effect (particularly if the delays caused lawmakers to phase in future emission cuts more rapidly than they might otherwise). Regardless of the effect that delaying emission reductions might have on the cost of achieving lower emissions, such delays would increase the expected damage from climate change by increasing the risk of very costly, potentially even catastrophic, outcomes. Given the persistent nature of greenhouse gases and the dynamics of climate change, warming would continue for several decades even if emis- sions were quickly cut to a small fraction of their current levels.46 In general, the risk of costly damage is higher as the extent of warming increases and as the pace of warm- ing picks up; thus, failing to limit emissions soon increases that risk. 46. For more information, see Congressional Budget Office, Potential Impacts of Climate Change in the United States (May 2009), www.cbo.gov/publication/41180. 20 EFFECTS OF A CARBON TAX ON THE ECONOMY AND THE ENVIRONMENT MAY 2013 CBO About This Document This Congressional Budget Office (CBO) report was prepared at the request of the Ranking Member of the House Committee on Energy and Commerce. In keeping with CBO’s mandate to provide objective, impartial analysis, the report makes no recommendations. The analysis was prepared by Terry Dinan of CBO’s Microeconomic Studies Division with guidance from Joseph Kile. Bruce Arnold, J’nell Blanco, Kim Cawley, Wendy Edelberg, Theresa Gullo, Daniel Hoople, Mark Lasky, Susanne Mehlman, William Randolph (formerly of CBO), Frank Sammartino, Robert Shackleton, Andrew Stocking, Alan van der Hilst, and David Weiner provided helpful comments. Lawrence Goulder of Stanford University, Chip Knappenberger of the Cato Institute, David Kreutzer of the Heritage Foundation, Gilbert Metcalf of Tufts University, Robert Murphy of the Institute for Energy Research, William Pizer of Duke University, Sebastian Rausch of the Massachusetts Institute of Technology, and Pete Wilcoxen of Syracuse University reviewed the report. The assistance of external reviewers implies no responsibility for the final product, which rests solely with CBO. Christian Howlett edited the report; Maureen Costantino and Jeanine Rees prepared it for publication; and Maureen Costantino designed the cover. The report is available on CBO’s website (www.cbo.gov). Douglas W. Elmendorf Director May 2013 BY NOAH KAUFMAN, JOHN LARSEN, PETER MARSTERS, HANNAH KOLUS, AND SHASHANK MOHAN OCTOBER 2019 AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT Attachment 5 ABOUT THE CENTER ON GLOBAL ENERGY POLICY The Center on Global Energy Policy provides independent, balanced, data-driven analysis to help policymakers navigate the complex world of energy. We approach energy as an economic, security, and environmental concern. And we draw on the resources of a world- class institution, faculty with real-world experience, and a location in the world’s finance and media capital. Visit us at www.energypolicy.columbia.edu @ColumbiaUenergy ABOUT THE SCHOOL OF INTERNATIONAL AND PUBLIC AFFAIRS SIPA’s mission is to empower people to serve the global public interest. Our goal is to foster economic growth, sustainable development, social progress, and democratic governance by educating public policy professionals, producing policy-related research, and conveying the results to the world. Based in New York City, with a student body that is 50 percent international and educational partners in cities around the world, SIPA is the most global of public policy schools. For more information, please visit www.sipa.columbia.edu ABOUT THE RHODIUM GROUP Rhodium Group is a leading independent research provider that combines economic data analytics and policy insights to help clients understand global trends. Rhodium’s Energy & Climate team analyzes the market impact of energy and climate policy and the economic risks of global climate change. Their research supports decision-makers in the public, financial services, corporate, philanthropic and non-profit sectors. By combining policy expertise with a suite of detailed energy-economic models, Rhodium helps clients understand the impact of energy and climate change policy on economic output, energy markets, and greenhouse gas emissions. For more information, please visit www.rhg.com AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT BY NOAH KAUFMAN, JOHN LARSEN, PETER MARSTERS, HANNAH KOLUS, AND SHASHANK MOHAN OCTOBER 2019 Columbia University CGEP 1255 Amsterdam Ave. New York, NY 10027 energypolicy.columbia.edu @ColumbiaUenergy Rhodium Group 5 Columbus Circle New York, NY 10019 rhg.com @RhodiumGrp @rhodium_group | AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT ENERGYPOLICY.COLUMBIA.EDU • RHG.COM | OCTOBER 2019 | 3 The authors would like to thank three anonymous reviewers who provided useful comments and feedback. The authors would also like to acknowledge the contributions of Christina Nelson, Anna Gossett, Sha Du, Matthew Robinson, Artealia Gilliard, Genna Morton, Stephanie Hanson Damassa, and Jason Bordoff. This policy paper represents the research and views of the authors. It does not necessarily represent the views of the Center on Global Energy Policy or Rhodium Group. The paper may be subject to further revision. This work was made possible by support from the Center on Global Energy Policy. More information is available at https://energypolicy.columbia.edu/about/partners. ACKNOWLEDGEMENTS AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT 4 | CENTER ON GLOBAL ENERGY POLICY | COLUMBIA SIPA • RHODIUM GROUP The Center on Global Energy Policy (CGEP) at Columbia University’s School of International and Public Affairs launched a Carbon Tax Research Initiative in 2018 with the goal of enabling the design and thoughtful consideration of federal carbon tax policy in the United States. The initiative is a collaboration among scholars at CGEP, the broader Columbia University faculty, and independent external experts. This paper is a collaboration between CGEP and Rhodium Group, an independent research provider. FOREWORD AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT ENERGYPOLICY.COLUMBIA.EDU • RHG.COM | OCTOBER 2019 | 5 Noah Kaufman joined the Columbia University SIPA Center on Global Energy Policy (CGEP) as a research scholar in January 2018. Noah works on climate and clean energy policies and directs CGEP’s Carbon Tax Research Initiative. At World Resource Institute, Noah led projects on carbon pricing, the economic impacts of climate policies, and long-term decarbonization strategies. Under President Obama, he served as the Deputy Associate Director of Energy & Climate Change at the White House Council on Environmental Quality. Previously, he was a Senior Consultant in the Environment Practice of NERA Economic Consulting. Noah received his BS in economics, cum laude, from Duke University, and his PhD and MS in economics from the University of Texas at Austin. John Larsen is a Director at Rhodium Group and leads the firm’s US power sector and energy systems research. John specializes in analysis of national and state clean energy policy and market trends. Previously, John worked for the US Department of Energy’s Office of Energy Policy and Systems Analysis, where he served as an electric power policy advisor. Prior to working in government, John led federal and congressional policy analysis in the World Resources Institute’s Climate and Energy Program. John is a non-resident Senior Associate in the Energy and National Security Program at the Center for Strategic and International Studies. He has lectured at several academic institutions including Johns Hopkins University and Amherst College. He holds a bachelor’s degree in environmental science from the University of Massachusetts, Amherst, and a master’s degree in urban and environmental policy and planning from Tufts University. Peter Marsters is a Research Associate focused on supporting the Carbon Tax Research Initiative at the Center on Global Energy Policy. His work focuses on the policy levers and economic outcomes of deep decarbonization and carbon pricing. Peter has researched and published on issues such as state-level transitions to 100% clean energy, the energy and environmental implications of a federal carbon tax, and the future of the US coal industry. Before joining the Center on Global Energy Policy, he worked at the Rhodium Group, the National Renewable Energy Laboratory, and the Woodrow Wilson Center for International Scholars. He holds a master of arts in energy and resources from the University of California-Berkeley and a bachelor of science in history from Bates College. Hannah Kolus is a Research Analyst with Rhodium Group’s Energy & Climate team, focusing on US energy markets and policy. Before joining Rhodium, Hannah worked with global land models and output at the Jet Propulsion Laboratory and researched historical climate at Northern Arizona University. She has a bachelor’s degree in physics from Brown University and a master’s degree in environmental science and policy from Northern Arizona University. Shashank Mohan is Director of Quantitative Analysis at Rhodium Group. Shashank leads the development and management of Rhodium’s suite of economic models and other quantitative ABOUT THE AUTHORS AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT 6 | CENTER ON GLOBAL ENERGY POLICY | COLUMBIA SIPA • RHODIUM GROUP tools. He joined Rhodium in 2008 as a research analyst, and has since worked across Rhodium’s practice areas to analyze the impact of policy proposals and structural developments on specific markets and broader economic trends. Shashank has extensive experience building and leveraging a wide variety of economic and energy system modeling, including computable general equilibrium models, econometric growth models, the National Energy Modeling System, and input-output analysis, to inform market and policy-relevant energy, economic, and environmental analysis. Prior to joining Rhodium, Shashank was a software engineer at Microsoft. He holds a master’s degree from the School of International and Public Affairs at Columbia University and is a mathematics and computer science graduate of the Indian Institute of Technology (IIT), Kharagpur. AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT ENERGYPOLICY.COLUMBIA.EDU • RHG.COM | OCTOBER 2019 | 7 Executive Summary Introduction Analytical Approach GHG Emissions Implications Energy Implications Revenue and Carbon Dividend Impacts Not Directly Modeled Appendix A: Methodology for Estimating the Carbon Dividend and Its Taxation Notes TABLE OF CONTENTS 08 10 11 13 16 20 27 29 31 TABLE OF CONTENTS AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT 8 | CENTER ON GLOBAL ENERGY POLICY | COLUMBIA SIPA • RHODIUM GROUP Growing public concern about the social, economic, and environmental impacts of climate change, along with pressure for lawmakers to introduce policy proposals that reduce emissions, have brought carbon taxes to the center of policy discussions on Capitol Hill. Thus far in 2019, seven different carbon tax legislative proposals have been introduced in Congress. The proposal with the most cosponsors, totaling 64 Democrats and 1 Republican as of the end of September 2019, is the Energy Innovation and Carbon Dividend Act (EICDA), introduced in February 2019 by lead sponsor Ted Deutch (D-FL). This study assesses the potential impacts of EICDA on the US energy system, environment, and economy. EICDA establishes a fee on each ton of greenhouse gas (GHG) emissions. It covers over 80 percent of gross national emissions. The fee starts at $15 per metric ton and increases by $10 or $15 each year, depending on future emissions levels. Revenue raised by the carbon fee is used for “carbon dividends,” a rebate to every eligible US citizen or lawful resident. The bill also includes measures to protect US competitiveness and to reduce the risk that companies will relocate their operations to a different country with laxer climate laws. Through the carbon fee and additional regulations if necessary, EICDA targets 90 percent emissions reductions by 2050 compared to 2016 levels. This study is part of a joint effort by Columbia University’s Center on Global Energy Policy (CGEP) and Rhodium Group to help policymakers, journalists, and other stakeholders understand the important decisions associated with the design of carbon tax policies and the implications of these decisions. This analysis uses a version of the National Energy Modeling System maintained by the Rhodium Group (RHG-NEMS) to quantify the energy and environmental implications of EICDA, focusing on outcomes through 2030. Supplemental analyses provide insights on how EICDA would affect households, the economy, and government budgets. The following are key results: ●GHG emissions decline substantially. Compared to 2005 levels, implementing EICDA as a stand-alone policy leads to economy-wide net GHG emissions reductions of 32–33 percent by 2025 and 36–38 percent by 2030. These emissions reductions exceed the targets in the EICDA proposal through 2030 and exceed the US commitments to the Paris Agreement over this period. Most of the near-term emission reductions occur in the power sector, where emissions fall 82–84 percent by 2030. ●Air pollution also declines. EICDA reduces local air pollution from power plants. Sulfur dioxide (SO2) and mercury emissions from the power sector decline by more than 95 percent and emissions of oxides of nitrogen (NOX) decline by about 75 percent by 2030 relative to a current policy scenario. ●Electricity generation shifts to cleaner sources. The price on carbon causes the US economy to shift from carbon-intensive energy sources to low- and zero-carbon energy EXECUTIVE SUMMARY AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT ENERGYPOLICY.COLUMBIA.EDU • RHG.COM | OCTOBER 2019 | 9 sources. Coal is nearly eliminated from the power sector by 2030, with solar, wind, nuclear, and natural gas with carbon capture and storage all providing significantly larger generation shares compared to a current policy scenario. ●Energy prices rise but do not skyrocket. The price on carbon causes energy prices to increase for all carbon-emitting fuels, which leads to significantly higher overall energy expenditures, though within the range of recent historical variation. Taking two prominent examples, results show EICDA causing national average gasoline prices to increase by about 12 cents per gallon in 2020 and 90 cents per gallon in 2030 and causing national average electricity prices to increase by about 1 and 3 cents per kilowatt hour in 2020 and 2030, respectively. EICDA causes per capita energy expenditures to increase by $200-$210 in 2020 and $1,160-$1,170 in 2030 compared to a current policy scenario. In all years, annual per capita energy expenditures remain below the recent historical peak during the commodities crisis in 2008. ●The carbon dividend cushions energy price impacts. EICDA generates substantial revenue that is distributed in the form of equal dividend payments. EICDA generates $72–$75 billion in carbon tax revenues in 2020 and $403–$422 billion in 2030. This translates into an annual dividend for eligible adults of $250-$260 in 2020 and $1,410- $1,470 in 2030, with half those amounts also paid to eligible children. On average, the carbon dividend payments are comparable to the changes in energy expenditures caused by EICDA. Because higher-income households purchase far more carbon- intensive goods and services, distributing dividends equally implies that average low- and middle-income households receive more in dividends than they pay in increased economy-wide prices for goods and services resulting from the carbon tax. ●Net government revenue declines slightly, at least initially. Carbon tax-and-dividend policies are often described as “revenue neutral,” but the impacts of EICDA on government revenue are uncertain and likely negative in the near term. We estimate that the net government revenues under EICDA decline by roughly 10 percent of the annual carbon tax revenue in the early years of the policy. This estimate considers government revenue gains from taxing emissions and dividends, dividend payouts, and government revenue losses from reduced income and payroll taxes from those who pay the carbon tax. However, the proposal will also affect government revenue in other ways that are beyond the scope of our analysis, so the overall impacts on net government revenue is uncertain. AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT 10 | CENTER ON GLOBAL ENERGY POLICY | COLUMBIA SIPA • RHODIUM GROUP This paper analyzes the Energy Innovation and Carbon Dividend Act (EICDA) of 2019 proposed by Congressman Ted Deutch (D-FL) and cosponsored by 65 members of the House of Representatives as of the end of September 2019, including 1 Republican. It presents estimates of the impacts of EICDA on emissions, energy markets, households, and government revenues. It also compares EICDA to other recent proposals for federal carbon pricing policies and highlights relevant results from the literature. EICDA establishes a fee on emissions of greenhouse gases (GHGs) that starts at a rate of $15 per metric ton and increases by $10 per year plus the rate of inflation, contingent on meeting annual emission targets stipulated in the legislation. If emissions from covered fuels fail to meet a target in a given year, the tax rate increases by $15 the following year. EICDA also covers fluorinated gases at a rate of 10 percent of the carbon fee, so it grows from $1.50 per ton of CO2 equivalence (CO2e) in 2020 to $11.50 by 2030. The GHG emissions covered by EICDA account for the majority (over 80 percent) of gross national emissions. Outside the scope of the bill are emissions from and related to agriculture, land use, certain industrial processes, and any emissions from the armed forces. Revenue raised by the carbon fee (after minor administrative expenses) is used for “carbon dividends,” a rebate to every eligible US citizen or lawful resident. Eligible adults would receive a full portion and children would receive half. In addition, the bill proposes a border carbon adjustment that would tax carbon-intensive imports and refund taxes to carbon- intensive exports. Finally, EICDA proposes to temporarily suspend Environmental Protection Agency (EPA) authority to regulate emissions from stationary sources of CO2 that are also covered by the carbon fee. Regulatory authority over mobile emissions sources and emissions not covered by the carbon fee are unchanged. If emissions goals are not met after 10 years, regulatory authority is restored to accompany the increasing carbon fee, and the federal government is required to put regulations in place to achieve the targets described in the bill, which chart a pathway to 90 percent emissions reductions by 2050 compared to 2016 levels. INTRODUCTION AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT ENERGYPOLICY.COLUMBIA.EDU • RHG.COM | OCTOBER 2019 | 11 To assess the energy and environmental implications of the EICDA proposal, we modeled a range of scenarios in a version of the National Energy Modeling Sysem constructed by the Energy Information Agency and maintained by the Rhodium Group (RHG-NEMS). RHG-NEMS can produce economy-wide projections of the US energy system as well as projections of all major GHG emissions.1 Energy technology and market assumptions for all scenarios match Rhodium Group’s Taking Stock 2018 scenarios.2 Specifically we consider high-, central-, and low-energy cost scenarios that vary the assumed costs of renewable energy and battery technologies as well as the price of natural gas. More details can be found in the Taking Stock 2018 technical appendix.3 In the low-energy cost scenario only, we also assume the availability of additional low-carbon technologies beyond what’s included in Taking Stock 2018, such as carbon capture and storage for industrial facilities and renewable natural gas.4 These additions are intended to represent additional technological innovation that may occur in the US in connection with the implementation of an economy-wide carbon price. Historical GHG data used in this analysis is sourced from the EPA’s GHG inventory published in 2018 with data through 2016. Consistent with the EPA inventory, we use 100-year global warming potentials and upstream methane emission rates for fossil fuel production and distribution from the Intergovernmental Panel on Climate Change Fourth Assessment Report. Throughout this report, we primarily discuss results out to 2030, due to uncertainties about the evolution of the US energy system and economy further into the future. Modeling the EICDA Proposal As a starting point, we construct a current policy scenario that reflects all federal and state policies in place through May 2018. This scenario assumes US carbon sequestration from land use, land use change, and forestry follows the optimistic pathway considered in Rhodium Group’s 2018 Taking Stock report.5 We assume climate policy in the rest of the world remains unchanged across all of our scenarios. Our EICDA scenario builds on the current policy scenario, adding all provisions contained in the EICDA proposal unless otherwise noted below. We assume all state and federal policies not revoked or revised by the proposal remain in place. We assume all measures take effect in 2020 and continue throughout the projection period. For CO2 emissions from fossil fuel use, we apply the tax in RHG-NEMS to all covered fuels, and the model solves for the least-cost pathway to provide energy services throughout the US economy. The carbon tax applies to imported fossil fuels but not exports. Under EICDA, a border tax adjustment would be applied to the export and import of certain energy- and trade-intensive products. To reflect this provision of the bill, we fixed relative international prices for fuels ANALYTICAL APPROACH AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT 12 | CENTER ON GLOBAL ENERGY POLICY | COLUMBIA SIPA • RHODIUM GROUP and commodities so that international trade is not affected by a change in US prices due to a carbon tax. Tax credits are available for nonemissive uses of taxed fuels and for the capture and permanent sequestration of CO2 emissions from taxed fuels. Modeling the impact of the fee on F-gases is outside the scope of our analysis. In line with the language in the proposal, we assume the carbon fee does not apply to upstream GHG emissions from fossil fuel production due to the administrative difficulties of doing so, but an alternative plausible reading of the proposal is that it covers these emissions. AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT ENERGYPOLICY.COLUMBIA.EDU • RHG.COM | OCTOBER 2019 | 13 We find that the EICDA proposal could drive US economy-wide net GHG emissions down 32–33 percent from 2005 levels by 2025 and down 36–38 percent from 2005 levels by 2030 (figure 1). The range reflects the three energy cost scenarios discussed above. The bill represents a departure from current policy, under which emissions are projected to be between 15–19 percent below 2005 levels in 2025 and 15–17 percent below 2005 levels by 2030. Figure 1: US economy-wide net GHG emissions, 2015-2030 Source: Rhodium Group analysis More than two-thirds of the emissions reductions achieved relative to 2005 and roughly 85 percent of the emission reductions achieved relative to current policy occur in the electric power sector. Indeed, power sector emissions decline rapidly once the tax is in place and fall 82–84 percent below 2005 levels by 2030 (figure 2). These reductions are greater than the 30–39 percent reductions from 2005 by 2030 that occur in the current policy scenario. Driving these reductions are the presence of competitive markets and readily available abatement opportunities, such as shifting dispatch from carbon-intensive coal generators to lower-carbon natural gas generators, as well as developing new low- and zero-emitting capacity, such as wind, solar, and natural gas with carbon capture and storage.6 GHG EMISSIONS IMPLICATIONS AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT 14 | CENTER ON GLOBAL ENERGY POLICY | COLUMBIA SIPA • RHODIUM GROUP Figure 2: US electric power sector and all other GHG emissions, 2015-2030 Source: Rhodium Group analysis Emissions from other sectors also decline under the EICDA proposal, but not to the same degree as in the electric power sector. Some sectors, such as buildings and transportation, are slower to respond to a carbon tax because of relatively small changes in consumer prices, slow stock turnover, and other nonprice barriers such as principal-agent problems.7 Some emissions sources, such as in the agriculture and waste sectors, are not subject to the carbon tax and in turn are little changed compared to current policy.8 Taken together, we find that emissions from the rest of the US economy outside the electric power sector decline slowly under the EICDA proposal to 6–9 percent below 2005 levels by 2030. Still, emissions reductions are three times greater under EICDA than the 2–3 percent reduction from 2005 levels under current policy in that year. As mentioned above, EICDA includes emissions targets and a provision that accelerates the annual carbon tax rate increases if taxed emissions from covered fuels are above these targets. Through 2030, we find that the provision in the proposal that adjusts the tax rate to meet emission-reduction targets for taxed emissions is not triggered in our scenarios (figure 3). This analysis focuses on outcomes through 2030 due to the limitations of projecting energy systems over multiple decades. Looking at the results beyond 2030, the RHG-NEMS model shows that reductions in taxed emissions slow substantially and exceed the EICDA’s emission- reduction targets in the early 2030s (figure 3). If this comes to pass, the tax rate in the proposal would increase at $15/ton per year instead of the default $10/ton per year until covered emissions are reduced to a point where they meet or exceed the targets. However, if we are underestimating the technological progress of clean energy or the behavioral responses to the carbon tax,9 or if other policies are adopted that enable more rapid emissions reductions, the emissions targets could be achieved through early 2030 and beyond. AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT ENERGYPOLICY.COLUMBIA.EDU • RHG.COM | OCTOBER 2019 | 15 Figure 3: EICDA taxed emissions and emissions reduction targets, 2015-2035 Source: Rhodium Group analysis AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT 16 | CENTER ON GLOBAL ENERGY POLICY | COLUMBIA SIPA • RHODIUM GROUP The price on carbon contained in the EICDA proposal causes the US economy to shift from carbon-intensive energy sources to low- and zero-carbon energy sources. This shift underlies the emissions reductions discussed above. If their products are competitive in global markets, US fossil fuel producers can seek external markets, since exports are not taxed, and our analysis does not assume that comparable policies are put in place by US trading partners. Meanwhile, energy prices for all consumers rise to reflect the carbon tax. In turn, energy expenditures increase relative to current policy. Energy Production Implications Looking across all US fossil fuel production, we find that the carbon tax has the largest impact on coal, because it is the most carbon-intensive fuel. In 2030, coal production is 135–138 million short tons under EICDA, which is a 72–81 percent reduction relative to current policy (figure 4), with remaining coal production predominantly serving consumers in the industrial sector.10 We find that coal exports are roughly the same under EICDA as they are under a current policy scenario. US oil production is essentially unchanged under EICDA compared to a current policy scenario. Fuel demand is lower under the carbon tax, but this translates into a reduction in net petroleum imports rather than a change in production. Natural gas production in 2030 is projected to be similar under EICDA and under current policies in the high-energy cost scenario. In the low-energy cost scenario, projected natural gas production in 2030 is five billion cubic feet per day lower under EICDA due to deployment of renewable natural gas. This low-carbon alternative captures market share from fossil natural gas in response to the carbon tax. Figure 4: US fossil fuel production, 2030 Source: Rhodium Group analysis ENERGY IMPLICATIONS AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT ENERGYPOLICY.COLUMBIA.EDU • RHG.COM | OCTOBER 2019 | 17 Electricity generation from zero- and low-CO2-emitting sources increases under EICDA compared to a current policy scenario. Figure 5 displays the results from our central-energy cost scenario. In 2020, the first year of the tax, we find that conventional natural gas and renewable generation both increase relative to a current policy scenario, displacing coal. By 2030, the US electric system looks quite different under EICDA. Coal generation falls from 18 percent of generation under current policies to 1 percent of generation under EICDA in response to the carbon tax, and generation from natural gas without carbon capture and storage (CCS) declines by a similar amount. They are replaced in large part by renewables (primarily wind and solar), which increase to 44 percent of generation under EICDA; average annual deployment in the 2020s of solar and wind capacity are 20–24 gigawatts (GW) and 9–10 GW, respectively. Also replacing uncontrolled fossil generation are new natural gas-fired power plants equipped with CCS, which provides 16 percent of total generation in 2030. Finally, EICDA causes nuclear generation to retain more of its current market share. While some retirements of nuclear plants will occur regardless of the carbon tax, under EICDA, the remaining nuclear plants are more competitive compared to uncontrolled fossil fuel generators. Depending on cost assumptions, between 4 and 30 GW of nuclear energy capacity retirements are avoided by 2030 due to EICDA, and nuclear energy provides about 16 percent of total generation under EICDA in each of the cost scenarios.11 Figure 5: US electric generation mix, 2020 and 2030 Source: Rhodium Group analysis. Note: Only central-energy cost results are shown. AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT 18 | CENTER ON GLOBAL ENERGY POLICY | COLUMBIA SIPA • RHODIUM GROUP Energy Price Implications The price on carbon in the EICDA proposal increases the cost of fuels and electricity for all consumers across the economy. We focus on prices for two key energy commodities: gasoline and electricity. The carbon tax increases the price of transportation fuels in relation to their carbon intensity. Meanwhile, as consumers respond to price increases, travel demand declines; over time, some drivers choose electric vehicles over internal-combustion vehicles to reduce costs. This reduced demand for gasoline slightly dampens the overall impact of the carbon tax on gasoline prices. In 2020, we find that national average gasoline prices under EICDA are $3.12–$3.14 per gallon, compared to roughly $3.00 per gallon under current policy (figure 6). As the tax rate escalates, gasoline prices increase. In 2030, gasoline costs $4.33–$4.41 per gallon under EICDA, which is roughly 90 cents more per gallon than under current policy in the same year. Figure 6: US average gasoline prices, 2020 and 2030 Source: Rhodium Group analysis In the current policy scenario, national average electric prices rise from a range of 10–11 cents per kilowatt-hour (kWh) in 2020 to 11–12 cents per kWh in 2030 (figure 7). Under the EICDA proposal, wholesale electric prices increase as EICDA causes the cost of generation from fossil fuel–fired power plants to rise, leading electric markets to shift away from carbon-intensive resources. These higher costs flow through to retail rates. In 2020, average retail prices are 11–12 cents per kWh, or 9–10 percent higher than the current policy scenario; in 2030, prices are 14–15 cents per kWh, 25–27 percent higher than the current policy scenario. Consumers respond to higher prices by reducing demand, so the impacts on national average electric bills are smaller. In 2020, average bills are roughly 4–5 percent higher under EICDA than under current policy, and in 2030, bills are 22–24 percent higher. AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT ENERGYPOLICY.COLUMBIA.EDU • RHG.COM | OCTOBER 2019 | 19 Figure 7: National average electric prices, 2020 and 2030 Source: Rhodium Group analysis AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT 20 | CENTER ON GLOBAL ENERGY POLICY | COLUMBIA SIPA • RHODIUM GROUP The tax generates substantial new revenue for the federal government. We estimate carbon tax gross revenue of $72–$75 billion in 2020. Because of the increasing tax rate, annual carbon tax gross revenue increases throughout the decade and reaches $403–$422 billion in 2030. Carbon tax revenue is distributed in the form of a monthly dividend payment to anyone with a Social Security number or a tax identification number. An exception is for administrative expenses, which we assume account for 1 percent of carbon tax revenue each year.12 Eligible individuals 19 years and older (adults) receive a full dividend, while those 18 years and younger (children) receive a half dividend. Figure 8 shows our estimates of the annual dividends, which are about $250-$260 for each adult and $125-$130 per child in 2020, rising steadily to $1,410- $1,470 for each adult and $705-$735 per child in 2030. Appendix A provides the details of these calculations. Figure 8: EICDA estimated annual dividend payments, 2020-2030 Source: CGEP and Rhodium Group analysis A natural question is how the dividend payments compare to the impacts on consumers of increased energy prices. This is a difficult question to answer, but to inform it, we compare the dividend payments to the increases in per capita energy expenditures, defined as economy- wide expenditures divided by total population. Figure 9 shows that the carbon tax increases per capita energy expenditures steadily through the 2020s, to $5,035 per person in 2030 in the central-energy cost scenario. This is $1,171 more than the comparable value under current policies. Even with a carbon tax rate of over $100 per ton in 2030, per capita energy expenditures do not exceed the recent historical peak of $5,214 during the commodities crisis in 2008. REVENUE AND CARBON DIVIDEND AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT ENERGYPOLICY.COLUMBIA.EDU • RHG.COM | OCTOBER 2019 | 21 Figure 9: US per capita energy expenditures, 2005-2030 Source: Rhodium Group analysis Figure 10 compares the annual dividend payments to the economy-wide increases in energy expenditures caused by EICDA for an average household in 2020 and 2030. It shows that the dividend payments are roughly equal to the increased expenditures, with the dividend payments slightly higher both years for the average household. This is a coarse comparison for numerous reasons: the expenditure figures include energy price changes that are incurred in part by commercial services providers, industrial good providers, and transportation providers, which are likely to be passed on to households to some degree through increases in the cost of goods and services; the tax implications for both the dividend and the expenditures are ignored; and, of course, there will be significant differences in per capita expenditures across regions of the country and income levels. Still, it provides a high- level perspective on how dividends compare to increases in consumer energy costs. AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT 22 | CENTER ON GLOBAL ENERGY POLICY | COLUMBIA SIPA • RHODIUM GROUP Figure 10: Average household dividend payments and changes in household energy expenditures, 2020 and 2030 Source: CGEP and Rhodium Group analysis. Note: Household energy expenditures represent economy-wide energy expenditure increases averaged over all households. Dividends are calculated by taking total revenues of the tax less administrative fees and distributing them evenly among households. Impacts on Federal Government Revenue The two largest changes in federal government revenue and expenditures caused by EICDA are the payments of the carbon tax and the payments of the carbon dividends. We estimate the gross revenue raised by the carbon tax is $72–$75 billion in 2020, rising to $403–$422 billion in 2030. Since virtually all revenues are used to fund carbon dividends, carbon tax-and-dividend proposals are commonly described as “revenue neutral.” However, the actual effect on government revenue is more complicated due to numerous additional policy impacts. First, under EICDA, the dividend payments are taxable income. We estimate that by taxing dividends, the federal government will collect an additional 10–12 percent of the carbon tax revenue each year. This is a progressive tax because the proportion of the tax payments from higher-income individuals is higher than the proportion of the population that is higher-income individuals. However, roughly half of the dividend tax payments come from individuals or households in the 10 or 12 percent marginal tax bracket (see appendix for details on these calculations). Second, like any excise tax, the payments of a carbon tax leave individuals and businesses with less income and thus lower tax payments derived from that income. This is referred to AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT ENERGYPOLICY.COLUMBIA.EDU • RHG.COM | OCTOBER 2019 | 23 by the Joint Committee on Taxation and the Congressional Budget Office as the “Income and Payroll Tax Offset,”13,14 and it implies lower government revenues. Recent analysis of separate carbon tax proposals in 2018 indicate that this offset could reduce government revenue by about 23 percent of the annual carbon tax revenue.15 Finally, there will be other effects that we have not quantified. Consumers will spend the carbon dividend, creating additional taxable income; to some extent, payments of the carbon tax will come in lieu of payments for other goods and services, which means less taxable income; perhaps most importantly, the carbon tax will lead to shifts in economic activity (and thus tax revenue) across the economy. Figure 11 summarizes the effects on federal government revenue. Based on the impacts we can reasonably estimate, EICDA would be expected to cause a small decrease in federal government revenue in the early years of the policy. However, the effects we have not quantified could be large, particularly in the long run, making the net effects on federal government revenue unknown.16 Figure 11: Changes to government revenue from EICDA Source: CGEP analysis AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT 24 | CENTER ON GLOBAL ENERGY POLICY | COLUMBIA SIPA • RHODIUM GROUP How EICDA Compares to Other Proposals In addition to EICDA, several legislative proposals that would put a price on carbon across the US energy system have been put forward in or about the last year. ●The MARKET CHOICE Act proposed by Congressman Brian Fitzpatrick (R-PA) in September 2019 (“Fitzpatrick Bill”) ●The American Opportunity Carbon Fee Act proposed by Senator Sheldon Whitehouse (D-RI) in April 2019 (“Whitehouse Bill”) ●The Stemming Warming and Augmenting Pay Act proposed by Congressman Francis Rooney (R-FL) in July 2019 (“Rooney Bill”) ●The Climate Action Rebate Act proposed by Senator Chris Coons (D-DE) in July 2019 (“Coons Bill”) ●The Raise Wages, Cut Carbon Act proposed by Congressman Dan Lipinksi (D-IL) in July 2019 (“Lipinski Bill”) ●The America Wins Act proposed by Congressman John Larson (D-CT) in August 2019 (“Larson Bill”) In addition, in March 2019, Senator Chris Van Hollen (D-MD) and Congressman Don Beyer (D- VA) introduced legislation that would auction a limited number of carbon dioxide emissions permits and distribute the proceeds as an equal dividend (“Van Hollen Bill”). EICDA and each of these proposals are more similar than different. Each of the policies puts a price on carbon across the energy system, with only minor differences in the emissions sources covered. Each includes a border carbon adjustment intended to protect the competitiveness of US firms, prevent emissions leakage, and encourage other countries to implement their own carbon prices. Each includes measures to protect low-income households from energy price increases they cannot afford. Figure 12 shows the tax rates in each of the carbon tax proposals. EICDA carbon tax rates start lower than the other bills but increase at a rapid annual pace, making it a higher tax rate by the mid-2020s than every other bill except the Coons proposal. Not reflected in figure 12 are mechanisms in many of the proposals (EICDA, Coons, Fitzpatrick, and Rooney) to accelerate the tax rate increase if emissions targets are missed. AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT ENERGYPOLICY.COLUMBIA.EDU • RHG.COM | OCTOBER 2019 | 25 Figure 12: Comparing carbon tax rates across proposals, 2020-2030 Source: CGEP analysis All else equal, higher carbon tax rates drive deeper emissions reductions. However, in the near term, because large emissions reductions are available at a relatively low cost, there is generally diminishing additional emissions reductions for higher carbon tax rates (i.e., doubling the rates is unlikely to produce double the emissions reductions). The other major difference among these carbon pricing proposals is the use of the revenue, displayed in figure 13. EICDA uses the revenue for equal carbon dividends. Other proposals use most revenues for infrastructure or to fund reductions in payroll taxes, and some use a small portion to invest in workers and communities dependent on the fossil fuel industry. All of the proposals set aside at least a portion of revenues for the protection of vulnerable households and communities. AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT 26 | CENTER ON GLOBAL ENERGY POLICY | COLUMBIA SIPA • RHODIUM GROUP Figure 13: Use of carbon tax revenues 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% EICDA Coons bill Fitzpatrick bill Larson bill*Lipinski bill Rooney bill Whitehouse bill* Infrastructure Transition Assistance Payments to Low- and Middle-Income Households Infrastructure Adaptation and R&DLow-Income Assistance General Fund Infrastructure Adaptation, R&D & Other Administrative Costs Payroll Tax Redeductions Social Security Payments Payroll Tax Credits Low-Income Assistance Social Security Payments Payroll Tax Redeductions Low-Income Assistance Adaptation and R&D General Fund Administrative Costs Dividends to Low- and Middle-Income Households Innovation Carbon Dividends Transition Assistance Veterans Benefits Social Security Payments Grants to States Source: CGEP analysis *Larson and Whitehouse bills’ revenue divisions are estimated; exact values will vary by year. Finally, much has been made of the potential to swap a carbon tax for the elimination of regulations on the theory that such a trade would be appealing to the industry and certain regulations will become fully or partially redundant upon implementation of a price on carbon.17 However, as shown in table 1, the differences across proposals in this regard are relatively minor thus far. The Coons, Larson, Van Hollen, and Whitehouse proposals do not change any existing regulations or authorities. Along with the Lipinski and Rooney proposals, EICDA suspends EPA authority to regulate CO2 emissions from stationary sources; such regulations may be redundant to a policy such as EICDA.18 The Fitzpatrick proposal suspends the same EPA regulations and repeals the federal fuel excise taxes. Table 1: Policy modifications EICDA, Lipinksi, and Rooney bills Fitzpatrick bill Coons, Larson, and Whitehouse bills Suspends EPA regulations of stationary-source CO2 emissions covered by the carbon tax ●Suspends EPA regulations of stationary-source CO2 emissions sources covered by the carbon tax; ●Repeals fuel excise taxes None AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT ENERGYPOLICY.COLUMBIA.EDU • RHG.COM | OCTOBER 2019 | 27 Our analysis focuses on the impacts of EICDA on emissions, energy markets, and revenues. The broader literature on carbon tax impacts provides certain robust findings that are likely to apply to EICDA as well. The following sections describe the literature’s findings on a few key issues beyond the scope of our analysis. Macroeconomic Impacts A large-scale shift from high-carbon to low-carbon energy sources will have a wide-ranging effect on the US economy. A price on carbon is a uniquely cost-effective policy tool because it incentivizes emissions reductions wherever and however they can be achieved at the lowest cost. That is why economists almost universally support putting a price on carbon.19 For years, economists have been studying the potential economic impacts of carbon pricing policies. Model projections suggest small and typically negative impacts of a carbon tax on near-term macroeconomic outcomes like gross domestic product (GDP) compared to a current policy scenario. These studies are highly imperfect—they nearly always exclude the economic benefits of avoided regulations and reduced emissions, as well as any changes in technological progress stimulated by the tax. Economic studies of carbon prices may be most useful in highlighting the trade-offs among policy design choices. Among carbon pricing policies, how the carbon tax revenue is used is the major differentiating factor in macroeconomic outcomes. Economic studies show that macroeconomic outcomes are best when carbon tax revenues are used in ways that correct preexisting inefficiencies in the US economy. For example, using revenue to reduce payroll taxes or income taxes would not only return the revenues to taxpayers but also provide financial incentives for increased work. In contrast, using revenues for carbon dividends, as contemplated by EICDA, returns the carbon tax payments to eligible recipients without correcting existing distortions in the economy, so economic studies typically show slightly worse macroeconomic outcomes for carbon tax policies that use revenues for carbon dividends. According to recent empirical estimates, differing revenue uses could lead to differences in GDP in the range of 0 to 0.5 percent after 10 years of policy implementation.20 Impacts on Low- and Middle-Income Households The impacts on individual households of a price on carbon vary based on the characteristics of the household. Of particular concern are the consequences of rising energy prices for low- and middle-income households. One study estimated that in 2015, nearly one-third of US households had trouble either paying energy bills or maintaining adequate heating or cooling service.21 Many low-income households (particularly retirees) receive support from Social Security and other government assistance programs in which payments are tied to price levels (i.e., they increase with inflation); when the carbon tax increases energy prices, support from IMPACTS NOT DIRECTLY MODELED AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT 28 | CENTER ON GLOBAL ENERGY POLICY | COLUMBIA SIPA • RHODIUM GROUP these government programs will also increase. But this only partially shields households from higher prices. Carbon tax revenue can be used in ways that offset these adverse impacts. EICDA’s use of revenues for equal carbon dividends creates a highly progressive policy: on average, low- and middle-income households receive more in rebates than they pay out in increased prices of carbon-emitting services and products, while richer households pay more in carbon taxes than they receive in carbon dividends.22 In addition, EICDA proposes an “advanced carbon dividend” paid to individuals before the first collection of the tax, which should avoid concerns associated with the limited liquidity of low-income households (i.e., the potential difficulties of paying the higher energy prices before receiving the carbon dividends). Carbon tax proposals that do not use revenues for carbon dividends typically compensate low-income households in other ways, for example, by earmarking a portion of the carbon tax revenue for monetary transfers to low-income households. Finally, as lower-income and minority households suffer disproportionally from the impacts of criteria air pollutants, such as SO2, mercury, particulate matter, and ozone, they are likely to benefit disproportionately from pollution mitigation. While this paper does not explicitly model cobenefits, studies have shown that reducing air pollutants can significantly reduce morbidity and mortality.23 Coal power is a key source of these pollutants. Under EICDA, our modeling finds that in the power sector, sulfur dioxide and mercury emissions would be reduced by over 95 percent and emissions of nitrogen oxides would be reduced by about 75 percent in 2030 compared to current policy. Regional Impacts Nationwide results mask significant subnational variation in the impacts of a carbon tax. A region’s carbon intensity, the availability of cheap low-carbon substitutes, and the characteristics of household energy expenditures across different geographic locations will all influence the impacts of the carbon tax. Shifting behavior and economic incentives will impact industries differently. The most acute impact of this shift will be felt within communities focused on mining and burning coal for power production, because our analysis of EICDA shows that the use of coal in the US power sector is virtually eliminated by 2030. The coal industry is relatively small in the United States: roughly 161,000 workers were employed in the coal mining, coal transport, and coal-fired electric-generation sectors in 2018.24 But coal production is highly geographically concentrated. Towns and counties across Appalachia and the Western United States are dependent on the coal industry for jobs and tax revenues. In the absence of a large-scale effort to support these regions, any serious climate-mitigation policy would have significant adverse consequences on the coal industry and thus on coal-dependent regions.25 Carbon tax revenues can be used in ways to compensate adversely affected regions of the country. Proposals commonly include grants to states to assist vulnerable households and regions. Additionally, billions of dollars in annual investments to revitalize coal communities could be funded with a very small portion of carbon pricing revenue. Using all revenue for carbon dividends will sacrifice such opportunities, although such programs could potentially be funded with accompanying legislation. AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT ENERGYPOLICY.COLUMBIA.EDU • RHG.COM | OCTOBER 2019 | 29 This appendix provides a step-by-step description of the methodology used to estimate the annual carbon dividends and the government revenue from taxing the carbon dividends as income. The starting point is the estimates from the RHG-NEMS model of the annual payments of the carbon tax under EICDA. The EICDA proposal generates roughly $72–$75 billion in gross revenue in 2020. Because of the increasing tax rate, annual carbon tax revenue increases $422 billion in 2030 in the central-energy cost scenario. EICDA sets aside a small portion of the carbon tax revenues for administrative expense; we assume 1 percent of the total annual revenues is used for administrative expenses. The remainder of the revenue is allocated for equal carbon dividends, with eligible adults (19 years and older) receiving a full share and eligible children receiving a half share. We use data from the RHG-NEMS model and the US Census to estimate the total US population by age.26,27 Individuals are eligible for the carbon dividend if they have a Social Security or taxpayer identification number. As a proxy for the portion of the total population that is ineligible for the carbon dividend, we use data on the unauthorized immigrant population in the United States from the Pew Research Center.28 We estimate a 2018 population of eligible adults of 241 million and eligible children of 77 million. We assume the population grows between 0.7 and 0.8 percent per year using data from RHG-NEMS. The annual carbon dividends for adults and children are then calculated using the annual estimates of the total revenue (after administrative expenses) and eligible adults and children. The Tax Policy Center29,30 provides the data of distribution of tax units by marginal tax bracket, presence of children, and marital status as of December 2018. Using these data and our estimates of the total population of adults and children, we estimated the number of adults and children within each marginal tax bracket. Finally, we estimate the total carbon dividend payments to individuals within each marginal tax bracket and then apply the marginal tax rate to estimate the government revenue from the taxation of dividends. Total government revenues from the taxation of dividends divided by the total carbon tax payments (i.e., gross revenues from the carbon tax) is roughly 10–12 percent in each year. Figure A1 displays the distribution of eligible adults and the taxation of carbon dividends by marginal tax bracket. These distributions show that like the income tax in the United States, the taxation of the carbon dividends is progressive, with higher-income households paying more than proportionately. However, the majority of income comes from households in the 12 and 22 percent tax brackets. APPENDIX A: METHODOLOGY FOR ESTIMATING THE CARBON DIVIDEND AND ITS TAXATION AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT 30 | CENTER ON GLOBAL ENERGY POLICY | COLUMBIA SIPA • RHODIUM GROUP Figure A1: Distribution of eligible adults and carbon dividend taxation revenue Source: CGEP analysis AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT ENERGYPOLICY.COLUMBIA.EDU • RHG.COM | OCTOBER 2019 | 31 1. For more information on RHG-NEMS, see https://rhg.com/impact/us-climate-service/. 2. John Larsen, Kate Larsen, Whitney Herndon, Peter Marsters, Hannah Pitt, and Shashank Mohan, Taking Stock, June 28, 2018, https://rhg.com/research/taking-stock-2018/. 3. Larsen et al., “Technical Appendix,” Taking Stock. 4. For a complete description of all input assumptions and model details, see https:// rhg.com/research/taking-stock-2018/ and https://rhg.com/research/energy-and- environmental-implications-of-a-carbon-tax-in-the-united-states/. 5. Larsen et al., Taking Stock. This assumption is done to simplify the analysis. If LULUCF (Land Use, Land-Use Change, and Forestry) trends follow the pessimistic pathway, then net GHG results will be higher than reported here. 6. Two-thirds of US electric load is served by competitive wholesale electric power markets where generators directly compete on costs. See Federal Energy Regulatory Commision, Electric Power Markets: National Overview, April 10, 2019, https://www.ferc.gov/market- oversight/mkt-electric/overview.asp. The remaining electric load is served by integrated utilities and other entities, such as cooperatives and municipal utilities. While this subset of the electric sector does not directly compete on costs, these organizations are still incentivized to provide least-cost service to consumers. A carbon tax will drive operations and investment decisions to shift away from carbon-intensive generation in a similar way to what’s expected in competitive markets. 7. We assume consumers respond to carbon taxes like they respond to other comparable energy price changes. If consumers are more responsive to the more permanent and visible price changes caused by a carbon tax, energy consumption and energy bills will be lower than we project. 8. For a comprehensive discussion of sectoral emissions implications of carbon taxes, see John Larsen, Shashank Mohan, Peter Marsters, and Whitney Herndon, Energy and Environmental Implications of a Carbon Tax in the United States, July 17, 2018, https://rhg.com/research/ energy-and-environmental-implications-of-a-carbon-tax-in-the-united-states/. 9. Indeed, there are reasons to believe that most energy system models, including RHG- NEMS, may underestimate the potential emissions impacts of a carbon tax because, for example, models cannot anticipate the cost and performance of future low-carbon technologies that in many cases have yet to reach commercial scale. They also do not capture the accelerated innovation in low-carbon technologies caused by the carbon tax. See Noah Kaufman, Michael Obeiter, and Eleanor Krause, “Putting a Price on Carbon: Reducing Emissions,” World Resources Institute Issue Brief, January 2016, (Washington: World Resources Institute). NOTES AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT 32 | CENTER ON GLOBAL ENERGY POLICY | COLUMBIA SIPA • RHODIUM GROUP 10. The broad range of coal production under current policy reflects uncertainty around future natural gas prices and the cost of renewable energy technologies. Both factors can materially change the share of coal generation in the electric power sector by 2030. 11. 2030 nuclear capacity under current policies is projected to be between 58 and 84 GWs, depending on energy costs. Under EICDA, 88 GWs of nuclear capacity is projected to be in operation in 2030 regardless of energy costs. 12. According to our estimates, 1 percent of gross carbon tax revenue would provide an average of $2.7 billion per year for administrative expenses over the first decade. To help put this in context, $2.7 billion is about one-third of the sum of 2017 administrative expenses for Social Security payments ($3.8 billion for the Old Age and Survivors Insurance Trust Fund) and IRS enforcement costs ($4.7 billion). For details, see the Social Security Administration website at https://www.ssa.gov/oact/STATS/admin.html and the IRS website at https://www.irs.gov/statistics/irs-budget-and-workforce. 13. Joint Committee on Taxation, The Income and Payroll Tax Offset to Changes in Excise Tax Revenues (JCX-59-11), Dec. 23, 2011, https://www.jct.gov/publications. html?func=startdown&id=4378. 14. G. Thomas Woodward, “The Role of the 25 Percent Revenue Offset in Estimating the Budgetary Effects of Legislation,” Congressional Budget Office Economic and Budget Issue Brief, Jan. 13, 2009, https://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/96xx/ doc9618/01-13-25percentoffset.pdf. 15. Note that the assumption traditionally used by the Congressional Budget Office for the income and payroll tax offset is 25 percent, which does not take into account the potential for increased revenue for taxable dividends. See Joseph Rosenberg, Eric Toder, and Chenxi Lu, Distributional Implications of a Carbon Tax, July 17, 2018, https://energypolicy.columbia. edu/research/report/distributional-implications-carbon-tax. 16. John W. Diamond and George R. Zodrow, The Effects of Carbon Tax Policies on the US Economy and the Welfare of Households, July 18, 2018, https://energypolicy.columbia.edu/ sites/default/files/pictures/CGEP_Effects_of_CarbonTaxPolicies_US_Economy_Welfar_ of_Households.pdf. 17. Justin Gundlach, Ron Minsk, and Noah Kaufman, Interactions between a Federal Carbon Tax and Other Climate Policies, March 6, 2019, https://energypolicy.columbia.edu/research/ report/interactions-between-federal-carbon-tax-and-other-climate-policies. 18. Ibid. 19. IGM Forum, Carbon Taxes II, Dec. 4, 2012, http://www.igmchicago.org/surveys/carbon-taxes-ii. 20. Diamond and Zodrow, The Effects of Carbon Tax Policies. 21. Lauren Ross, Ariel Drehobl, and Brian Stickles, “The High Cost of Energy in Rural America: Household Energy Burdens and Opportunities for Energy Efficiency,” ACEEE, July, 2018, https://aceee.org/sites/default/files/publications/researchreports/u1806.pdf. AN ASSESSMENT OF THE ENERGY INNOVATION AND CARBON DIVIDEND ACT ENERGYPOLICY.COLUMBIA.EDU • RHG.COM | OCTOBER 2019 | 33 22. Diamond and Zodrow, The Effects of Carbon Tax Policies. 23. Mercedes Bravo, Keita Ebisu, Francesca Dominici, Yun Wang, Roger Peng, and Michelle Bell, “Airborne Fine Particles and Risk of Hospital Admissions for Understudied Populations: Effects by Urbanicity and Short-Term Cumulative Exposures in 708 US Counties,” Environmental Health Perspectives 125 (April 2017), 594–601, https://ehp.niehs. nih.gov/doi/full/10.1289/EHP257. 24. National Association of State Energy Officials and the Energy Futures Initiative, 2019 US Energy and Employment Report, March, 2019, https://www.usenergyjobs.org. 25. Adele C. Morris, Noah Kaufman, and Siddhi Doshi, The Risk of Fiscal Collapse in Coal- Reliant Communities, July 15, 2019, https://energypolicy.columbia.edu/sites/default/files/ file-uploads/RiskofFiscalCollapseinCoalReliantCommunities-CGEP_Report_080619.pdf. 26. For total population, see “United States Quickfacts,” US Census, July 1, 2018, https://www. census.gov/quickfacts/fact/table/US/PST045218. 27. For population by age, see Estimates of US Population by Age and Sex: April 1, 2010, to July 1, 2017, US Census, April 19, 2018, https://www.census.gov/newsroom/press- releases/2018/pop-characteristics.html. 28. Jeffrey S. Passel and D’Vera Cohn, Unauthorized Immigrant Population: National and State Trends, 2010, Feb. 1, 2011, http://www.pewhispanic.org/2011/02/01/unauthorized- immigrant-population-brnational-and-state-trends-2010/. 29. Urban-Brookings Tax Policy Center, Number of Tax Units by Tax Bracket and Presence of Children, 2018, Dec. 10, 2018, https://www.taxpolicycenter.org/model-estimates/baseline- distribution-tax-units-tax-bracket-and-presence-children-december-2018-0. 30. Urban-Brookings Tax Policy Center, Number of Tax Units by Tax Bracket and Filing Status, 2018, Aug. 23, 2018, https://www.taxpolicycenter.org/model-estimates/baseline- distribution-tax-units-tax-bracket-august-2018/t18-0075-number-tax-units. 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