US Carbon Price Still (Almost) Impossible

At face value, it would seem the perfect time to introduce a carbon price or other unpopular energy reforms in the US, now that oil prices have sunk and consumers would barely notice new costs tacked onto their fuel bills. Many economists would agree, since it has rarely been possible to impose new fuel consumption charges during times of high oil prices — much less a carbon tax or cap-and-trade system. Yet imposing any kind of carbon price in the US is still next to impossible, even under today's low pump prices, given the polarization in Washington and a lack of attention to palatable legislative proposals. Several Asian governments, by contrast, have been able to move more quickly to take advantage of lower oil prices to enact fuel subsidy and tax reforms — increasing charges on fuel consumption, while slashing or ending subsidies that artificially inflate demand and tailpipe emissions.

In the US, there are still some calling for a carbon price — former US Treasury Secretary Lawrence Summers, for one, recently argued in a Financial Times op-ed that, with the fall in oil prices, the case for carbon taxation had turned from "compelling" to "overwhelming." But they tend to be lonely sounding voices, and there seems to be a simple lack of political will to enact a carbon price regardless of price trends. That's not surprising, perhaps, given that the US governance system was structured centuries ago to maintain the status quo unless a big consensus emerges for reform. With Republicans now holding majorities in both houses of Congress for the next two years, a carbon tax or cap-and-trade system is unlikely to gain even consideration at the committee level, with Republicans seeing it as too much of an economic blow. There are several ways a carbon price could be made more appealing to Republicans, but few were a major part of any of the bills that gained serious traction in the past, such as the Waxman-Markey bill that died in the Senate in 2009, or the Lieberman-Warner bill that narrowly failed in the Senate a year earlier.

Some economists argue that carbon pricing presents an opportunity for governments to collect revenues on something they wish to curtail — heat-trapping greenhouse gas emissions — while reducing taxes on income in order to encourage economic growth. In Canada, the province of British Columbia did just that several years ago with a revenue-neutral tax that was offset by a reduction in personal and corporate income taxes. In the US, a long-running yet bipartisan push for corporate tax reform could be an opportunity for similar reforms. Another option would be for revenues generated from a carbon price to be returned to the economy through rebates or subsidies.

If such safeguards were worked into US carbon pricing legislation sometime down the road, however, it could be more appealing to Republican politicians who are primarily concerned about protecting the economy and business activity, while also securing some support from low-income households, normally a stronghold for Democrats. The less disposable income a household has, the harder it is to swallow the extra costs that energy providers would pass along to pay for a carbon price. Several months after oil prices hit an all-time high of $147 per barrel in July 2008, the Washington-based Urban Institute released data showing that the average US commuter below the poverty line spent around 8.6% of their wages on fuel when gasoline surpassed $4 per gallon — more than six percentage points above that spent by consumers above the poverty line. High fuel costs also increase the price of heavily transported products, including food, while putting a squeeze on businesses with large fuel bills.

So, what are the options for President Barack Obama — assuming he would like to take advantage of the favorable oil price environment and put in place some fiscal measures, both to burnish his environmental legacy and help the way to a global climate deal at Paris talks in December?

One option would be to increase the US' gasoline and diesel taxes. US fuel taxes haven't been updated in more than two decades and aren't indexed to inflation, and a resulting shortfall in revenues is bankrupting the US Highway Trust Fund, a key source of federal funding for interstate transit projects and road maintenance. Increasing the tax could curb fuel consumption and tailpipe emissions — perhaps not as forcefully as a carbon tax indexed to inflation or higher, but without the same degree of controversy. Europe has been applying considerable excise duties on transportation fuels for decades, which arguably contribute to the continent's leading fuel economy performance — they currently amount to around 60 eurocents (70¢) per liter in the EU's main countries, which translates into $2.65/gallon and $365 per ton of CO2, including value-added tax. Some US lawmakers, including a few Republicans, are beginning to rally behind an increase in the fuel tax, but any changes would require months of negotiations.

In Asia, some governments have been able to move more swiftly with such measures since oil prices started plummeting. China has increased the consumption tax on gasoline by 12% to 1.12 yuan (18¢) per liter, or 17% of the price of gasoline at the pump, while the levy on diesel was hiked 17.5% to 0.94 yuan/liter, or about 14% of its retail price. Fossil fuel subsidies, which are said to artificially inflate fuel demand, are being targeted for reduction in four Asian countries that have typically offered liberal subsidies — Indonesia, India, Malaysia and Thailand. In Indonesia, for example, where the government has spent huge sums on subsidies in the past, new President Joko Widodo has raised subsidized fuel prices by more than 30%, cut domestic fuel tariffs and stopped subsidizing low-octane gasoline.

If a hike in US fuel taxation also proves politically impossible, Obama's options are essentially limited to implicit pricing — the imposition of regulations that effectively impose a carbon price by causing companies and consumers to invest in more expensive technologies to reduce emissions, an approach that can often largely bypass Congress. This has already been his path since cap-and-trade legislation died in 2009. Sweeping rules on greenhouse gas emissions by new and existing power plants proposed by the Environmental Protection Agency represent one such method, as do mandates on the use of renewable power or biofuels. The trouble is that this is also a more expensive, less efficient route to the same end than either taxation or cap-and-trade. For example, cost of electricity data prepared by Energy Intelligence's EI New Energy suggests that imposing a renewable energy standard in a gas-rich US region is equivalent to an $80/ton carbon price (NE Jun.19'14). Similarly, a recent study by the OECD, which compared electricity and transport policies in a sample of member countries, found that instruments such as feed-in tariffs, capital subsidies, fuel mandates or emissions standards are more costly than explicit carbon pricing, sometimes by a factor of 10 or more (NE Nov.28'13). Yet advice about rational policymaking rarely meshes with the reality of political gridlock — and Obama, in particular, seems determined to leave an environmental legacy, regardless of how he delivers it.

Lauren Craft is the editor of EI New Energy, Energy Intelligence's publication on carbon, renewables and transport innovation. Philippe Roos is a senior reporter and subject matter specialist for alternative energy at Energy Intelligence.