Newly proposed climate legislationAddressing climate change is a growing priority for many Politicians and concerned Citizens.  Most recently Senators Sanders and Boxer have proposed the Climate Protection and Sustainable Energy Acts to reduce U.S. carbon emissions and end subsidies for fossil fuels.  U.S. carbon emissions would be reduced by taxing fossil fuels consumption, and the new tax revenues would be used to support projects that may benefit the economy’s transition towards renewable energy. 

Analysis of the 2013 Climate Protection and Sustainable Energy Acts finds that these proposed regulations cover a broad range of initiatives beyond just climate related issues.  Can the proposed Senate Climate Legislation reasonably reduce U.S. carbon emissions and improve the economy by taxing carbon and reducing fossil fuels subsidies?

Climate Protection and Sustainable Energy Acts Benefits Summary

The following summarizes Senators Sanders/Boxer Climate Legislation published benefits:  

  • Prices Carbon – enacts a $20 per metric ton (MT) fee or tax on carbon emissions from fossil fuels consumption and increases this ‘carbon tax’ by 5.6%/yr. 
  • Energy Projects Funding – allocates a (large) portion of collected carbon taxes to new efficiency, infrastructure, and R&D projects.
  • Carbon Tax Rebate Program – redistributes 3/5ths of the carbon taxes to Residents for off-setting possible (direct or indirect) increases in fossil fuels or power costs.
  • International Trade – applies carbon taxes to all imports from countries that do not have similar climate protection programs.
  • Hydraulic Fracturing – Federally regulates all natural gas production from shale deposits on private, state and federal lands.
  • Pays Down the Debt – ends fossil fuels subsidies and extends renewable energy tax incentive programs.  Unused carbon taxes should help pay down the Federal deficit; $300 billion estimate over 10 years.

Detailed Climate Protection Act (CPA) Analysis and Impacts

The above summary highlights many benefits of the proposed CPA legislation.  The actual bill is, of course, significantly more detailed and complex than the summary.   The following highlights additional proposed CPA legislation details and likely impacts:

  • Carbon Fee (Tax) – the summary indicates only Industrial & Commercial sectors will be primarily affected by the carbon taxes.  This implies Residential-consumers will not be taxed for direct use of the fossil fuels (motor & heating fuels or electric power).  The actual bill (Title I, Sec. 195(1)), however, clearly states carbon taxes apply: “When combusted or otherwise used”, which includes Residential-consumers directly paying carbon ‘consumption taxes’.  Consumers will pay a combination of ‘direct’ fossil fuel consumption taxes and ‘indirect’ manufacturing carbon taxes that will be added to the costs of all goods and services that consume fossil fuels.
  • Projects Funding – the bill (Sec. 197(b)) states: “The Treasury shall transfer…50 percent (of total carbon taxes based on imports) received during the preceding fiscal year for use of" (funding): U.S. climate adaption, infrastructure, environmental protection and wild life projects, and international adaptation projects.  Unfortunately none of these project categories appears to directly reduce U.S. carbon emissions.
  • Carbon Tax Rebates – the bill (Sec. 102) states: “Appropriates to the EPA…3/5 of the (total carbon tax based on domestic consumption) amounts received in the Treasury…to provide monthly residential rebate(s)”.  This effectively empowers the EPA to decide how 60% of the collected carbon taxes will be distributed to U.S. Residents.  The EPA is further required to disburse rebates using existing public (assistance?) payment programs.  Even though the Climate Legislative summary states that ‘all’ U.S. Residents will receive these monthly rebates, the actual bill does not specifically require providing rebates to all Residents.  The EPA’s new authority to develop-implement the “most progressive way…to offset cost increases” can involve ‘redistribution’ of the collected carbon taxes from the Middle and Upper (income) Classes to the less advantaged Lower Class residents.
  • Hydraulic Fracturing – the bill Title III effectively gives the EPA nearly unlimited authority to regulate the production of natural gas from shale formations.  The new authority appears to supersede all current State regulatory agencies’ authorities to administrate and manage natural gas production on private and state lands.

Detailed Sustainable Energy Act (SEA) Analysis and Impacts

The following highlights additional proposed SEA legislation details and likely impacts: 

  • Fossil Fuel Subsidies – the bill (Sec. 102-104) effectively ends all subsidies for off-/on-shore oil & gas production and coal production.  This action will negatively impact smaller Independent Companies much more than Major Companies/Corporations.
  • Fossil Fuels R&D – the bill (Sec. 107-109) shuts down the Office of Fossil  Energy R&D and Innovative Technologies, which includes ‘carbon capture and sequester’ (CC&S) research.  This CC&S R&D shutdown action appears to be inconsistent with reasonably comprehensive climate legislation.
  • Other Foreign and Domestic Funding – the bill (Sec. 111-112) ends all funding for overseas and export-import fossil fuels projects or transportation operations, including eliminating the funding of U.S. Rail or (marine) Ports that transport and receive coal, oil or natural gas (LNG).  This action increases operating costs of most Railroads and Ports that primarily transport and import-export non-fossil fuels, which can substantially harm these critical U.S. infrastructures. 
  • Tax Deductions – the bill (Sec. 113/7875) eliminates numerous income tax deductions including all forms of existing tax credits for coal, oil & gas development/production, reserves depletion, asset depreciation and amortizing environmental controls & operating expenses.  In addition the credits for CC&S are eliminated.  In other words, the bill eliminates normal operating expenses and capital depreciation/amortization deductions generally applied to all U.S. Businesses.  Once again smaller Independent Companies will be more negatively impacted than Major Companies/Corporations.
  • Other Tax Deductions – the bill (Sec. 114-118) eliminates credits for ‘alternative fuels’ (CNG/LNG/LPG), natural gas infrastructure, hard minerals (which could apply to all metals & other minerals), capital gain royalties, and on and on.  In other words the bill eliminates numerous tax deductions for non-petroleum oil alternative fuels, which have been much more successful in reducing the U.S. oil imports than electric vehicles and most other renewable alternatives to petroleum fuels.  This action directionally reduces U.S. energy security.

The bottom line is that the SEA is extremely anti-fossil fuels, without apparent concerns for overall U.S. economy or security impacts.  It will substantially increase expenses, reduce profit margins, and the net value of many fossil fuel capital assets.  Big Oil & Gas will make adjustments as needed to preserve their domestic assets where feasible or relocate operations to foreign countries.  It’s the smaller, Independent fossil fuels Energy Companies that will suffer most, and many could eventually become bankrupted and shutdown.  The magnitude of smaller, Independent Energy Company job losses and negative impacts on local and the overall economy could be very significant.

Climate Legislation Performance – this proposed legislation is advocated to substantially reduce U.S. total carbon emissions and cost effectively transition the U.S. economy to cleaner energy.  Unfortunately the likely effectiveness of this proposed Climate Legislation has many potential gaps and areas of questionable performance.  These most contentious performance issues are: 

  1. Carbon Tax and Rebate Effectiveness – how significant will the new carbon tax be on actual Consumer behavior?  Based on $20/MT carbon, this tax would initially increase the cost of petroleum motor fuels, heating fuels and electric power by 5%-8%.  After applying a 60% ‘rebate’ the added cost to the average Residential-consumer fossil fuels-power costs will only increase by 2%-3%.  The proposed carbon tax does not appear to be very significant.  Based on typical U.S. energy consumption ‘price-demand elasticity’, the actual reduction in U.S. Consumer fossil fuels consumption will likely be relatively insignificant.
  2. Carbon Emission Reduction Performance – the Climate Legislation summary states that U.S. total carbon emissions should be reduced by about 20% from 2005 levels by 2025.  Assuming the small increase in fossil fuels costs actually reduces consumption at this almost 1%/yr. level, this indicates the proposed Climate legislation should reduce total U.S. carbon emissions by about 42 MMT/yr.  Since the end of 2007 (and beginning of the recent economic recession), U.S. total actual carbon emissions have declined from 6023 MMT/yr. to about 5300 MMT/yr. (2012).  These data indicate that before the proposed Climate Legislation, the combination of existing energy regulations, increased natural gas and the economy’s performance, has reduced actual total U.S. carbon emissions by about 145 MMT/yr. over the past 5 years.  Measuring the actual effectiveness of the proposed Climate Legislation will be difficult and likely very small compared to recent actual carbon emission reductions.
  3. Average Household Costs – The CBO estimates the Climate Legislation will generate $1.2 trillion carbon taxes over 10 years.  The average $120 billion/yr. carbon taxes would increase current average U.S. Household’s annual expenses by about $1000/yr.  After rebates (assuming all Households qualify), this cost will be reduced to about $400 dollars per Household-yr.
  4. Eliminated Fossil Fuels Subsidies – the loss of subsidies will increase the Coal, Oil and Natural Gas Industries’ expenses by up to about $15 Billion/yr.  These costs will most likely be passed on to all fossil fuels Consumers.  This would increase average Household energy costs by about an additional $130/yr.  This raises average Household energy costs to $530/yr. after rebates.

Increasing average Household expenses by $530/yr. may not be too onerous for many Residents.  This, however, does not represent the total added costs average Residents will face from this proposed Climate Legislation.  All Residents will pay for the carbon taxes associated with imports from Developing Countries, such as China.  Another major cost (or loss of income) will come from the loss of subsidies via the SEA that will cause reduced equity values for all Independent and Major fossil fuels Companies/Corporations.  This lost equity value will negatively impact stock market values, which can also negatively impact many Individuals and average Households savings and retirement accounts.  In addition, the loss of smaller, Independent Energy Companies jobs will further and very negatively affect many Individuals and Households around the country.

Can the Proposed Climate Legislation Become Reasonably Effective? – U.S. carbon emissions can feasibly be reduced by a carbon tax regulatory strategy.  If Politicians truly want to reduce actual U.S. carbon emissions significantly, a number of changes to the proposed Senate Climate Legislation are needed: 

  1. Increase the Carbon Tax Level – to actually reduce Consumer’s fossil fuel consumption behavior the carbon taxes must be increased substantially above $20/MT.  This likely means increasing the carbon tax by 5-10 times (up to $200/MT).  This would effectively double all fossil fuels/power prices; similar to the levels found in the European Union.
  2. Eliminate the Rebate – no rebates should be allowed; rebates directionally increase fossil fuels consumption.  If the objective is to tax higher income Middle-Upper Class Residents and redistribute the money to lower income Residents, this policy should be legislated through a separate and more transparent (non-climate) bill.
  3. Gradually Reduce Fossil Fuels Subsidies – to prevent significantly damaging the economy, increasing unemployment and adversely impacting many Residents’ retirement-savings accounts, the fossil fuels subsidies should be gradually reduced over a period of years.
  4. Other Improvements – non-climate issues such as hydraulic fracturing, eliminating rail/port infrastructure subsidies, subsidizing new energy projects, etc. that are not directly related to reducing U.S. carbon emissions should be addressed through separate bills. 

Consider More Effective Carbon Emission Reduction Alternatives – addressing climate change is very important to by many Residents and Organizations.  Unfortunately the Sanders/Boxer proposed Climate Legislation appears to be largely a ‘tax-and-spend’ bill with ‘feebates’, which will very likely be ineffective towards significantly reducing U.S. carbon emissions.  Rather than continuing to pursue this carbon tax regulatory strategy Legislators should seriously consider building on historic energy regulations that have very successfully reduced U.S. carbon emissions in recent years.  These include further energy efficiency increases (CAFE, Residential sector, etc.), supporting increased natural gas to replace coal, and possibly expanding renewable energy standards. 

In Conclusion – transitioning the U.S. economy from current fossil fuels to lower carbon alternatives will take time and have significant costs for average Residents.  We all have choices to make.  Do we achieve this transition in a smart-cost effective manner that supports a healthy economy needed to fund the development of renewable energy supplies and technologies, or do we blindly support ineffective regulatory strategies such as arbitrarily increasing the costs and reducing the supply of fossil fuels without concern for impacts on the overall economy or actual carbon emission reductions?  The Sanders/Boxer Climate Legislation likely achieves the latter.