Policy Studies Energy and Environment

Using the Clean Power Plan’s carbon fee option to offset state taxes

Author

Josiah Neeley
Director, Texas; Resident Senior Fellow, Energy

Press Release

States should consider using carbon-fee option to offset other taxes

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Introduction

Earlier this month, the U.S. Environmental Protection Agency released the final version of its Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units. Known colloquially as the “Clean Power Plan,” the rule sets standards for carbon-dioxide emissions from existing power plants.

The CPP calls for an overall reduction in CO2 emissions of 32 percent from 2005 levels by 2030. However, it applies different standards to each state depending on what prescriptions, in the EPA’s view, are technically feasible. The CPP proposed two alternative standards for each state: a mass-based standard that limits the total amount of CO2 emitted, and a rate-based standard that would be applied to average emissions per kilowatt-hour of electricity.

The final rule does not set standards for Alaska or Hawaii, as the EPA claimed it lacked sufficient technical information for those two states. In addition, the CPP sets no emissionsreduction standards for Vermont, which receives its electricity largely from Canadian hydroelectric power. But each of the other 47 states are required to develop a plan to meet reduction goals, while retaining discretion as to the methods used to achieve those goals.

Of particular interest to those who prefer a market-based approach, the final rule stipulates that the plan “could accommodate imposition by a state of a fee for CO2 emissions from affected EGUs [electric generating units].”

Most economists view a carbon fee as a more efficient way to achieve emissions reductions than regulatory mandates or subsidies. A carbon fee has the additional advantage that it can be paired with equivalent cuts to existing taxes. Depending on the type of taxes involved, making a carbon fee revenue-neutral could largely or entirely offset the economic damage that would otherwise would stem from higher energy costs imposed by the CPP.

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