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

Aug 18, 2015

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 emissions-reduction 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.

‘Shadow’ carbon prices

In order to estimate how much revenue a CPP-compliant carbon fee would generate, we looked to EPA modeling on the implicit carbon price needed in each state to achieve the required emissions reductions. For the calculations, we relied on the EPA’s mass-based standards, rather than the rate-based standards, as outlined in the EPA’s state-specific fact sheets.

From this modeling, the “shadow” carbon prices can be combined with state-specific limits for the amount of CO₂ that can be emitted under the CPP. We used this to estimate the revenue that would be generated from a carbon fee that complies with the CPP.

Figure 1: State ‘shadow’ carbon prices for 2030

SOURCE: R Street analysis of EPA data

This shadow carbon price varies considerably across the states, from $26 a ton for Utah to $0 a ton for Delaware, Massachusetts, New Hampshire, New York, Oregon, Rhode Island and Washington state.

Importantly, these calculations assume the carbon fee applies only to emissions from the power sector, rather than being an economy-wide carbon tax. An economy-wide price on carbon would be substantially lower than one applied only to electric-generating plants, as it would apply to a much broader tax base. This briefing makes no attempt to calculate what economy-wide carbon fees each state would need to adopt to meet its CPP reduction goals, as such fees ultimately would generate equivalent revenue.

Carbon fee revenues

The amount of revenue each state would get annually from a CPP-compliant carbon fee is listed in Table 1. Based on the fees that would be collected should the state hit its 2030 emissions targets, the highest annual revenue is generated by Texas, at $2.5 billion, followed by Indiana, at $1.3 billion; Florida, at $1.3 billion; and Ohio, at $1 billion.

Table 1: Projected state-by-state carbon-fee revenues

State	Emissions (millions of tons)		Projected revenues ($M)
State	2030 (target)	2012 (actual)	2012 levels	2030 levels
AR	30	40	400	300
AL	57	76	836	627
AZ	30	40	800	600
CA	48	46	690	720
CO	30	42	882	630
CT	7	7	7	7
DE	5	5	0	0
FL	105	118	1,416	1,260
GA	46	63	945	690
IA	25	38	570	375
ID	1	1	24	24
IL	66	96	960	660
IN	76	107	1,819	1,292
KS	22	34	680	440
KY	63	91	182	126
LA	35	43	86	70
MA	12	13	0	0
MD	14	20	80	56
ME	2	2	4	4
MI	48	70	350	240
MN	23	28	476	391
MO	55	78	1,248	880
MS	25	26	260	250
MT	11	18	360	220
NC	51	59	59	51
ND	21	33	396	252
NE	18	27	648	432
NH	4	5	0	0
NJ	17	15	75	85
NM	12	17	221	156
NV	14	16	224	196
NY	31	35	0	0
OH	74	102	1,428	1,036
OK	40	53	742	560
OR	8	8	0	0
PA	90	117	702	540
RI	4	4	0	0
SC	26	36	216	156
SD	4	3	42	56
TN	28	41	615	420
TX	190	208	2,704	2,470
UT	24	31	806	624
VA	27	27	108	108
WA	11	7	0	0
WI	28	42	672	448
WV	51	72	1,080	765
WY	32	50	900	576

SOURCE: R Street analysis of EPA data

Revenues from a CPP-compliant carbon fee exceed many individual state taxes. Many states would be able to reduce or eliminate state corporate, income, gasoline or other taxes if they adopted a tax-swap approach.

For example, in Texas, revenue from a CPP-compliant tax would be greater than what the state currently collects in taxes on insurance; natural-gas production; cigarettes and tobacco; alcoholic beverages; hotels; and utilities. The fees could offset a 9 percent cut in the sales tax; a 52 percent cut in the franchise tax; a 59 percent cut in motor-vehicle sales and rental taxes; a 64 percent cut in the oil-production tax; or a 75 percent cut in the fuel tax. The insurance and utilities taxes could be phased out entirely, and still leave $45 million to apply toward the state’s $267 million in miscellaneous taxes.

It should be stressed that these estimates do not represent projections about the total cost of the CPP to the wider economy. How costly the CPP ultimately proves to be will depend both on how each state chooses to go about meeting the required reduction goals. The estimates do, however, provide a sense both of how costly meeting the CPP goals via a carbon fee would be, and how much revenue would potentially be available for offsetting tax cuts.