How States Can Use the Clean Power Plan to Cut Taxes

November 30, 2015 9:26 pm0 comments

With the latest round of climate talking getting underway, all eyes are on Paris. Yet back in the U.S., states are already considering how to reduce greenhouse gas emissions. Under the final version of the Clean Power Plan (CPP), published in October, states are required to reduce carbon dioxide emissions from existing power plants by 32 percent (from 2005 levels) by 2030.

To meet the CPP’s emissions goals, states have a variety of options, from efficiency mandates to cap and trade. There is, however, one compliance option that would not only reduce emissions, but would also allow states to finance needed tax reform. As the EPA notes in the final rule, a state could comply with the CPP by imposing “a fee for carbon emissions from affected EGUs” sufficient to achieve the required reductions. Revenue generated from this fee could then be used to offset cuts to existing more burdensome taxes.

To get a sense of how much money we are talking about, I took a look at EPA modeling data on the carbon price each state would need to impose to meet its CPP 2030 goals. This price varies considerably between states. Many New England states, for example, would require no carbon price at all, indicating that those states are already on track to meet their CPP goals. In other states, the price is above $20 a ton.

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The amount of revenue each state would get annually from a CPP-compliant carbon fee is in many cases considerable. The highest annual revenue is generated by Texas ($2.5 billion) followed by Illinois ($1.6 billion), Florida ($1.3 billion), and Ohio ($1 billion.

For states where meeting CPP goals requires a higher carbon price, a carbon fee for electrical generation could generate substantial revenue for tax relief. Revenues from a CPP-compliant carbon fee exceed many individual state taxes. In Texas, for example, revenue from a CPP-compliant tax is significantly greater than revenue from the state’s tax on natural gas production, all cigarette and alcohol taxes combined, would be more than half of revenue collected from the state’s franchise tax, and third quarters of the state’s gasoline tax. Many other states would be able to reduce or eliminate state corporate, gasoline, or other taxes if they adopted a tax swap approach.

In a recent report, I looked specifically at some of the ways Texas might implement a carbon fee approach. While Texas is one of the handful of states without a state income tax, it still has several economically damaging taxes, such as the business franchise tax, that revenue from a carbon fee could be used to eliminate. The state could also use revenues to offset a portion of the state’s sales tax, which is particularly regressive. Properly designed, a state could implement a system that guaranteed all revenue generated from a carbon fee are passed on to taxpayers without growing government. While focused on Texas, these ideas are obviously applicable to every state that must implement a carbon reduction plan.

A wide variety of economist and activists from Nobel Prize winning economist Gary Becker to climatologist James Hansen have endorsed carbon fees as the most efficient way to reduce greenhouse gas emissions. And because the fee approach provides the opportunity for tax relief, it blunts the economic impact of the CPP in a way other plans do not.

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