With former Exxon CEO Rex Tillerson confirmed as Secretary of State, one can expect continued references (though possibly not by Tillerson himself) to his previous support for a revenue neutral carbon tax (“Exxon Touts Carbon Tax to Oil Industry”, June 30th, 2016 – https://www.wsj.com/articles/exxon-touts-carbon-tax-to-oil-industry-1467279004).
What exactly is a carbon tax and how does it work?
Put simply, a carbon tax is a tax on pollution generated through fossil fuel use. There are various proposed models for a carbon tax in the United States. The most recent proposal for adopting a carbon tax in the U.S. was put forth by Senator Bernie Sanders in December of 2015 in the “Climate Protection and Justice Act”.
Here is a summary of the key provisions of the act from Senator Sanders’ website:
“To ensure that the United States makes the transition away from fossil fuels, the bill sets enforceable pollution reduction targets for each decade, including a 40% reduction below 1990 levels by 2030, and a more than 80% reduction level by 2050. The legislation sets a price on carbon for fossil fuel producers or importers starting at $15/ton in 2017, rising to $73/ton by 2035, and growing by 5% annually after that. Proceeds from this carbon pollution fee are returned to the bottom 80% of households making less than $100,000/year to offset any rate hikes by the fossil fuels companies. For an average family of four, this amounts to a rebate of roughly $900 in 2017, and grows to an annual rebate of $1,900 in 2030. EPA’s existing authority to regulate carbon pollution sources from power plants, vehicles, and other sources is reaffirmed, and if the U.S. is not on track to meet its emissions reduction targets, the EPA shall issue new regulations to ensure that it does.” (https://www.sanders.senate.gov/download/climate-protection-and-justice-act-one-pager?inline=file).
The bill did not get very far in the legislative process.
Another element of consideration for carbon tax proposals may include the social costs of carbon. The Environmental Protection Agency provides estimates of the “social costs of carbon”. The EPA defines this as: “The SC-CO2 is a measure, in dollars, of the long-term damage done by a ton of carbon dioxide (CO2) emissions in a given year. This dollar figure also represents the value of damages avoided for a small emission reduction (i.e., the benefit of a CO2 reduction).” (https://www.epa.gov/climatechange/social-cost-carbon).
Will the carbon tax be revisited? What about other sustainability promoting measures in the tax code?
A group of Republicans led by former Secretary of State James A. Baker III has a proposal for a carbon tax as of February 7, 2017. The Baker proposal sets a price at $40 per ton of carbon dioxide produced and would also impose something called “border adjustments” targeted at imports from countries that do not have a similar carbon tax system. It will be interesting to see what happens with this most recent proposal, particularly with these “border adjustment/tariffs” if the proposal takes off.
In addition to carbon tax proposals, there are other sustainability oriented tax measures currently available to taxpayers. Some of these other tax credit measures include: 1) the Renewable Electricity Production Tax Credit (the “PTC”), 2) the Business Energy Investment Tax Credit (the “ITC”), and 3) the Residential Renewable Energy Tax Credit. For further information about these credits, please see energy.gov and the associated IRS guidance.