Carbon Tax

Carbon Tax or Obama's Clean Power Plan?

Calculating cost of regulations in terms of carbon taxes



The Environmental Protection Agency is scheduled to roll out the final regulations for the Obama Administration's Clean Power Plan in August. Under the CPP, electric power generators are supposed to reduce their greenhouse gas emissions (chiefly carbon dioxide) by 30 percent by 2030—that's about 730 million metric tonnes of carbon emissions. Given that each state has a different mixture of power generation plants, there will be differences in how each will have to abate their emissions. Individual states will have to figure out a mix of regulations, market mechanisms, and subsidies to achieve the goals set them by the EPA.

The Washington, D.C.-based libertarian think tank the Niskanen Center, which generally favors the adoption of a revenue neutral carbon tax, asks the question: "How High Would a Carbon Tax Need to Be to Hit CPP Emission Reductions?" From the Niskanen Center:

So, presuming that states are stuck with having to deal with the CPP's regulatory morass, what would it take to replace the CPP with a carbon tax? How much would such a tax—applied only to power plants—have to be to produce the same emission reductions as EPA proposes, and thereby be a viable alternative?

Fortunately, EPA has done the work for us, and even better, it is shown in the map below, courtesy of Stanford's Michael Wara. The data (technically the "CO2 Constraint shadow price") is carefully buried in a model output file on EPA's website. The "shadow price" is technically defined as the allowance price a cap and trade system would require for a cap equaling the emissions the CPP requires in each year for the rate-based (as opposed to mass-based) option. Or, more simply, the price EPA believes would generate the same results as the CPP for that state.

Niskanen Center

The Niskanen Center report notes that taxes range from zero in Vermont—where the CPP sets no target because there is no coal fired power generation—to a high of $101/ton CO2 in West Virginia, with Utah ($63) and Colorado, Massachusetts, and Connecticut (all $47) next highest. Using the EPA's figures, the Center's analsysts further estimate that a national carbon tax would average  about $29 per ton in 2030.

For reference, Resources for the Future estimated that a $25 per ton carbon tax would boost electricity rates by 1.2 cents per kilowatt-hour. Now the price of residential electricity in the contiguous U.S. averages 12.5 cents per kilowatt-hour, ranging from a high of 22.1 cents in Massachusetts to a low of 6.8 cents in Washington State.

Overall, Niskanen Center analysts point out that implementing a carbon tax even at state level would be a far simpler and less costly option than complying with EPA's impending CPP regulations.