Conservatives' Embrace of a Carbon Tax Requires Revisiting the Coal Impact

In early February, a group of prominent and respected economists as well as former federal cabinet secretaries released a three-part report under the auspices of the Climate Leadership Council (CLC), urging the adoption of a carbon tax to help address the problem of global warming. It is the quantitative analysis in the second of the three reports (A Winning Trade) that is particularly germane to my discussion here.

What is distinctive about the position of the CLC is not so much the substance of its proposal. The group’s call for an initial tax of $40 per ton of carbon dioxide (CO2) emissions reflects an approach (with a roughly comparable dollar magnitude) advocated for some time by numerous others. This is also true of the proposal’s eye toward ensuring both fiscal neutrality and fairness—i.e., by having the entire proceeds of the tax returned to the economy, with distributional equity an inherent feature. Instead, it was the nature of the members’ common political identity that caught the public eye: all were individuals long recognized for their strong Republican conservative credentials. On a policy issue that has continued to be contentiously debated along divisive political lines—never mind steadily improved scientific understanding of the global warming threat—the CLC position deserved to be seen as a genuinely unifying and forward-looking contribution.

As noted, the essence of the CLC proposal is the imposition of a tax equivalent to $40 per ton of CO2 emissions. I use the phrase “tax equivalent” because, in the group’s detailed blueprint of that imposition, the tax would be assessed, not at the point where CO2­ releases actually occur—say, at a coal-burning electric generating plant—but (in the CLC’s language) “at the first point where fossil fuels enter the economy.”  That would mean “upstream”—at oil and gas wells, coal mines, or ports of entry in the case of imported fuels. From an economic perspective that, in essence, would require a fossil fuel producer to either pay the tax on the firm’s extracted output or keep its energy resource deposit in the ground. (In an earlier study with several RFF colleagues, we also analyzed carbon policy from such an upstream perspective; more on this below.)

Let’s now apply the analytics of that approach to coal. Coal contained or produced at a mine does not emit carbon dioxide; rather, it contains the CO2 equivalent in terms of carbon. There is little dispute that a carbon tax at the point of extraction corresponding to a tax of $40 per ton of CO2 emissions at a power plant would mean something like a tax of $90 per ton of coal. For coal selling (on average) at around $30 per ton, the incentive to curtail coal production leaves little to the imagination. Nor is it hard to wonder how the ongoing and significant pursuit of carbon capture and sequestration “downstream” at a power plant would fare under a scenario in which coal does not leave the mine.

This prompts me to revert briefly to the RFF analysis that, in some ways quite similarly to the CLC study, sought to explore the implications of putting a carbon levy on federally owned coal in the West. In distinction to the CLC study, my colleagues and I were not tasked with defending the justification for such a levy, but simply to test its feasibility and implications. Not entirely by accident, we also wound up with an assumed “hit” of around $90 per ton of coal, having started with a downstream CO2­ tax of around $45 per ton—the latter derived from an estimated “social cost of carbon” of that magnitude. Unsurprisingly, we found the $90 figure unreal as a policy prescription; but, rather than dismiss out of hand the principle of taxing coal or some other resource on what leaves an in-the-ground deposit, we suggested that an initial series of low and slowly rising taxes might be a realistic way to explore this upstream alternative or complement to other policies to address climate change.

Such small steps are scarcely what the CLC strategy calls for, however.  Indeed, the group’s blueprint recommends a steadily rising carbon tax on all fossil fuels in the years ahead.  But I believe that coal exposes the dilemma of an upstream tax on carbon content most glaringly.  In that respect, an otherwise telling initiative on the challenge of designing policy to address global warming needs another look.