Editorial: Meeting at the market

Oct. 4, 2021

Back in April, Senate Finance Committee Chair Ron Wyden (D-Ore.) and 24 Democrat colleagues introduced legislation to overhaul the federal energy tax code in a manner they said would also create jobs and combat climate change. The ‘Clean Energy for America Act’ would consolidate 44 current energy tax incentives into three emissions-based provisions intended to incentivize clean electricity, clean transportation, and energy efficiency. The incentives would be available to all energy technologies that meet emissions reduction goals, with technologies that prompt larger reductions getting bigger credits.

Separate legislation before the House Ways and Means Committee, however, both extends current renewable energy tax credits (while extending them to new technologies) and retains breaks in place for the oil and gas industry.

Carbon pricing

Among the steps being considered by the Senate is a “per-ton tax on the carbon dioxide content of fossil fuels upon extraction.” This tax would start at $15/ton and increase. It would contain provisions allowing for direct relief to low-income taxpayers and ensuring foreign companies also pay.

At least part of the purpose behind the carbon tax is to incentivize rapid action in reducing emissions by creating a tangible cost for not doing so. Establishing a market in which carbon credits could be bought and sold would then allow companies aggressive in their reduction efforts to sell allowances to others who have decided to stay closer to business as usual.

President Biden has yet to propose a carbon tax and there is concern in states that produce oil and natural gas that further increasing the price of either to pay the federal government might not be good politics. Meanwhile, the industry faces increased pressure from institutional investors to change its behavior regarding renewables, emissions, and accounting practices which incentivize continued exploitation of inefficient assets.

Carbon credits can be generated either by cutting one’s actual greenhouse gas (GHG) emissions or by launching projects to help capture GHGs already in the atmosphere. In either case, the resulting reductions in emissions must be additional to what would have happened otherwise. A company can’t buy a tract of forest for instance, and then say that by doing so it’s reducing emissions. The forest would have been doing the same thing regardless of its ownership. Buying it so that it won’t be cut down, however, could be considered an addition to reductions.

The difficulty of independently parsing these sorts of circumstances to ensure the market doesn’t turn into a giant corporate shell game is one of the concerns raised by those who oppose establishing it. Another is the difficulty in accurately measuring how much GHG is removed by one method or another.

But the whole system doesn’t have to be built at once. Initial forays into market creation could focus on areas in which the ability to measure outcomes is most concrete and the level of emissions largest. Additional methods in other areas could then be added to the system as they are proven.

A large portion of the industry is in favor of and actively pursuing carbon pricing as a necessary part of curbing emissions. This alone is enough to bring at least segments of the environmental lobby out in force against it: “if they want it, how could it possibly be good for the rest of us?” or some such reasoning.

Flawed thought patterns aside, allowing companies which are leading the charge in mitigating the scale of their emissions the ability to sell excess credits they’ve earned to others which have fallen behind will result in markets that can help ensure overall goals are met in a timely manner even if some individual targets are not.

Good faith efforts to reach overall targets require allowing the industry to act as a whole. Carbon markets would provide the venue for such action.