Tax all carbon–make natural gas the bridge, not end of road

by Dan Watkiss, McDermott Will & Emery LLP

As Congress and the nation debate tax revenues and social expenditures in the context of the so-called fiscal cliff, there are compelling reasons for Congress to enact a carbon tax now. According to recent studies from researchers at the Massachusetts Institute of Technology and the Congressional Budget Office, a carbon tax starting in 2013 at $20 per ton and rising at 4 percent in real terms would generate $1.25 trillion in new revenues over 10 years that could offset other taxes, fund social programs (including energy research and development) or some combination of both. Enacting such a tax also would reduce greenhouse gas emissions and improve the competitive posture of carbon-free renewable sources of electric generation.

Regardless of where in the production or consumption cycle the tax is assessed, it should attach to all uses of fossil fuels in proportion to their carbon content. Coal with its high carbon content–use of which to generate electricity continues to decline–would be most affected. But so, too, would be oil and natural gas. Per unit of energy produced, combustion of coal produces 30 percent more carbon dioxide than oil and 80 percent more than natural gas.

Increasing access to economical reserves of domestic natural gas has seen natural gas generation displace the nation’s aging fleet of coal-fired units. (Oil generally does not fire electric generation in the U.S.) From a high price of more than $13 per 1,000 cubic feet (Mcf) in 2008, natural gas prices have fallen below $3 per Mcf. At these prices, most of the 90 gigawatts of new generation projected to be needed by 2015 to replace retiring coal plants will come from natural gas.

According to the International Energy Agency, replacing coal with natural gas to generate electricity in the U.S. will reduce total greenhouse gas emissions by 45 percent. Although short of the 80 percent reduction climate scientists posit will be needed to prevent dangerous climate change, displacing coal with natural gas charts a path in the right direction. This is why many energy policy analysts refer to natural gas as the bridge fuel to an economy powered largely by carbon-free renewable resources.

Considerable debate exists about how long the natural gas bridge will be needed and conversely how quickly carbon-free renewables can become an economical alternative to natural gas, but it is not debatable that a carbon tax that targets all fossil fuels, including natural gas, will speed passage over the bridge and better control carbon emissions than the status quo.

We backed into the current performance-standard approach to controlling carbon emissions from power plants after efforts to legislate a cap-and-trade system faltered in Congress. That left an energy and environmental policy vacuum that became filled with a combination of the Supreme Court’s Massachusetts v. Environmental Protection Agency (EPA) ruling that the existing Clean Air Act empowered the EPA to regulate emissions of greenhouse gases and the EPA’s subsequent determination that greenhouse gases endanger the public health and welfare. That determination, in turn, triggered Clean Air Act provisions that require the EPA set performance standards for mobile sources of carbon emissions–vehicle–and stationary sources–power plants–the latter of which the EPA set at 1,000 pounds per megawatt-hour–the performance achievable by today’s natural gas combined-cycle (NGCC) technology. This performance standard rules out new coal-fired generation but gives new natural gas-fired generation a free pass. Under a carbon tax, natural gas still would displace coal in all new plants but no longer would receive a free ride.

Holding natural gas-fired generation accountable for the cost of its carbon emissions would have several salutary consequences. It would encourage further innovation in NGCC technology to reduce further emissions of greenhouse gases. It increasingly would improve the competitive prospects of carbon-free renewables as the carbon tax increases over time. And at current prices, natural gas can carry the tax burden and still remain competitive for the duration of the bridge. Whether viewed as deficit reduction, revenue-neutral tax relief for individuals or businesses, a source of revenue for social programs or climate change management, a carbon tax would be good energy policy and should be embraced.

Author

Dan Watkiss is a partner in the law firm McDermott Will & Emery LLP and is based in Washington, D.C. He focuses on transactional and regulatory matters in energy and related infrastructure industries. Reach him at dwatkiss@mwe.com.

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