How Should the EPA Modify Carbon Emission Regulation?

Some climate and energy policy specialists are calling for a carbon tax policy to reduce carbon dioxide (CO₂) emissions. Imposed on fuels based on their carbon content, a carbon tax would allegedly discourage CO₂ emissions.

Recently, three scholars added their voices to this call for carbon taxes, arguing that the U.S. Environmental Protection Agency (EPA) should authorize state governments to implement carbon tax policies. In their recent paper, Michael Wara and Marta R. Darby of Stanford Law School, along with Adele C. Morris of the Brookings Institution, argue that carbon tax policy has more advantages than alternative ways of pricing carbon emissions.

One alternative to carbon tax policies is a cap-and-trade system. Under cap-and-trade, the government sets an overall limit on carbon emissions, and companies can buy and sell a fixed number of emissions permits. Despite the functional similarity between carbon tax systems and cap-and-trade systems, Wara and his co-authors emphasize the simplicity of carbon tax systems: a carbon tax does not require states to “allocate allowances, administer auctions, create an allowance registry, monitor trades and positions, enforce a price floor,” or “measure electricity generation, transmission, or consumption,” as in a cap-and-trade system. In addition, the authors stress that a “single state agency” can implement a carbon tax policy without needing to coordinate between air, energy, and other regulatory bodies about CO₂ emissions. Consequently, the State need only “monitor fossil fuel use and collect the money” to ensure the compliance under a carbon tax policy.

Despite the potential of carbon tax policies, the trio argue that the EPA has “inadvertently” constrained states’ ability to adopt carbon taxes. Under both existing regulations and the EPA’s proposed new CO₂ emission rule, the EPA does not appear to allow for an effective state-based carbon tax policy.

Under existing regulations, state governments have the authority to implement and enforce “emission standards” to reduce CO₂ emission. The EPA defines “emission standard” as “a legally enforceable regulation setting forth an allowable rate of emissions into the atmosphere, establishing an allowance system, or prescribing equipment specifications for control of air pollution emissions.” However, the authors point out that a carbon tax would not set forth an allowable rate of emissions, nor would it be an allowance system or a prescription for specific equipment. Thus, a carbon tax policy cannot be regarded as an “emission standard” on plain reading.

Additionally, according to Wara, Darby, and Morris, the EPA’s newly proposed rule limits effective carbon taxation. While a state can impose a carbon tax on certain actors in the supply chain, the proposed rule may preclude the “simplest approach”: placing tax liability directly on electric generating units (EGU). In its proposed rule, the EPA defines “emission standard” as “any requirement applicable to any affected entity other than an affected source that has the effect of reducing utilization of one or more affected sources.” This definition means that if a state implements a carbon tax policy, the tax liability will be on “electricity-using business[es]” or “electric utilit[ies]” as “affected entit[ies],” rather than on EGUs, including a power plant, as “affected source[s]” of CO₂ fuels. However, as Wara and his coauthors claim, the simplest approach is imposing tax liability on EGUs for their CO₂ “emissions.”

How can the EPA remove these barriers to effective carbon tax policy? The authors advocate two recommendations. For one, they suggest that the EPA should amend current regulations to broaden the definition of “emission standard” to include a carbon tax. Alternatively, they urge the EPA to alter the definition of “emission standard” in the agency’s proposed rule so that state governments can impose tax liability on EGUs — what they see as the most straightforward approach to addressing climate change.