Who gets paid under a carbon price? New paper looks at impacts across states

Source: Nathanael Massey, E&E reporter • Posted: Tuesday, October 21, 2014

Four years after comprehensive cap-and-trade legislation stalled out in the Senate, the prospect of carbon pricing is back on the table. With regional carbon markets already up and running in California and the Northeast, and cross-state collaboration explicitly encouraged under U.S. EPA’s Clean Power Plan, more states are examining carbon caps and carbon taxes as a route to lower emissions.

Depending on the structure of a given carbon pricing scheme, however, what makes the most sense for a state’s coffers might not be the best deal for the majority of its residents. That’s one takeaway from a new discussion paper by the think tank Resources For the Future (RFF), which has examined the state-by-state impacts of a theoretical carbon tax.

At the crux of the problem is revenue. Carbon pricing incentivizes power producers to back off fossil fuels by imposing a fee on emissions, and the revenue generated can be distributed in a variety of ways — as investment in new energy systems, as a substitute for other government spending, or as a direct rebate to energy consumers, who ultimately bear the cost of higher energy prices from the scheme, to name just a few examples.

RFF’s policy paper, which builds on earlier work looking at the effects of carbon pricing across income levels, concerns itself with the latter scenario. RFF modeled how the distribution of costs among states would vary under three policies that put a cost on carbon and pay the proceeds to citizens, either as a tax cut to ordinary income, a tax cut on capital income or an equal-sized check for every American.

In each case, the returned revenues would help offset the higher energy costs created by a carbon price. Whether they would completely offset those higher costs, generate a net benefit or incur a cost depended on the state.

The authors did not look at potential environmental benefits of averting emissions for these particular studies.

States could find 50 different ways to spend revenue

The initial results of yesterday’s paper are fairly straightforward. States that derive more of their revenues from capital income, like Florida or Wyoming, do well when the payback from carbon pricing comes as a capital income tax cut. Poorer states — notably those in the coal-dependent South and Midwest, where a carbon price would likely have the strongest upward impact on power prices — fare better with a lump-sum payment.

The findings get a little more nuanced, however, when the results of yesterday’s paper are stacked up against the previous discussion paper, which looked at impacts at different income levels. Through that research, the authors found that, for the nation as a whole, the bottom 60 percent of household incomes benefit the most from a lump-sum repayment scheme. That pattern, they wrote, “seems likely to hold within any given state.”

“The biggest takeaway from these two papers, I think, is that there’s bigger variation [in impacts] across incomes than across states,” said Rob Williams, director of Economic Programs at RFF and one of the report’s authors.

“What you do with the money from carbon pricing, what you do with the value generated by a program, can be at least as important as the carbon tax itself for picking who ends up a winner or loser under the program,” he said.

When it comes to state or regional carbon price schemes, it’s likely that states will find a variety of ways to spend revenue, the authors said.

That’s already the case in California, where many ratepayers will receive a $35 check this month or next under the state’s Climate Credit program, part of the state’s cap-and-trade system. Other revenues have already been diverted to environmental programs and sent back to power producers in the form of allowances.