THE GHG CAP VERSUS THE FEE
Two approaches have been developed to reduce emissions of greenhouse gases (GHGs) in governmental jurisdictions (States/Provinces/Nations): one involves placing a cap on emissions, the other involves attaching a fee or tax to emissions. Whether the approach involves a cap or a fee, a second element concerns how any funds raised are allocated. Let’s deal with the cap vs tax/fee first.
What’s common to the two approaches?
Whether a cap or a fee is involved, the first common feature is that, to be effective, they must impose the approach on greenhouse gas emissions, not just carbon (dioxide). Failing to do this results in several greenhouse gases escaping attention. The first escapee is nitrous oxide, one of the top three greenhouse gases (with a warming potential 300 times greater than carbon dioxide). The second evader includes all gases that contain carbon but are much more effective warming agents than carbon dioxide. This includes methane (85 times worse than carbon dioxide), the fluorocarbons such a HCFCs (many thousand times worse than carbon dioxide) and other gases. The wrinkle is that sometimes programs are developed which claim to address all greenhouse gases but really only address carbon(dioxide) from fuel combustion (Washington State’s 2018 Initiative 1631 was an example of this problem), while others phrase themselves in terms of carbon but really address greenhouse gases (The Federal Innovative Energy and Carbon Dividend HR 763 – 2019 is an example).
The second commonality should be that whichever approach is taken, it address the emissions upstream, meaning where the fossil fuel is extracted or enters the economy. This is because it’s much easier to target a few major sources which then pass the cost down the line, than the multitude of end users. Most approaches, indeed, do this.
The third is that both approaches incorporate a desired outcome in terms of emissions, and assess their success according to whether the trajectory towards that outcome is being achieved.
What’s the Difference?
With a CAP, the appropriate agency (or the proposal itself) identifies what the target greenhouse gas emissions for that jurisdiction should be in tons of greenhouse gases measured in terms of their Global Warming Potential (= carbon dioxide equivalent or number of tons of carbon dioxide equivalent to one ton of the gas) and when it should be achieved. A trajectory with interim goals is usually developed also. Allowance (or permits) to emit GHGs are developed and may be issues, sold, or auctioned to targeted emitters. If auctioned, the price will be subject to market principles. The targeted emitters are usually the largest emitters in the jurisdiction. Since point sources (identifiable buildings or activities where emissions can be easily measured) are easier to target, the program usually targets these (at least, first). Unfortunately, this means that forestry and agriculture, where emissions are extremely diffuse spatially, are often excluded except for the fuels used in vehicles and equipment. Not coincidentally, these more diffuse emissions are often not accounted in the emissions assessments of the jurisdiction.
Allowances (or permits) are usually identified as a permit to release one ton of carbon dioxide equivalent of GHGs. Polluters are then allowed to emit GHGs up to the number of allowances they obtained. Excess emissions above that are subjected to a penalty sufficient to discourage such behavior. If a polluter is able to reduce emissions below the allowances purchased, that polluter may sell unused allowances to another polluter who is unable to reduce emissions to the limit imposed by those purchased. This is the TRADE component, where the price of these allowances will fluctuate according to market principles.
Annually, the number of allowances available decreases according to the trajectory and goals established in the program inducing polluters to adjust to non-polluting energy sources and activities. The price of allowances sold or auctioned also rises (in the latter case, again according to market principles) thus increasing the incentive for polluters to reduce their emissions by adopting practices (such as renewable energy) that avoid the emissions cap. This levels the playing field among polluters and non-polluters.
The cap comprises a direct limit on emissions.
With a TAX/FEE the appropriate agency (or proposal itself) establishes a fee that will be imposed on fuel or activity for each ton of GHG emissions produced. The tax/fee rises annually to increase the incentive for polluters to adjust their behavior. If the declining emissions trajectory is not steep enough, the annual fee rise may increase to depress emissions. Targeted emitters may be restricted to those above a cut-off annual emissions tonnage (as above).
Just as above, since point sources (identifiable buildings or activities where emissions can be easily measured) are easier to target, the program usually targets these (at least, first). Unfortunately, this means that forestry and agriculture, where emissions are extremely diffuse spatially, are often excluded except for the fuels used in vehicles and equipment. Not coincidentally, these more diffuse emissions are often not accounted in the emissions assessments of the jurisdiction.
The tax/fee is applied to each ton of carbon dioxide equivalent of GHGs. This levels the playing field among polluters and non-polluters even though polluters are allowed to emit unlimited GHGs and pay for these emissions in the tax/fee.
The tax/fee comprises an indirect limit on emissions which encourages polluters to assume practices (such as using renewable energy) that avoid emissions. It is possible, especially in an expanding economy, that polluters and or consumers will simply accept the increasing cost of goods and services that the charge imposes. Emissions reductions will then not be achieved.
What happens to Funds Raised?
Under the Cap approach, funds are raised if allowances are sold or auctioned. Under the Tax/Fee approach, funds are inevitably raised from the pollution fee. These funds may be assigned to the General Treasury for disbursement along with other jurisdiction income, or they may be used to allow reduction in some other tax (for example income tax). Alternatively, they may simply be returned to the residents of the jurisdiction as a Dividend of some kind, either to taxpayers or residents, hence the Fee and Dividend approach. . This may be returned proportionally to income or simply as a flat rate. The dividend then serves as a reward to consumers buying items that are made without emissions since such items should now be more cost-competitive.
An alternative approach is to use the funds raised for specific investment purposes that (a) further either the goal of reducing GHG emissions and atmospheric GHG concentration, (b) promote adaption preparedness for climate change, or (c) promote social justice/equity goals, or all of the above. This comprises the Investment component of a Cap, Trade, & Invest approach, where these expenditures represent investments in the future.
The Oregon Dilemma
In Oregon, two constitutional barriers exist to the free exercise of our choices.
- According to Article IV Section 25 Three-fifths of all members elected to each House shall be necessary to pass bills for raising revenue.
This raises the question of whether these bills require a 3/5th majority to pass. Although the current iteration of the cap, trade., invest legislation had been written as to avoid instigating this requirement, if passing with less than a 3/5th majority in both chambers, it will likely be challenged on the basis that it raised revenue. Meanwhile, whether a tax/fee and dividend bill can escape such a requirement based on the argument that it is not raising revenue for the Treasury (since funds are returned to Oregonians), and is basically charging a fee to undertake and action is not clear.
2. According to Article IX – 3a funds raised from transportation fuel must be assigned to the Highway Fund for roads, while Article VIII, – 2 (1)(g) requires specific fuds to be allocated to the Common School Fund.
Although these provisions potentially limit how some funds raised by the current proposal can be spent, effort has been expended to assure that such funds can serve the goals of the proposal in reducing GHG emissions or atmospheric concentrations.