Government, Law, and Sustainability

Attorneys float carbon tax questions

Downstream vs. upstream is the first decision that will have to be made.

August 26, 2016
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When the United States signed the Paris Agreement on April 22, it joined 176 states and the European Union in making a commitment to hold the increase of planetary warming to 2 degrees Celsius or less.

If and once the agreement is ratified, the U.S. will need to find a way to reduce its carbon emissions to remain in accordance with the treaty. Among several options, one that has received quite a bit of attention is the possibility of instituting carbon pricing, or a carbon tax — a tax on carbon dioxide emissions intended to reduce emissions.

What a carbon tax could look like, how effective it would be and whether it’s even feasible in the U.S. are questions that are up in the air, however.

“How many sectors would it apply to, and who do you apply it to?” said Steve Chester, an environmental attorney at Miller Canfield based out of Lansing. “Is it upstream on the actual producers of coal, or would it be on the other end, a tax on consumers? And once you’ve generated all that revenue, what do you do with it?”

Carbon taxes do exist in the United States — with Boulder, Colorado, instituting a municipal carbon tax in 2007 at about $7 per ton of carbon dioxide emitted. The city estimated the tax costs the average household about $1.30 per month.

Chester said at the municipal level, there isn’t much of a choice for how a carbon tax can be applied — it has to be downstream, a tax on the consumers. But on a national scale, he said it’s more likely the tax would be applied upstream, where the tax would be imposed on energy producing industries, with the costs likely passed down through higher electricity bills, costs of petroleum-based products and high-use energy goods.

Whether a carbon tax could be feasible in the United States, or even in Michigan, is another question.

According to William Horn, the environmental law practice chair at Mika Meyers in Grand Rapids, even if the U.S. did institute a carbon tax, it wouldn’t do any good if the rest of the world doesn’t follow suit. While there is some form of carbon-pricing in 40 countries, according to a 2014 report from World Bank, it isn’t a widespread policy.

“So, you have the idea of who should go first, and even though some countries have adopted one, if one does and another doesn’t, what’s the overall impact going to be?” he said. “It’s an interesting topic, but there are theoretical issues with it.”

Chester, who attended the Paris Agreement talks as chairman of the board at the Center for Climate Strategies, said although a carbon tax probably would be more effective in reducing carbon emissions, it’s more likely and more feasible that the United States would implement a cap-and-trade program, where the government would provide economic incentives for organizations that reduce their emissions below a certain cap.

In a cap-and-trade scenario, a limit would be placed on the amount of carbon that can be produced by certain facilities. And if a company is able to reduce its emissions below the cap, it would be eligible to receive a credit or an allowance for every ton it is below the cap.

Additionally, the trade creates an open market for carbon allowances, in which companies that have managed to create space underneath the cap could sell it to a company that has had a harder time getting below the allowances.

“That frankly is the approach that shows up most frequently and has been discussed most frequently in legislation,” Chester said. “If it’s national legislation, I’m assuming you would see a cap and trade as a part of that.”

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