Could the EPA push a carbon tax on its own? Maybe — here’s how.

November 15, 2013

Next year, the Obama administration will unveil its biggest climate-change policy to date — new rules to limit carbon-dioxide emissions from thousands of existing coal- and gas-fired power plants. That's nearly one-third of the nation's greenhouse gases.

(F. Carter Smith/BLOOMBERG)
(F. Carter Smith/Bloomberg)

And some experts have argued that the administration should try to get creative with those rules. One possibility: The Environmental Protection Agency (EPA) could allow states to impose carbon taxes as a way of complying with the new regulations. That's according to a recent proposal from Adele Morris of the Brookings Institution.

So far, there's little sign that the EPA is considering a carbon-tax approach. And the proposal has a few potential problems. But the idea is worth exploring as a way of looking at how the agency's power-plant regulations might actually work.

Here's how this would work, in theory. The EPA doesn't have the authority to impose taxes on fossil fuels directly. But, under section 111(d) of the Clean Air Act, the agency can set federal guidelines for carbon emissions from existing power plants and give states options for meeting those goals. "That allows for a lot of flexibility," says Morris, a former climate negotiator for the Clinton administration.

There's the simplest option: The EPA could tell the states that all of their power plants can emit no more than a certain amount of carbon-dioxide for each kilowatt-hour of electricity they produce. That would be a flat regulation, and states would each have to craft plans to meet the goal — say, by requiring power plants to adopt certain control technologies.

But the EPA could also give the states more flexibility here. Perhaps, for instance, states would be allowed to work together to meet their emissions goals, in order to account for imports and electric grids that span borders. Or maybe states would be allowed to join a regional cap-and-trade program for their power plants — similar to what California has done, or what states in the Northeast have done.

Morris's proposal, meanwhile, is for the EPA to allow states to enact excise taxes on the carbon content of fuels used by regulated power plants as a way of complying with the rules. The EPA could either suggest a price or a range for the tax.

"The EPA could give states a concrete menu of options," says Morris. "These would be 'model' State Implementation Plans. The EPA would basically say, if you do one of these things, then we’re going to approve it as compliant with our guidelines." And carbon taxes could, in theory, be one of those options.

Of course, states couldn't be forced to pursue the carbon tax option. If they refused, the EPA can't impose taxes on its own. But, Morris says, some state legislatures might find this route more attractive than flat regulations. They could raise revenue and use it to reduce taxes elsewhere. A carbon tax would also give utilities a more flexible way to cut their greenhouse gases.

The pros and cons. Morris rattles off some advantages here: A tax would give electric utilities incentives to do such things as switch from coal to natural gas or other cleaner sources, rather than just adopt whatever technology the EPA dictates. And state regulators have more experience imposing taxes than they do regulating carbon dioxide. (Many states already have excise taxes on fuels.)

But how plausible is this, really? I put this question to Nathan Richardson, a legal scholar at Resources for the Future and an expert on EPA regulations. He points out that state legislatures would have to proactively vote to give their regulators authority to tax emissions. And that's not a simple matter.

"Look how hard it was to get authority to do cap/trade in California and the RGGI states [in the Northeast]," he says. "You have to go through the same fight. For a technology standard or tradable performance standard, you may not have to."

What's more, Richardson adds, it could be difficult for states to prove that a carbon tax really fulfills all the requirements of the EPA regulations — especially if the tax entices utilities to switch from coal to natural gas or shifts coal power to other states that haven't adopted a tax. That could lead to legal challenges down the road. State-by-state carbon taxes overseen by the EPA would likely be clumsier than one enacted by Congress.

Michael Wara, a law professor at Stanford who has looked at Morris' proposal, agrees that there are legal risks here — in part because there are so few precedents for section 111(d) of the Clean Air Act, which hasn't been used often. "A lot depends on what a panel at the D.C. Circuit Court decides," he says. But, he adds, "I'm not sure this is any riskier than other flexible approaches the EPA might consider."

Long story short: This is at least in the realm of possibility. But because the EPA can't impose carbon taxes on its own, the state legislatures would have to vote to give their local regulators this authority. And that's far from certain.

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