Here’s one way to rally support for oil and coal exports: Tax them

March 10

As the United States finds itself increasingly awash in fossil fuels, it faces two really important questions that could shape the nation's energy policy and the world's climate fate.

The first is question is how to drum up enough money to pay for research into technologies to fight climate change. The second is whether to begin to export some of the country's new-found riches of oil and natural gas, as well as coal. Ever since the 1970s, the nation has effectively banned  oil exports and limited natural gas exports.

The group Third Way says it has an idea to solve both problems at once: allow all exports but tax them and use the proceeds for R&D.

The idea is that a modest tax, or fee, on exports of fossil fuels would raise money for research and development of carbon capture and storage and other innovations to control climate-harming carbon dioxide emissions, areas that Third Way says have not received anywhere near the level of R&D they deserve. This could make it easier for Congress to lift the four decade-old ban on crude oil exports, and for the administration to approve more natural gas export terminals.

Third Way – a nonprofit group that claims to represent America’s “vital center” combining “pragmatic solutions and principled compromise” -- says that its plan would achieve the hat trick of energy policy: satisfy oil, gas and coal companies eager to export; satisfy people worried about the climate by generating a new stream of revenue for research and initial projects; and do it all without raising the federal deficit.

“With well-placed technology investment, it’s possible to imagine a future in which we export not only the fuels the world wants, but also the pollution control technology the world needs,” the group says in a new paper. “That is energy super power.”

The proposal is timely. It lands as House Speaker John Boehner has issued calls for more natural gas exports in the shadow of Russia's threats against Ukraine. And it comes amid a growing struggle in Congress over whether to end the ban on oil exports. The American Petroleum Institute has made this one of its main priorities this year. U.S. producers of light, high quality crude oil want to ship it to countries with refineries that can’t handle low quality crudes. In return, the United States would receive lower quality (and lower cost) crude oil for its modernized refineries like those along the Texas gulf coast.

Moreover, Sen. Mary Landrieu (D-La.), the new chairman of the Senate Energy and Natural Resources Committee, is drawing up her list of legislative priorities. Third Way hopes that she and other lawmakers might take an interest in the idea, especially since the revenues could be targeted on energy producing states like Louisiana. (Third Way’s top trustees include veteran investment banker John L. Vogelstein, former head of global equity trading at Goldman Sachs David Heller, and Bernard L. Schwartz, retired chief executive of Loral Space & Communications, a major defense contractor. Its president used to be Andrew Cuomo's chief of staff at HUD, and its honorary chairmen include centrist Democratic members of Congress such as Sens. Claire McCaskill (Mo.), Jeanne Shaheen (N.H.) and Kay Hagan (N.C.))

But many policy makers are reluctant to permit exports of oil, arguing that it could raise oil prices and provide incentives for expanding output of fossil fuels.

The solution? A fee. Or should I say a tax? Third Way uses the word fee, but to me, it seems as though Third Way is borrowing a page from the late Richard Darman, who was President George H.W. Bush’s budget director. Since Bush had vowed never to raise taxes – “read my lips, no new taxes” was his campaign pledge in 1988 – Darman sought with a wink and a nod to tiptoe around the pledge by calling many tax increases fees.

Third Way says there’s more than semantics involved. “There’s a very important difference between a tax and a fee,” says Joshua Freed, vice president for the clean energy program at Third Way, explaining that a tax goes into general revenues while the fee his group proposes is “dedicated to alleviating the environmental impact of a commodity.”

Third Way says its “energy fee” could be structured a couple of ways. One, it could impose an 18 cent charge on every million British Thermal Units of energy, raising about $2 billion a year. That would add 3.9 percent to the price of coal exports and 3.3 percent to the price of natural gas exports, it said. Or, Congress could slap a modest $10 a ton “fee” on carbon exports, raising more than $1 billion a year based on 2012 coal and natural gas exports. Such modest amounts wouldn’t render U.S. exports non-competitive, Third Way says.

The revenues could go into an energy infrastructure bank, and some preference could be given to states producing energy resources. By using a banking model, the program could avoid bureaucracy and leverage the tax revenues by using them as seed capital.

“The world needs ‘all of the above,’ but not the way it looks today,” the group says. “Realistically, we need both alternatives to traditional fossil fuels and cleaner-burning versions of what we have now.”

What’s the catch? Well there are a few.

First, it has to overcome opposition from environmental groups, who worry that lifting the oil export ban and promoting gas and coal exports would increase incentives for fossil fuel production even with an export fee. Unions also worry that workers could be hurt. On March 10, the United Steelworkers, which represents refinery workers, announced its opposition to oil exports. “Lifting the ban would benefit oil companies that engage in oil exploration and production, but it would harm their refining operations that have to purchase crude at the market price,” USW International President Leo W. Gerard said in a statement. “It also would hurt independent refiners that do not engage in oil exploration.” The union said that some east coast refineries – it cites a Philadelphia refinery owned in part by the Carlyle Group -- are currently buying oil at $20 to $25 a barrel discounts that would vanish.

Second, an export tax or fee alters market signals in ways many economists dislike.

“Export taxes, like tariffs on imports, throw sand in the gears of the international trading system,” says Gregory Mankiw, a Harvard economics professor and former chairman of the Council of Economic Advisers. “They lead to an inefficient allocation of global resources by preventing nations from realizing the full gains from trade.” Mankiw favor an economy-wide carbon tax, but not one limited to exports.

(The International Monetary Fund has written an interesting paper on the Ivory Coast’s export tax on cocoa, a commodity whose international price the Ivory Coast could alter. http://www.imf.org/external/pubs/ft/wp/2010/wp10269.pdf)

Third, the tax – or fee – might be unconstitutional. The constitution says that “no tax or duties shall be levied on exports from any state.”

Michael Levi, an energy expert at the Council on Foreign Relations, says that the southern states had it put into the constitution so the north couldn’t put an export tax on cotton, drive down the domestic price, and then divert the cotton to manufacturing centers in the north.

“It’s fairly clear and the Supreme Court has repeatedly sustained it,” Levi says. “Anything that functions as a tax is a tax as far as the Supreme Court is concerned.”

A congressional aide interested in the Third Way proposal noted, however, that whereas cotton producing states opposed an export tax, oil producing states support it and probably wouldn’t challenge the tax in court. And Third Way's Freed says “a tax on exports writ large is unconstitutional but a fee to recover money from the environmental impacts is likely to pass muster.”

Other countries use export taxes. Indonesia taxes exports of palm oil, and Argentina taxes exports of soybean oil used to make biodiesel. The taxes effectively lower domestic prices for palm and soybean oil, the raw materials for domestic biofuel producers. As a result, the biofuel producers in Argentina and Indonesia can undercut other countries’ biofuel producers. European Union imports from the two countries jumped two-and-a-half fold and then the Europen Union imposed anti-dumping duties. If crude oil export taxes were to follow this pattern, domestic refiners would actually benefit (unlike the USW assertion) and the European Union would impose anti-dumping duties on U.S. refiners’ exports of finished petroleum products like gasoline and diesel. Third Way's Freed says that an export fee on carbon emissions, as opposed to a tax on the commodity, would be treated differently

Third Way isn’t the first group to think of linking the energy exports with new taxes for advanced energy research. In an open memorandum written Jan. 23, Charles K. Ebinger and Tim Boersma of of the Brookings Institution urge President Obama to lift the ban on oil exports.  They wrote:

“Some will oppose this new fossil fuel development, arguing that additional carbon emissions will occur and that there are higher risks of environmental damage. We believe, however, that accompanying a lifting of the ban on crude exports with renewed calls for a carbon tax—with some of the revenue allocated back towards research on advanced renewable energy technologies, carbon capture and sequestration of CO2 for both coal and natural gas, small-scale modular reactors and advanced battery storage—could counteract some of these concerns.”

Ebinger says he would “sequester the carbon tax which should be put on the point of production and use for deficit reduction period.”

This isn’t exactly what Third Way has in mind. Its use of the fee revenues are more targeted, and that's why it thinks the proposal might have a better chance of passage than an economy-wide carbon tax, which may be sensible but politically a long shot at the moment.

“The debate over fossil fuel exports doesn’t have to be winner-take-all; either shut all exports down or export as much as possible," says Third Way's Freed. "Our proposal provides something important for everyone. We allow for responsible exports because the fee provides a giant gusher of money to make fossil fuels cleaner.”

 

Historical bonus: Blake Clayton, an adjunct fellow at the Council on Foreign Relations, writes that “the primary laws prohibiting crude exports are the Mineral Leasing Act of 1920, the Energy Policy and Conservation Act of 1975, and the Export Administration Act of 1979.”  Controls are spelled out under the Export Administration Regulations (EAR) of the Bureau of Industry and Security (BIS), an agency of the Department of Commerce.

“A few obscure types of crude oil automatically qualify for export licenses,” Clayton writes, such as crude oil produced in Alaska's Cook Inlet and small amounts of heavy (or viscous) crude oil produced in California. Other niche cases do not require licenses. Some U.S. crude oil can be exported with a presidential finding or if the BIS finds that proposed exports are "consistent with the national interest and the purposes of the Energy Policy and Conservation Act."

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