3 minute read 26 Jun 2019
Smokestacks

How climate change is a US tax policy issue

By

Cathy Koch

EY Global Tax Policy Network and Americas Tax Policy Leader, EY Americas Center for Tax Policy Director

Leader in US and global tax policy with an informed perspective on public and private sectors and a deep knowledge of the US legislative environment.

3 minute read 26 Jun 2019
Related topics Tax

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Climate change remains relevant for US companies as policies for reducing carbon emissions have become part of the political discourse.

In its recently released paper, the International Monetary Fund (IMF) has examined how participating countries could use carbon taxes and other instruments to meet carbon mitigation goals the countries submitted as part of the 2015 Paris Agreement.

While the United States withdrew from the Paris Agreement in 2017, climate change remains relevant for US companies, as policies for reducing carbon emissions have become part of the political discourse. In fact, the US House Ways and Means Committee recently held its first climate change hearing in 12 years — at which attendees debated whether climate change should be addressed through a price on carbon or other ways to curb emissions. One prominent group at the hearing, the Climate Leadership Council, which consists of several large corporations and nongovernmental organizations, said its members are willing to support a $40-per-ton price on carbon emissions that increases over time, in exchange for regulatory streamlining.

In addition to the recent congressional attention, several US governmental and international organizations have released climate change reports, keeping the issue at the forefront of policy discussions. These include:

Key observations

The paper presents the results of a spreadsheet tool the IMF used to evaluate the impact of various mitigation options, including carbon pricing, incentives for energy efficiency, emissions trading systems and fuel taxes. It also looks at ways revenue from those approaches could be used and the possible distributional impact. Of note, the IMF says that, even if current pledges were fully met, projected global warming would still fall short of the Paris Agreement’s goals; to hit the high-end target, it says, would require cutting emissions by roughly 1/3 by 2030 and an approximately $70 per-ton global carbon price.

The paper considers the effects on 30 countries (including the United States) of a 2030 US$35 and US $70 per-ton carbon price on CO2 emissions, noting that the required carbon price level to meet a country's stated mitigation pledge varies. The paper finds that, on average, a US$35 per-ton carbon price easily meets the mitigation pledges for large emitters. Nine countries need carbon prices below US$35 per ton to meet mitigation pledges, another nine need prices between US$35 and US$70 per ton, and 12 countries need prices above US$70 per ton, according to the paper. As to pricing effects, the paper says a US$35 per-ton carbon price would increase, on average, coal prices 107%, natural gas 33%, electricity 23% and gasoline 8% across the examined countries.

The paper also calculates the unilateral costs and domestic net benefits of a US$70 carbon price. The calculations include the annualized costs of carbon pricing and estimates of the “environmental co-benefits from reduced fuel use” (such as reduced traffic and air pollution mortality). It finds that Australia, Iran and South Africa would be “worse off” under carbon pricing, 18 countries would be “no worse off or moderately better off” and the remaining nine countries would be “considerably better off.” Countries with economies that would significantly benefit from a carbon mitigation regime include China, India, Indonesia, Kazakhstan, Macedonia and Russia. Other net beneficiaries include Argentina, Colombia, Germany, Jamaica, Japan, Morocco, Pakistan, Saudi Arabia, Turkey, Vietnam and the United States.

The paper further suggests that accompanying measures, such as research and development, infrastructure investment, revenue-neutral tax subsidies promoting clean power generation, shifting to cleaner vehicles, energy efficiency improvements and financial market policies are needed. At the international level, it suggests a carbon price floor arrangement among willing countries.

While the paper proposes “ideal” carbon pricing strategies, it acknowledges the reality that country-level mitigation strategies will reflect differing initial policy positions, existing taxes and political constraints.

Summary

The IMF paper is one in several recent policy documents on climate change and carbon emission mitigation. Companies are joining the debate to articulate their concerns and help policymakers and governmental organizations understand the impacts and trade-offs involved in any mitigation strategies. This heightened focus on carbon emissions will likely continue, so companies should monitor and, as appropriate, engage on the issue.

About this article

By

Cathy Koch

EY Global Tax Policy Network and Americas Tax Policy Leader, EY Americas Center for Tax Policy Director

Leader in US and global tax policy with an informed perspective on public and private sectors and a deep knowledge of the US legislative environment.

Related topics Tax