If you feel like you’re reading about a carbon tax more frequently these days, you’re not alone. Many tax leaders we work with are wisely asking questions about carbon taxation in the U.S. The re-emergence of this “fiscal panacea” is not unusual; in economic terms, it is actually pro-cyclical. For the past few decades or so, two revenue-raising mechanisms are automatically proposed when economic crises arise in the U.S.: carbon taxes and value added taxes (VAT). Hence, the likelihood that one or both of these taxes will be adopted increases with each occurrence. President Biden’s infrastructure proposals — the American Job Plan and the Made in American Plan, which includes corporate tax increases — are both linked to climate change. Here are four questions we’ve been discussing with our customers and ecosystem partners in recent weeks:
Question: Why are we hearing more about a carbon tax these days?
Answer: There are a couple of reasons. First, the Biden Administration has emphasized its intent to focus on climate-related investments and policies. On the policy-making front, tax leaders in publicly listed companies should keep tabs on the SEC’s consideration of new climate-related disclosures. Second, the massive infrastructure projects that President Biden has proposed will require broad funding. Carbon taxes are generally favored by most economists and environmentalists, in part because they’re considered highly efficient and can potentially prevent or correct certain market failures. As I mentioned, carbon taxes or emissions trading systems (ETS) represent a potential – though unlikely, at the moment – funding mechanism. To be clear, there are several other funding options, including a supply-side tax that resembles the value added tax (VAT) used throughout the European Union (EU) and other regions and countries (that option is also unlikely given the current socio-political environment in the U.S.). Also considered as a funding option is Transportation Secretary Pete Buttigieg’s notion of a “vehicle mileage tax.” While we do not know exactly what these would look like yet, the so-called mileage tax could be an additional way to finance support infrastructure plans.
Question: What’s the difference between a carbon tax and an emissions trading system (ETS)?
Answer: An ETS, also referred to as a cap-and-trade system, works in parallel to a trading- exchange mechanism. It caps the total level of greenhouse gas emissions and allows companies with low emissions to sell their extra allowances to larger greenhouse gas producers. But there remains a reluctance to implement ETS systems in the near future, without some measure of reform, given the EU’s multi-billion-euro carbon-trading fraud scheme that took place in the mid-late 2000’s, culminating in criminal prosecutions. Conversely, a carbon tax directly sets a price on carbon by delineating a tax rate on greenhouse gas emissions or, more commonly, on the carbon content of fossil fuels. A carbon tax differs from an ETS in that the emission-reduction outcome of a carbon tax is not pre-defined, but the carbon price is.
Question: Does the currently proposed federal infrastructure plan or the Made in America Tax plan call for a carbon tax or an ETS?
Answer: No, and that’s noteworthy. According to a U.S. Treasury report, the Made in America Tax Plan contains a proposal to repeal tax incentives that the president maintains unfairly benefits the fossil fuel industry. That move, according to the report, could generate an additional $35 billion in taxes during the next decade. Nonetheless, although it is apparent that Treasury Secretary Yellen and the President are leveraging the corporate tax system to help tackle climate change, President Biden has primarily elected to underwrite the infrastructure projects primarily through corporate tax revenue hikes, new clean energy incentives, and reforming energy taxation in the petroleum industry, including eliminating long-ago granted subsidies, that are no longer considered practical. The American Petroleum Institute, speaking for most of the largest oil and petrochemical companies, endorsed carbon pricing on emissions. This is a remarkable shift from a history of its regulatory resistance on climate change.
Question: What are the odds that a carbon tax or ETS will materialize in the U.S. in the next year or so?
Answer: All things being equal, not very good, at least not in the short term. While political, economic, fiscal and social winds can shift quickly, the cards are currently stacked against a federal carbon tax or ETS (however, state policymaking may be a different story,). While environmentalists, economists and even many large energy companies that produce fossil fuel favor a carbon tax or an ETS, it is not a top priority in either political party right now. In fact, not even the Green New Deal mentions a carbon tax.
Regardless of this, we’ll keep you updated as new developments unfold.
Read our next post for information on the North Carolina state senate's introduction of a bill calling for a new tax on distributors of carbon-based fuel.
Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.