Carbon Pricing in the United States: what does the future hold?

Carbon pricing internalizes the social cost of greenhouse gas emissions

Carbon pricing, in its simplest terms, assigns a financial cost to emitting greenhouse gases. The idea is that the polluter, not society at large, bares the cost of emissions by accounting for it as part of business. By internalizing the cost of carbon, carbon pricing induces efforts to reduce emissions at the source – introducing this policy to existing markets can shift investment decisions and behavior across all sectors.

Cap-and-trade vs. carbon tax is not the key question

Most experts agree that widespread carbon pricing will be a necessary component of impactful U.S. climate policy, but there is less agreement on the best policy instrument to be used for its administration. Though the choice between a carbon tax or a cap-and-trade scheme has been long debated, in practice distinctions are blurred by hybridization and the choice of design elements along the policy continuum. There is a strong case that the detailed design of the instrument, not the choice of instrument, has the greatest implications on the efficacy, cost-effectiveness, and fairness of the overall scheme. Perhaps most importantly, the political viability of the carbon pricing policy tends to have the greatest influence on the desired outcome, and whether it is implemented at all.

A lack of action at the federal level has stimulated state action on carbon pricing

During the Trump administration’s widespread dismantling of U.S. federal climate policy, attention turned to state governments to take the lead on carbon pricing. At present, active carbon pricing schemes are implemented in 11 states which together account for over a third of U.S. GDP and a quarter of the U.S. population.

The Transportation Climate Initiative (TCI), an effort including all current RGGI participants, plus Pennsylvania, Virginia, and the District of Columbia, is also developing a regional cap-and-trade scheme for the transport sector starting in 2022, with the rate of cap decline to be agreed on by TCI jurisdictions.

Despite sound carbon pricing progress in some states in the form of cap-and-trade schemes, national coverage remains overwhelmingly sparse. Two separate carbon pricing programs have been thwarted by voters in Washington State in recent years, Initiative 731 in 2016, and then Initiative 1631 in 2018. Under a Biden presidency, federally regulated schemes could prove a more feasible and efficient way of reducing nationwide emissions than fickle state-by-state political strategies, but top-down efforts have hurdles of their own.

A Biden administration should reduce State-Federal divides on carbon pricing

Contrasting state-by-state policy objectives pose a challenge to devising widely acceptable climate policy – such as carbon pricing – and conflicts between State and Federal agendas have materialized in this area. In late 2019 a ruling made by the Federal Energy Regulatory Commission (FERC) restricted state subsidies to low carbon energy sources on the basis that they undermined the pricing of resources crucial for grid stability. But a conference held by the FERC in September 2020, in response to requests from energy generators, industry, and clean-energy proponents, has now seen agreement of the benefits of integrating state-determined carbon pricing into larger regional energy markets. This avenue could reconcile State-Federal divides on the practicalities of administering climate policy aimed at emissions reduction. A Biden Administration is also less likely to oppose climate ambition at the State level. 

New York is a testbed for wider carbon pricing

New York’s grid operator NYISO is currently working on a carbon pricing proposal to integrate into New York’s wholesale energy market. The carbon prices hinge on a social cost of carbon to be determined by New York State regulators, and the plan would still require approval from the FERC. If approved, the carbon price would be accounted for in every energy market transaction across the state, and rapidly influence lower emission market behaviors. Though this case would only affect the state of New York, the FERC’s approval of the NYISO scheme could open the door to the development of similar carbon pricing mechanisms from Regional Transmission Organization’s (RTO’s), which would be applicable at multi-state levels.

This has the potential to introduce carbon pricing to much wider portions of the U.S., but its incremental nature could again result in slow expansion. Are there any carbon pricing developments that could cause swathing changes across the country?

Ambitious nationwide carbon pricing is unlikely without a Democratic Senate majority

President-Elect Biden’s climate plan has recently moved away from carbon pricing as a core policy, but there is one prominent congressional campaign pushing for it.

This campaign is focused on a bill called The Energy Innovation and Carbon Dividend Act (H.R. 763). Introduced to the U.S. House of Representatives in 2019, it would impose a carbon fee on fuels and fuel derived products that emit greenhouse gases. The fees – starting at $15 in 2019 and increasing by $10 each year – would be placed into a Carbon Dividend Trust Fund to be paid to U.S. citizens. Putting this money directly back into the hands of the public earns this bill political bargaining power, an aspect absent from Washington’s failed I-732 carbon pricing policy.  

H.R. 763 could reduce U.S. nationwide emissions by at least 40% in the first 12 years, but the bill must first pass through the House and Senate before it can be signed into law by the President. Though the bill has been widely touted as bipartisan on account of its introduction by two Republican and three Democratic Representatives, it earned endorsement from only one Republican of a total 82 co-sponsors as of November 16 2020. Whilst Biden himself has strong climate ambitions of his own, and is unlikely to oppose the bill in principle, it would need greater bipartisan support to reach the Senate floor. A Democratic majority in the House means the bill should pass in the lower chamber, but the chance of it passing in the Senate remains in the balance. 

A Senate runoff race in Georgia, scheduled on 5^th January 2021, is likely to decide the race for the U.S. Senate, and could therefore determine the fate of national carbon pricing policy proposed by H.R. 763. If Democrats take control of the Senate, H.R. 763 could well make its way to the Senate floor, opening the door to bipartisan congressional negotiations, that President-Elect Biden and Vice President-Elect Kamala Harris could support, or even spearhead.

Corporates should not wait a nationwide scheme to start acting on carbon pricing

The politics surrounding carbon pricing remains complex, but positions in the corporate world are much clearer. Despite a distinct lack of federally regulated pricing on carbon, dozens of leading U.S. companies are outdoing their governments and proactively planning for climate-related risks by incorporating internal carbon prices into their business planning and risk management strategies.

Corporations are also engaging policy makers, calling for clear pricing and regulatory certainty to help them plan their climate-related investments. The Silicon Valley Leadership Group, a public policy trade association representing leading businesses including Apple, Bank of America, Coca-Cola, General Motors, Johnson & Johnson, in 2019 expressed support in principle for H.R. 763 and its federally regulated carbon pricing proposal. More recently, the Business Roundtable, a lobbying group representing over 200 major U.S. corporations including Amazon, Chevron, and Walmart, publicly stated their support in September 2020 for a national market-based emissions reduction policy.

Corporations can take action now to mitigate climate risks

While the exact future of mandatory carbon pricing across the U.S. remains unpredictable, there are many near-term possibilities, and as climate change progresses, the number of initiatives lobbying for federal and state action will only increase.

A comprehensive greenhouse gas inventory is the essential first step towards projecting the possible risks of carbon pricing to your company. Your greenhouse gas inventory can be used both in climate scenario analysis to understand financial impacts under different plausible carbon pricing scenarios, and as the baseline for any emissions reduction targets. Understanding carbon pricing risks and your exposure to them can help inform business planning and risk mitigation, which may include developing internal carbon prices to prepare for mandatory pricing which could prevail in the future. Taking steps towards aligning with Taskforce on Climate-Related Financial Disclosures (TCFD) recommendations will help your company more comprehensively understand and mitigate climate-related risks and opportunities.

Wherever your starting point, Agendi supports you on your journey of climate action.