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Citizens for a Sound Economy Issue Analysis 57 - Think Globally, Tax Locally: The EPA's Global Warming "Action Plan" July 26, 1997
In July 1996, in a major policy shift, the Clinton administration agreed in principle to binding international limits to reduce manmade greenhouse gases. At the 150-nation Global Climate Conference in Geneva, Undersecretary of State for Global Affairs Timothy Wirth announced the administration's intent to secure an international agreement that would legally bind some countries to reduce emissions of CO2 and other "greenhouse" gases believed by some to cause global warming.
According to Mr. Wirth, the current, non-binding agreement intended to reduce greenhouse gases is ineffective and should be replaced by an agreement that requires mandatory reductions instead of voluntary emissions reductions. Under the Framework Convention on Climate Change, signed by the United States and some 150 other nations at the 1992 Earth Summit in Rio de Janeiro, each nation's goal was to take voluntary actions to reduce greenhouse gas emissions to their 1990 levels by the year 2000. In 1993, the Clinton administration released the Climate Change Action Plan to meet the goals of the convention. The Action Plan was a "voluntary" program that promoted reducing methane gas emissions, recycling programs, efficiency programs, and energy conservation.
Despite the progress made under the Action Plan, many nations that signed the 1992 agreement began to view voluntary reductions as ineffective. In a 1995 meeting in Berlin, Germany, the Berlin Mandate was adopted, which proposed that nations establish emissions limitations in the post-2000 period and encouraged developed nations to implement new control measures. At the July 1996 meeting in Geneva, the Clinton administration announced that the United States was committed to legally binding mandatory reductions of emissions. The details of these reductions are currently being negotiated and will be finalized, in all likelihood, at a December 1997 conference in Kyoto, Japan. The new treaty would require exorbitant new taxes and more command-and-control style regulations that would have a significant adverse impact on the U.S. economy. Some have compared the burdens of such binding emission reductions to problems encountered during the "energy crisis" of the 1970s, despite the fact that the science behind global warming theory is far from certain.
Global Warming and Human Activity
Underlying the current round of negotiations is a fundamental dispute over the cause and the dangers of global warming. Are temperatures on Earth rising? If so, are increases in the levels of CO2 and other greenhouse gases to blame? What role, if any, does human activity play with respect to global warming? These questions must be answered before any meaningful discussion of global warming and proposed policy prescriptions can begin.
Are temperatures rising? National Oceanic and Atmospheric Administration (NOAA) satellites measure the Earth's temperature a few kilometers above the surface. These satellites, the most accurate measuring instruments currently available, have shown no net warming over the last 18 years.1 Moreover, the satellite findings are verified by temperature readings from weather balloons that are launched twice daily throughout the world.
Is human activity to blame? Although climatologists agree that greenhouse gases are increasing in the atmosphere, they cannot with any degree of certainty claim that any increase in temperature is the result of human activity. Environmentalists ardently disagree, while others argue that no scientific evidence exists linking warming to man-made carbon sources. Nor is there scientific evidence, many scientists contend, that future increases in greenhouse gases will significantly affect the climate. Even if temperatures were rising, the hypothesis that warming is due to human factors would be problematic. Most of the highly disputed, one-degree Celsius of warming claimed by environmental groups occurred before 1940, while the intensity of man-made greenhouse gases was greater after 1940.
A large degree of uncertainty remains. A digest of the Intergovernmental Panel on Climate Change's (IPCC) voluminous 1995 report declares that "the balance of evidence suggests a discernible human influence on global climate."2 However, almost in the same place, the document admits that "our ability to quantify the human influence on global climate is currently limited ... because there are uncertainties in key factors."3
Making It Hurt
Despite the lack of scientific consensus on these issues, the EPA is considering new taxes and regulations on the burning of fossil fuels in order to meet the emissions limits currently being negotiated. The details are laid out in an internal 1994 memorandum from the EPA's Office of Policy, Planning and Evaluation that discusses possible measures to limit greenhouse gas emissions.4 The discussion document presents a host of punitive taxes designed to make the consumption of electricity, the ownership and operation of an automobile, or indeed anything requiring the burning of fossil fuels, more expensive. Ultimately, reducing CO2 emissions cannot be accomplished without reducing fossil fuel use. Proposals to reduce emissions, therefore, necessarily entail raising the price or rationing the use of energy. The following highlights some of the proposals outlined in the memorandum.
The most direct way to reduce energy use is to tax it. The most common tax discussed is a carbon tax, which would tax the carbon content of fossil fuels. Conservative estimates place the loss to gross domestic product at $350 billion annually from the carbon tax alone.5 It is highly unlikely that a broad-based carbon tax is politically feasible, meaning the administration may have to rely on other forms of taxes and regulation. The EPA memorandum suggests a number of possible taxes, each of which is designed to discourage the consumption of fossil fuels:
a greenhouse gas tax based on the potential of a given fuel to produce greenhouse gases when burned;
a BTU tax on the heat or energy content of a given fuel;
an at-source tax on the value of fuel at the point of extraction;
an end-use tax on the value of fuel at the point of final sale;
a motor fuels tax on the retail price of gasoline and diesel (see below);
an oil import fee on the value of imported crude oil and petroleum products;
"Or," as the EPA states "combinations or permutations of the taxes outlined above."
Many proponents of energy taxes claim that they can be used to offset reductions in other taxes. However, given the scale of the proposed energy taxes and the history of the Clinton administration regarding tax cuts, promises of offsetting cuts in the income tax and/or the social security payroll tax ring hollow.
The economic implications of such far-reaching and all-encompassing energy taxes are staggering. Obviously, any tax on energy would mean significantly higher prices for gasoline, electricity, home heating oil and just about anything requiring energy in its production or use.
50 cents per gallon gasoline tax. One of the EPA's more onerous proposals would raise the price of gasoline by 50 cents a gallon under the cloak of "national security." This strategy avoids the need for legislation when implementing the new tax. Using existing laws, the President could declare oil imports a threat to national security and take actions to adjust imports as necessary. Agency authors have outlined a plan whereby the Secretary of Commerce would launch an investigation to "determine" a threat to national security based on U.S. dependence on oil imports.
As the EPA points out, "Section 232 of the Trade Expansion Act of 1962 calls for the Secretary of Commerce to conduct investigations of the impact of imports on national security. In this case, the level and increase of oil imports would be the subject of the investigation and the EPA would petition the Department of Commerce to conduct the 232 investigation. If the Secretary of Commerce finds that oil imports threaten to impair national security, the President must determine if action should be taken to 'adjust imports' to remove the national security threat. In this case, the President would decide to impose a gasoline fee of $0.50/gallon to reduce consumption of petroleum and, in turn, oil imports."6 (emphasis added)
The EPA admits that this option would "require the use of substantial political capital since the levying of a gasoline fee would probably be politically unpopular."7
The EPA is concerned about the feasibility of taxes in general. "Energy taxes are likely to be unpopular and would require significant political capital to legislate," EPA officials concede. "They might initiate some backlash against climate change and other environmental actions."8 Consequently, the agency may rely on regulations to achieve emission reductions. However, in many ways regulations are simply hidden taxes that are ultimately paid for by consumers. The following list provides an example of the policies discussed by the EPA:
Stricter Corporate Average Fuel Economy (CAFE) standards. Another EPA proposal would raise fuel economy standards on automobiles by two percent per year from the year 2000 until the year 2025. Car fleets averaging 27.5 miles to the gallon today would be required to average 45.1 miles by the year 2025. Light trucks averaging 20.7 miles today would be required to average 34.0 miles to the gallon in 2025.
"This option would be very controversial," the EPA authors concede. "On the other hand, moving forward with the first stages of this action would send a signal to the auto industry that the administration is serious about climate change."9
Although the administration may be serious about climate change, tightening the CAFE standards offers little in the way of emission reductions. In fact, new cars and light trucks subject to the CAFE standards are responsible for a mere 1.5 percent of current worldwide manmade greenhouse gases.10 Based on that figure, many argue that 40 percent stiffer CAFE standards would produce carbon-emissions reduction in cars and light trucks that would be "virtually undetectable -- only four-tenths of one percent and not until the year 2010."11
CAFE Levels With 2% Annual Increase
Cars 27.5 mpg
Light Trucks 20.7 mpg
The EPA characterizes the welfare costs of this policy option as "significant." They disingenuously argue that "pre-2000 costs would be borne by auto manufacturers in the form of increased R&D," as though car makers' R&D money comes from some source other than the consumer. "Post-2000 costs," they admit, would be borne by "consumers forced to buy vehicles they would not otherwise have purchased."12 The agency states that costs may increase by as much as $2,000 to $4,000 per vehicle.
Regulations such as CAFE can have impacts far beyond the cost of compliance. For CAFE, in particular, there are serious health consequences to a higher CAFE standard. In 1991, the National Highway Traffic Safety Administration (NHTSA), which regulates highway safety, found that since the 1970s, downsizing vehicles was responsible for 2,000 deaths and 20,000 serious injuries. More recently, a study by John Graham of Harvard University found that increasing CAFE to 40 miles per gallon would result in an additional 1,650 deaths and 8,500 serious injuries per year.
Despite the cost and adverse health impacts, many consider a higher CAFE standard an important policy for reducing greenhouse gas emissions. In addition to EPA discussions of tougher CAFE standards, groups such as the Sierra Club are also advocating a 45-mile per gallon standard.13
Expanding the list of hazardous air pollutants under the Clean Air Act to include greenhouse gases. Under this proposal the EPA would begin proceedings to list CO2, methane, nitrous oxides, PFCs, HFCs, and any other greenhouse gases as hazardous pollutants that would require control technologies to reduce emission levels. This would require new regulations and reporting requirements.14
Expanding the EPA permitting process. Under the Clean Air Act, new emitters of sources of pollution must evaluate various pollution control measures and adopt the "best available control technology" before receiving a construction permit. The EPA suggests expanding this process to limit greenhouse gases. The effect of the new permitting requirements could be extreme, expanding the EPA's authority significantly. As the memorandum states, "At one extreme, it would be possible for EPA to question even the need for a particular new powerplant if energy efficiency measures have not been aggressively pursued in the service territory of the applicant."15
Establish new "Reasonably Available Control Technology" requirements for greenhouse gases. Under the Clean Air Act, areas that fail to meet air quality standards must adopt "reasonably available control technologies" to mitigate air quality problems. To address global warming concerns, the EPA is considering new "control technology guidelines" (CTGs) that states would have to follow when filing state implementation plans with the agency. Adding CTGs for greenhouse gases to the state implementation plans would be a significant expansion of EPA authority.
New paperwork burdens for industrial non-hazardous waste. In an effort to promote energy efficiency and reduce waste, the memo suggests businesses could be required "to report the quantity of industrial non-hazardous waste they generate each year, estimate constituents, describe how waste is managed and steps being taken to reduce/reuse waste." In turn the EPA would track reduction/reuse of waste and report its findings to Congress, with recommendations for federal legislation if necessary.
New reporting requirements on source reduction and secondary content use in products. Under this proposal, manufacturers would be required to report the amount of post-consumer material used in each commodity produced as well as any source reductions that have been achieved in each of their major product lines. The requirements would be aimed at making manufacturers use resources more efficiently and avoid unnecessary waste. The EPA would track the rates of source reduction and the use of secondary material and recommend legislation to Congress as necessary.
Other Proposals. In addition to new taxes and regulations, the EPA also examined a number of subsidies, "users fees," and other government programs that could be used to lower energy consumption. These include:
charging automobile owners an annual inspection fee plus "from zero to perhaps several hundred dollars" based on accumulated vehicle mileage, i.e., the more you drive, the more you pay;
charging user fees for highways ("Full Pricing of Roads");
implementing a pay-at-the-pump program for auto insurance so that people buy what they need as they go ("State Opt-in to a National Pay-at-the-Pump Insurance Program");
imposing price controls on natural gas ("Natural Gas Pricing Reform");
creating a "Solar Hot Water Heaters for Southern Low-Income Homes" program;
taxing the incineration of municipal and industrial non-hazardous waste; and
enacting national bottle and tire deposit-return programs.
Taking It on the Chin
The Berlin Mandate. The EPA's proposals on global warming are all the more troubling when put in the context of the Berlin Mandate, which specifically excludes developing nations -- e.g., China, Mexico, Brazil, and Korea -- from new emission-reduction requirements, while simultaneously binding the United States to an exacting reductions timetable. Thus, the United States would be required to impose significant new burdens on its economy, while our competitors in the global market are specifically exempted.
The United Mine Workers of America (UMW) explains that "the administration had gone to Berlin with the position that all nations -- both developed and developing -- should take on some reduction obligations if we were truly attempting to address global climate change. But faced with fierce opposition to reduction commitments from developing countries (led by China), the U.S. capitulated and agreed to enter negotiations on post-2000 reductions that would only apply to industrial nations. At this point, the debate was no longer about an environmental objective; it became a debate about trade and jobs."16 As much as 75 percent of global carbon emissions are expected to come from developing countries by the year 2040, with China becoming the single-largest emitter in a considerably shorter period.
The exemption of these nations from any commitments to carbon reductions ensures: (1) that any effort to stabilize atmospheric concentrations of CO2 will not only be expensive, but of limited impact; and (2) the regulatory fallout resulting from the signing and ratification of the treaty will create powerful incentives for American business to export jobs and capital to those countries with no carbon-reduction commitments. Since developing countries are negotiating commitments they will not have to abide by, it can only be assumed they will attempt to craft a deal that gives them a competitive economic advantage.
The current lack of consensus within the scientific community concerning the impact of man-made emissions, as well as the significant economic impacts of binding mandates for greenhouse gas reductions, make it imperative that the federal government carefully weigh the levying of new taxes and the implementation of new regulations against any supposed environmental gains. Until all the facts are in on global warming, the Clinton administration should not pursue measures that threaten to export America's job market, add to an already crippling tax burden, undermine our industrial capacity, or downgrade our present standard of living.
1 Patrick J. Michaels, "How Good are the Satellite Temperatures?" World Climate Report, vol. 2, no. 3, October 14, 1996.
2 J.T. Houghton, et. al., Climate Change 1995: The Science of Climate Change, 1996, p. 4.
3 J.T. Houghton, et. al., Climate Change 1995: The Science of Climate Change, 1996, p. 5.
4 "More Tons," EPA Memorandum, Office of Policy, Planning and Evaluation, May 31, 1994.
5 Lawrence M. Horowitz, "Impact of Carbon Dioxide Emission Reductions on Living Standards and Lifestyles," DRI/McGraw Hill, September 13, 1995, p. 2.
6 "More Tons," May 31, 1994.
7 "More Tons," May 31, 1994.
8 "More Tons," May 31, 1994.
9 "More Tons," May 31, 1994.
10 Letter to Rep. John Dingell (D-MI) from EPA Administrator William K. Reilly, April 2, 1991.
11 Cited in AutoWeek, May 31, 1993.
12 "More Tons," May 31, 1994.
13 "We Must Act Now to Curb Global Warming," http://www.sierraclub.org/news/globalwarming/0005.html.
14 "More Tons," May 31, 1994.
15 "More Tons," May 31, 1994.
16 "Background on Climate Change Negotiations," United Mine Workers of America.