To deal with climate change, it is necessary to trap carbon produced in manufacturing. Clean energy production is not ramping up quickly enough to reduce the carbon present in the atmosphere. So the IRS has created carbon sequestration credits to provide a tax break for manufacturers who trap carbon, and the Treasury proposed removing tax benefits for oil and gas production.
According to the IRS, it is possible to gain a tax credit for carbon sequestration. The credit is twice as high, twenty dollars a metric ton, if the carbon is not used to extract natural gas or oil once captured. A manufacturer can still receive ten dollars per metric ton if the carbon is used to extract petroleum fuels. This suggests that the carbon sequestration credit could be used to support additional petroleum exploration that releases carbon into the atmosphere, especially if the oil company offers more than the difference of ten dollars a metric ton for the carbon dioxide so it can be used in tertiary extraction.
Injecting the carbon dioxide into an oil field releases oil or gas that is difficult to extract through other means, so it is called a tertiary injectant as it is injected after other methods are used. According to the Treasury Green Book, the tertiary injection deduction may be repealed in 2011. A related policy, the enhanced oil recovery credit, is also suggested for repeal. This is part of energy legislation that removes other tax incentives for the oil and gas industry, such as tax deductions for drilling in marginal wells, in addition to changing how depletion and oil well drilling costs are reported. Coal extraction deductions for US manufacturing are also removed in this proposal. The overall effect of the energy legislation removes subsidies to natural gas and oil companies, so that their products are less cost competitive with renewable energy. This is an alternative to cap and trade, as it changes tax rules rather than creating a carbon futures exchange.
Tariffs are a type of import tax, often paid at the port when products arrive from their shipment across the ocean. Tariffs raise the costs of importers, helping domestic manufacturers sell more products and also raising the prices of products at retail stores. Retaliation is not uncommon with tariffs, as a country often decides to raise tariffs on a trading partner if its exports are subject to this tax.
Carbon tariffs are not implemented in the same way as other tariffs. Traditional tariffs are usually based on the country’s relationship with its trading partner, as well as the importance of domestic manufacturing firms. For example, when the United States granted China Most Favored Nation status, many tariffs were reduced. Tariffs are higher on industries that are considered to be critical by the country, for example the United States wants to protect auto makers to preserve jobs as well as to keep metal crafting machines functional in case of a war. Tariffs can also be used to punish a country for subsidizing domestic manufacturers who sell products in foreign markets, and Brazil recently introduced several tariffs because of subsidies paid to US cotton manufacturers, according to World Bulletin.
Carbon tariffs have been in the news lately. Energy Secretary Steven Chu suggests carbon tariffs as a method of keeping US industries competitive after carbon taxes are implemented here, according to the Wall Street Journal. Environmental conservation ideas behind carbon tariffs are one method of convincing domestic supporters to back a tariff, which is important because it will raise suppliers and retailers’ prices. Carbon tariffs provide an advantage to developed countries that have already installed emissions reduction equipment, giving them cost advantages over industrializing countries that don’t already have pollution controls installed.
President Obama expressed disapproval about Congress’ provision of carbon tariffs in the energy bill, according to the New York Times. NYT columnist Paul Krugman suggests that the carbon tariffs may be legal, although trading partners such as China threaten retaliation even if they don’t get World Trade Organization approval as Brazil did. French legislators also favor a carbon tariff to protect their manufacturers from Chinese imports, according to EurActiv. The CFR columnist Michael A. Levi opposes carbon tariffs because he thinks that they will not be implemented correctly, as well as causing trade wars.
Measuring carbon emissions accurately requires sending inspectors to the other country to audit carbon emissions, since the country under the tariff has an incentive to underreport its carbon emissions. An influential country such as China might demand to send carbon auditors to the United States and France, putting these countries in a bind. The countries would look hypocritical if they didn’t allow the inspectors in, and letting in foreign inspectors increases the risks of industrial espionage and sabotage and would be unpopular with the public.
Los Angeles is raising rates on water and power. According to the LA Times, the rates are going up 37% over the next four years. This rate increase has several objectives. The City of Los Angeles is operating in the red and water and energy bills are one way to make up the shortfall. Mayor Antonio Villaraigosa has an additional plan in this rate hike. During the 2008 presidential campaign, the candidates debated over green jobs. Green jobs include new work building windmills and solar plants, designing new ways to construct the power grids to transport renewable energy, and even low tech jobs such as painting rooftops. The mayor’s plan is to add new jobs to revitalize the Los Angeles economy, as many as 18,000 according to the Los Angeles Times.
Not all of the rate hike is going toward green jobs. According to EGP News, three quarters of the rate hike pays for current water and power systems provided by the Los Angeles Department of Water and Power, and one quarter of the rate hike pays for new clean energy systems. The bill also implements a larger rate hike on users that consume more water and power, as well as businesses. The quarter of the rate used to provide green jobs and new power sources is called a carbon reduction surcharge.
The carbon reduction surcharge is required by California law. State law penalizes utilities that do not switch over to renewable energy. Failure of this bill costs the City of Los Angeles as much as $300 million in fines, according to the mayor, as reported by NBC Los Angeles. Carbon reduction surcharges are promoted by the former Vice President and green energy advocate Al Gore. Al Gore is pleased with Mayor Villagairosa’s plan, according to LAist.