A US Carbon Tax – How Aligned Would the API be with Something That Worked

The API is suggesting that it would support a carbon tax in the US, but at the same time is suggesting that this would only be supported if it was the only mechanism that regulators used at a Federal level. While both Europe and California have carbon taxes, they have many other regulations and mechanisms to help lower emissions, such as credits for EV use and LCSF in California.

In Europe, the Cap and Trade system for CO2 was not well thought through in the early days and grossly underestimated the easy fixes in the system, leading to credits greatly exceeding demand and to very low carbon prices. As Caps have come down in Europe, we are now reaching a point where cheap carbon fixes are behind us and the carbon price has risen rapidly over the last three years and currently sits at around €40 per metric ton, with the expectation that it will go higher

Source: Chart

For the cap and trade system to work in the US, or for a tax alone to work, the conditions around the tax may not sit well with the API members and the details may be the stumbling block:

• First, it needs to be a carbon equivalent tax – which would impose very high penalties on methane emissions. One consequence of this is that it might encourage more flaring (still better than letting the methane escape), but it might also make some of the smaller scale methane capture technologies economic – LNG, methanol, and ammonia.
• Second, the tax needs to be high enough to drive behavioral change. 45Q is a great example of a tax structure that so far has not worked. It is too low to drive material investment in CCS, and while it has created an incentive to do plenty of analysis at a company level, it has not driven enough work on the need to improve (and lower the cost of) capture technology. If the carbon tax is too low, it will be passed on to customers and may not be significant enough on a per gallon of fuel or per megawatt-hour of electricity for anyone to care. A low carbon tax if additive to 45Q may drive increased interest in CCS.
• The tax also needs to escalate on an agreed but eventually aggressive path. All CO2 and equivalent emitters need to know that at some point – even if it is 20 years from now, it will be economically challenging to have all but the smallest carbon footprints. Ultimately a gallon of regular gasoline needs to be so expensive relative to hydrogen or electric power, or perhaps bio-based gasoline, that only very few will buy it.

There is much more detail needed around trade and how much of a time exemption you give certain industries to adjust – plus the tax needs to more than cover the cost of monitoring and enforcement. A carbon tax alone (as suggested by the API) could do the job, but the devil is in the details and the details will likely not be as agreeable to the API members today as the broad concept.