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In Memoriam: The “Linked Fee”

by Michael Levi
April 23, 2010

Oh, “linked fee”, we hardly knew you. For the last few months, conventional wisdom held that the Kerry-Lieberman-Graham climate bill, due out next Monday, would tackle emissions from transportation in a novel way. The bill was reported to leave transportation outside its emissions cap, and levy a fee on refined oil products (gasoline, petroleum, jet fuel) instead. That fee (call it a tax if you must) would have been indexed to the price of permits that power plants would have had to purchase under the cap. During its brief life, there was basically no serious public analysis of the fee’s wisdom. Now all signs say that it’s dead.

The linked fee deserves a decent autopsy, both because it might actually have been a good idea, and because it provides a cautionary tale as to how other key parts of the climate bill might get killed.

First, let’s talk about the cautionary tale part. The linked fee originated with the oil industry. Most people seemed to think that by having an explicit fee levied directly on fuels, the companies would have an easier time avoiding blame for any price increases (by shifting blame to the government). The fee appeared to have support not only from BP and ConocoPhillips, both of which had previously supported economy-wide cap-and-trade, but also from ExxonMobil. And since the fee was tied to the price of permits in the (narrower) cap-and-trade system, it would provide the same incentives for efficiency and low-carbon fuels as including transport under the cap would have. Same emissions impact, better politics: what’s not to like?

What’s not to like, of course, is that it looks exactly like a gas tax increase, which according to the immutable laws of nature, cannot exist in the United States. Which is exactly what killed it: as Lindsey Graham noted earlier this week, if truck drivers hate it, it’s dead, regardless of whether oil companies are cheering. And what’s left? We’ll have to wait for Monday to see the exact answer, but for now, we’re looking at a price on carbon for electric utilities and eventually for manufacturing, but not for transportation. The oil companies get off largely without a carbon price – without having actively opposed one! – even if the rest of the bill goes through. And why has that become possible? Because transport and oil were largely separated from the rest of the bill. It would have been very hard to win a floor fight to simply cut transport out of an economy-wide cap. But once the starting point was a bill where transportation/oil was already separate, killing that part became much easier.

Cynics (who might also be realists) will say that this was the oil industry strategy all along. (Some of the smartest climate-watchers I know predicted this full chain of events.) They thought that the oil industry would push for the linked fee so that they could participate as constructive players and then watch it be killed without taking down the rest of the bill. And that’s exactly what seems to have happened.

Why is this a cautionary tale? Because the rest of the emissions controls in the energy and climate bill could suffer a similar fate. Here’s the sequence of events: Proponents of cap-and-trade make a bunch of deals to gain support for their effort: They add big nuclear sweetners to the bill. They throw in a bunch of offshore oil-and-gas. They mix in some new biofuel subsidies. Then a political backlash kills the cap-and-trade elements of the bill – but cap-and-trade supporters are unable to remove all the stuff they’ve already given away. An energy bill passes, but without cap-and-trade. And cap-and-trade supporters lose all the bargaining chips they need if they want to make another run at passing a bill.

So much for the depressing politics. What makes this even worse is that the linked fee might actually have been a good policy idea. I can think of at least three reasons:

1. It would have made future U.S. efforts to cut oil consumption actually mean something for emissions. So long as you have an economy-wide emissions cap, independent efforts to cut emissions in one sector simply lead to offsetting emissions increases elsewhere in the economy. With a linked fee, any extra cuts made because of energy security concerns would have no effect on emissions under the cap, and hence on permit prices; as a result, those cuts would have been genuinely additional.

2. It might have dealt with a potentially important energy security issue: refineries. Economy-wide cap-and-trade will impose greater costs on domestically refined oil products than on imported ones (because refining creates emissions). The result could (and I emphasize could, because there is no good public modeling here) lead the U.S. to import a lot of gasoline and diesel instead of refining it here. Using border tariffs on imported gasoline and diesel in order to fix this problem could have caused WTO (and political) problems. A linked fee, in contrast, could have been applied equally to all refined products, regardless of where they were refined, avoiding this uneven playing field.

3. It would have separated some of the politics of cap-and-trade from the politics of gasoline prices. Of course, this separation appears to have been its downfall too.

So rest in peace, linked fee. Few will probably remember you, but those who do may remember you fondly.

Post a Comment 5 Comments

  • Posted by Hal

    I’m curious if the linked fee would have been set at a level where the price per amount of carbon was equivalent as for power plants? Analyses I’ve seen in the past seemed to show you couldn’t set a carbon price level that would materially influence drivers, without crippling coal plants. Do you know if the linked fee would have maintained “carbon parity” between transportation and power production? If not, good riddance.

  • Posted by Geoff

    Michael,
    Glad to see you highlighting the refining impact. US exploration and production could suffer a similar adverse effect under cap & trade or EPA Clean Air Act regulation of GHGs, if leakage isn’t covered as rigorously as domestic emissions. All sorts of perverse outcomes could ensue.

  • Posted by Michael Levi

    @Geoff: Can you make a quantitative case on E&P? I’m having a hard time seeing it. Margins in that segment are high; emissions are low. That makes leakage unlikely. (Instead, firms lose some profits and labor probably loses some income too.) Refining, in contrast, is characterized by relatively high emissions, and quite tight margins (with emissions being converted to $s through the carbon price). The one exception for E&P may be some very heavy oil.

  • Posted by Michael Levi

    @Hal: The level would be set so that the price per ton was the same as for power plants. As a result, the near-term impact on drivers would be minimal.

  • Posted by Geoff

    Michael,
    Depends on the level of carbon fee and the overall tax/royalty environment. If upstream is 10% of lifecycle emissions, which it could be for heavy oil (which accounts for a healthy share of US output) then a $20/ton fee could add a buck a barrel of cost. Not make-or-break to nearly the same degree as refining, for the reasons you note, but could still shift some production offshore if combined with things like the repeal of the Section 199 credits, depletion allowance, and other items in the President’s budget.

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