With Oil Fee, Obama Shows Plan for Sector-by-sector Carbon Price

The oil fee is one of the largest revenue-raising items in the president's budget, but details remain scant about how it would work ("Budget of the U.S. Government, Fiscal Year 2017", Office of Management and Budget, 2016).

 

In a bundle of budget documents that stretches to more than 1,000 pages, the fee is discussed in fewer than 500 words (most of them repeated).

 

The Office of Management and Budget has not shared its revenue-modelling assumptions or proposal for how the fee would be administered.

 

The only known details of the proposal are that the fee would be phased in, starting in fiscal year 2017 and be fully in effect from fiscal year 2022 ("Analytical Perspectives", OMB, 2016, page 189).

 

The fee is projected to raise $7 billion in fiscal 2017, rising to $41 billion in fiscal 2022, net of any impact on other tax collections ("Analytical Perspectives", table 12-2, page 205).

 

"The fee would be collected on domestically produced as well as imported petroleum products. Exported petroleum products would not be subject to the fee and home heating oil would be temporarily exempted."

 

Revenues would be used to fund the president's Clean Transportation Plan to upgrade infrastructure and reduce emissions, but 15 percent would be set aside to assist households with particularly burdensome energy costs.

 

 

The plan is at once oddly detailed and coyly vague. The fee has been calculated to the last 25 cents and the revenue projections are very specific but there are no public details on how it would actually be imposed.

 

Nonetheless, from the published details, it is possible to discern the outlines of the administration's plan and something of its intentions.

 

The straight-line revenue projection implies the fee would be introduced in six equal instalments equivalent to around $1.70 per barrel per year, adding roughly 4 cents per gallon per year to the price of gasoline or diesel.

 

Despite the clumsy and opaque wording in the budget documents, it appears the fee would be collected on refined products rather than the crude oil itself.

 

That would fit in with what senior administration officials told reporters last week when they said the fee would not be collected at the wellhead.

 

U.S. refiners would be protected from the competitive effects of the fee by ensuring it is also levied on imported petroleum products but not payable on exported petroleum products.

 

It appears the oil fee would be similar to an excise tax such as those imposed on gasoline, diesel and kerosene ("Fuel taxes", Internal Revenue Service, 2015).

 

In the case of federal fuel taxes, the "taxable event" is triggered when the fuel is removed from the terminal rack, or sold from a terminal rack at a refinery, or when it enters the United States.

 

The administration has been coy about how the new system would work, describing it as a fee rather than a tax, stating it would be collected on products but describing its effect in terms of "the equivalent of $10.25 per barrel of crude oil".

 

However, if it worked like an excise tax, all or almost all the fee would be passed on to consumers in the form of an increase in final fuel prices, in which case it would push up average fuel costs by around 25 cents a gallon once fully phased in.

 

 

The administration's oil fee looks very much like an increase in fuel tax, currently levied at the rate of 18.4 cents per gallon on motor gasoline and 24.4 cents per gallon on diesel.

 

Congress has repeatedly declined to raise fuel taxes, which have remained essentially unchanged since October 1993 ("Federal tax rates on motor fuels and lubricating oils", Federal Highway Administration, 2014).

 

The proposed fee seems to be a backdoor attempt to increase fuel taxes and has almost no chance of being enacted ("Obama's budget will not lead to a $10 oil tax", Reuters, Feb. 5).

 

Instead it should be seen as trialling the administration's longer-term ambition to impose a series of sectoral carbon prices to discourage fossil fuel consumption, boost clean energy and cut emissions.

 

There is widespread agreement that the most efficient and effective way to cut emissions would be to impose a price on activities that emit carbon dioxide and other greenhouse gases into the atmosphere.

 

The idea of carbon pricing has even been adopted by many oil and gas companies - with the provisos that the carbon price should be levied as widely as possible, at an equal rate, and hit consumption rather than production of fossil fuels ("Pricing carbon", World Bank, 2016).

 

Explicit carbon prices could be established through either a cap-and-trade system or the imposition of a tax; both systems have been proposed at various points over the last 20 years ("Pricing carbon: the European Union Emissions Trading Scheme", Ellerman, 2010).

 

But Congress rejected attempts to establish a nationwide cap-and-trade system for emissions pricing in 2010 so the focus has reverted to a carbon tax.

 

 

There is not much prospect of getting Congress to enact a nationwide carbon tax (or cap-and-trade scheme) but environmental groups and parts of the administration believe it might be possible to create a sector-by-sector approach to carbon pricing.

 

If the sector-based approaches were adopted in enough sectors, coordinated and aligned they could behave as if they were a nationwide carbon price.

 

The Obama administration has already taken several steps down this route with the Clean Power Plan for the electricity generation sector.

 

The Clean Transportation Plan (note the similarity in the name) aims to do the same for the transportation sector.

 

In effect, the White House, in close coordination with environmental groups, is constructing a shadow carbon price system one sector at a time.

 

There is no prospect of the Clean Transportation Plan or the oil fee being enacted by Congress and the Obama administration, not least because there is less than a year before a new legislature and new president take office.

 

But the Clean Transportation Plan and oil fee are meant to serve as markers of future intent, outlining how a sector-by-sector approach to carbon pricing might be made to work in future.