The U.S. Congress continues to bat the phrases “cap and trade” and “carbon tax” across hearing-room floors, but with economic legislation deadlocked, any proposal even suggesting a new federal tax is pretty much dead in the water. However, as utilities across the country are discovering, regions, states and municipalities are picking up the slack and attempting their own experiments in market-based carbon-reduction efforts.

First, here’s quick primer on the differences between these two approaches. Cap-and-trade establishes a total limit of allowable emissions of a given pollutant, either allots or sells credits equivalent to a portion of that total limit to individual polluters, and then allows those companies to buy and sell credits as their usage requires. A carbon tax, on the other hand, adds a surcharge to energy sources at their initial entry point into the market—whether that’s where oil enters a pipeline, coal is loaded onto a railcar or a tanker docks at a harbor. Wholesale buyers can then choose whether to pass that surcharge on to subsequent users.

Cap-and-trade has already been tested, in the regulation of sulfur dioxide emissions from power plants. A market in SO2 emissions was created in 1990 and has been credited by the EPA with reducing SO2 emissions by 60 percent, as of 2010. But recent efforts by Sens. John Kerry, D-Mass., and Joe Lieberman, I-Conn., to include a carbon cap-and-trade plan in an energy bill proposed in May failed; the bill didn’t even reach the senate floor for a vote.

The failure of cap-and-trade at a national level has some considering the usefulness of a flat carbon tax (or “fee,” as the approach is being rebranded). The advantages—alongside a boost in treasury revenues—include more certainty for companies making investment and pricing decisions, according to supporters.

“The most salient point is having a clear and understandable price signal so that every decision-maker knows, not just today, what the carbon-emission price is going to be, and make carbon-appropriate decisions,” said Charles Komanoff, a New York City-based energy-policy consultant and director of the Carbon Tax Center, a clearinghouse for carbon-tax issues.

However, even proponents such as Komanoff realize a carbon tax is an unlikely national alternative in the short term.

“Nobody is going to put money on the 112th Congress passing a carbon tax,” he said.

But a carbon tax is being tried within the boundaries of Boulder, Colo. Called the Carbon Action Plan tax, it was enacted in a 2006 referendum. It is paid by business and residential customers of the local utility, Xcel Energy, based on kilowatt-hour usage. (Those who subscribe to the utility’s wind-energy service don’t pay the tax on the portion of their usage generated by wind.) Funds raised are used to pay for programs, such as home energy audits and energy-­efficiency improvements, which will help the city reduce its total greenhouse gas emissions to 7 percent below 1990 levels by 2012. The program is so popular that citizens voted to increase the tax rate for faster emissions reduction.

And, while federal cap-and-trade efforts are seemingly dead, similar programs are moving forward at the state and regional level. In 2009, 10 states in the Northeast and Mid-Atlantic banded together to form the Regional Greenhouse Gas Initiative (RGGI), with the goal of reducing their combined carbon emissions by 10 percent by 2018. New Jersey Gov. Chris Christie made national headlines in May with an announcement that his state would be withdrawing from RGGI at the end of 2011; the remaining nine states are committed to the program for now.

California has aims to create its own carbon-trading market, beginning in 2013. The effort has faced court battles, but the most recent legal suit was decided in the state’s favor. In fact, California’s effort could form the basis for a Western version of the RGGI, with the Canadian province of British Columbia showing interest in such a plan, according to statements made by the province’s premier, Christy Clark, in June at the Economic Club of Canada.

Also in June, David Hunter, U.S. director of the International Emissions Trading Association, noted that such regional plans could end up filling the vacuum created by the lack of a national strategy. At the Climate Finance North America conference in New York City, he said such disparate programs could end up creating an organic, nongovernmental carbon market.

Increasingly, U.S. energy companies are seeking some predictable regulatory system to allow them to plan their carbon futures. The U.S. Supreme Court addressed some concerns regarding potentially haphazard regulations with a June ruling, which stated that only the EPA—not individual states—has the power to regulate CO2 and other greenhouse gases. But with the EPA now empowered to develop such regulations, new, market-based carrots—and accompanying sticks—may well be one option the regulators decide to explore.


ROSS is a freelance writer located in Brewster, Mass. He can be reached at chuck@chuckross.com.