The Deutch Energy Tax

Guest Post by Willis Eschenbach [Note: Link to PDF version added at the end]

At the suggestion of a commenter on my last post, I’m taking a look at a very destructive and pointless piece of proposed legislation. This is the “Energy Innovation and Carbon Dividend Act“, which is subtitled “The Market-Based Climate Solution”. It’s proposed by Reps. Deutch (D), Rooney (R), Delaney (D), Fitzpatrick (R), and Crist (D).

The text of the proposed legislation is here, and the Press Release is here. 

Their plan, from above:

Purpose of This Policy

• To encourage market-driven innovation in clean energy technologies.

• To create efficient markets, encourage competition, and promote our national interests.

• To create a healthier, more stable, more prosperous nation for future generations.

Projected Benefits

• Creates 2.1 million net new jobs by the 10th year.

• Deploys private capital and American innovation to advance clean energy technologies.

• Reduces U.S. carbon emissions by 33% in 10 years, targets 90% reduction by 2050 (vs. 2015).

• Improves health, prevents 13,000 pollution-related U.S. deaths annually.

Major Policy Components

Carbon Fee – A gradually-rising upstream fee on the carbon content of fuels.

● Purpose: Creates market-driven demand for cleaner energy technologies. Corrects market distortions by reflecting externalities of pollution costs

● Details: Assessed once, upstream. Starts at $15 per metric ton of CO2e, increases $10 each year. Exemption for agricultural fuels and non-emissive uses. Rebate for CCS.

● HFCs: Fee also assessed at 10% of GWP of fluorinated gases.

Carbon Dividend – Rebates 100% of net revenues to the American people.

● Purpose: Protects consumers and the economy. Maintains revenue neutrality. Rebate offsets cost increases for most Americans.

● Details: Equal share to adults with SSN or TIN, half share to minors. Administered by Treasury. Admin costs not to exceed 2%. 1-month advance payment.

Gotta love NewSpeak. They say that the dividend “protects consumers” … but since it is “protecting” them from the tax that the authors of the proposed law are imposing, I fear that’s less than comforting …

Let me start by giving this tax its actual name. It is not a “carbon tax” or a “carbon fee” as the legislation claims. Nor is it a carbon dioxide tax. It is a tax on energy.

Curiously, the size of their energy tax is finely tuned. It actually varies directly with the energy content of the various fuels like gasoline, diesel, coal, and jet fuel. This is because for the hydrocarbons that we call “fossil fuels”, the energy content is in part proportional to the carbon content. The energy is released when the carbon is burned and turned into carbon dioxide. More energy from the carbon = more carbon dioxide.

It gets more curious. Their energy tax is based, not on carbon dioxide emissions, but on a measurement called “CO2 equivalents”. From the text of the law:

‘‘(b) CARBON DIOXIDE EQUIVALENT OR CO2-E.—

The term ‘carbon dioxide equivalent’ or ‘CO2-e’ means the number of metric tons of carbon dioxide emissions with the same global warming potential as one metric ton of another greenhouse gas.

So CO2 has a “global warming potential” (GWP) of one because it’s the standard of measure. Methane has a GWP of thirty, meaning they count one molecule of methane as equivalent to thirty CO2 molecules. And one molecule of nitrous oxide is said to be equivalent to 275 CO2 molecules … and this despite the fact that the atmosphere contains nitrogen and oxygen. The result of this is that ANY open-air flame will produce various compounds of nitrogen and oxygen, including nitrous oxide … and they plan to tax nitrous oxide at a rate 275 times the tax on CO2??? Oh, man, given that for the tax rate nitrous oxide the tax rate will be 275 times that on CO2, nitrous oxide emissions will be another center of insane arguments about what is and isn’t taxable. (For those interested, there’s more EPA info on the global warming potential in the endnotes.)

It gets worse …

So they plan to tax CO2e by an amount starting at $15/tonne (metric ton) and increasing by $10/tonne per year. How will the collection of this tax be achieved? In good bureaucratic fashion, it will be done in the most arcane, complicated, vague, and contentious manner imaginable. They will start with:

‘‘(1) the identification of an effective point in the production, distribution, or use of a covered fuel or fluorinated greenhouse gas for collecting such carbon fee or fluorinated greenhouse gas fee, in such a manner so as to minimize administrative burden and maximize the extent to which full fuel cycle greenhouse gas emissions from covered fuels or fluorinated greenhouse gases have the carbon fee or fluorinated greenhouse gas fee levied upon them,

I’ve underlined the “full fuel cycle greenhouse gas emissions” part. This is not just the greenhouse gases (GHGs) in the fuel. That would be far too simple to calculate. This is the sum of the actual CO2e of the GHGs in the substance, plus in their words, “that fuel’s upstream greenhouse gas emissions.” This means all greenhouse gases emitted by activities going back through the refining, the transportation, and all the way to the “wellhead” or the mine. In their words:

(t) UPSTREAM GREENHOUSE GAS EMISSIONS.— The term ‘upstream greenhouse gas emissions’ means the quantity of greenhouse gases, expressed in metric tons of CO2-e, emitted to the atmosphere resulting from, non exclusively, the extraction, processing, transportation, financing, or other preparation of a covered [fossil] fuel for use.

Note the escape clause “non exclusively”, which means that they can add other things to the “upstream” emissions.

Of course this will lead to further endless arguments about things like whether corporate air travel to inspect pipelines or the cooking gases consumed by the worker’s kitchens or methane leakage from your competitors wells should be included as an “upstream” emission of GHGs or not … this is just more employment for tax accountants and lawyers, and more cost to the economy.

For an absurd example of their madness, they specifically say that you have to include the greenhouse gases emitted by obtaining financing … say what? Greenhouse gas emissions from financing? Here’s a notorious financial CO2 emitter … or perhaps just a source of excess methane mixed with hot air …

Did I happen to ask, just who thinks this is a good idea?

So energy is to be taxed at a rate including all the energy involved in bringing that energy to where you use the energy …

And at this point, we get to the messy and most important question—WHO GETS TAXED? Remember, above they said: “Details: Assessed once, upstream.” So the bureaucrats, having decided the most “effective point” in the production, distribution or use of fossil fuel, then take up the next question, where the rubber meets the road. This is the question of “who pays?”, or in their words:

‘‘(2) the identification of covered entities which shall be liable for the payment of the carbon fee or the fluorinated greenhouse gas fee,

YIKES! And who are these “covered entities” that are gonna get slammed?

(f) COVERED ENTITY.—The term ‘covered entity’ means—

(1) in the case of crude oil— ‘

(A) a refinery operating in the United States, and

(B) any importer of any petroleum or petroleum product into the United States,

(2) in the case of coal—

(A) any coal mining operation in the United States, and

(B) any importer of coal into the United States,

(3) in the case of natural gas—

(A) any entity entering pipeline quality natural gas into the natural gas transmission system, and

(B) any importer of natural gas into the United States,

(4) in the case of fluorinated gases any entity required to report the emission of a fluorinated gas under part 98 of title 40, Code of Federal Regulations, and

(5) any entity or class of entities which, as determined by the Secretary, is transporting, selling, or otherwise using a covered fuel in a manner which emits a greenhouse gas to the atmosphere and which has not been covered by the carbon fee, the fluorinated greenhouse gas fee, or the carbon border fee adjustment.

Now, as any experienced reader of such documents knows, the last clause is the escape clause. The Secretary can add any industry or even a single entity as he pleases to the list of those unfortunate businesses getting the sparkly new tax.

And there’s another sting in this tale. In addition to all of that, there is a whole set of border rules. When you import or export fuel itself, you either get taxed on imports or you receive (someday) a rebate for exports from your new best friend, the IRS. However, other importing and exporting businesses are taxed as well, for any “carbon-intensive products”. Of course, this really means “energy-intensive products”. As above, just what qualifies as an energy-intensive product is decided by the Secretary … but there’s a default list.

‘‘(2) until such time that the Secretary promulgates rules identifying carbon-intensive products, the following shall be considered carbon-intensive products: iron, steel, steel mill products (including pipe and tube), aluminum, cement, glass (including flat, container, and specialty glass and fiberglass), pulp, paper, chemicals, or industrial ceramics.

So the new energy taxes and potential energy tax rebates will fall on fuel importers and exporters, and also on the importers and exporters of metals, cement, industrial ceramics, glass, pulp, paper, and chemicals. And in every case, to determine the tax they will have to calculate “full fuel cycle greenhouse emissions”, meaning everything from the extraction of the raw materials from nature all the way through any manufacturing processes to their final ex-factory finished state … dear heavens, I’m sure y’all can see why I called this an insanely complicated system. Where do you draw the line as to what is a legit upstream emission? I mean, if financing has to be counted as an “upstream” source of greenhouse gas emissions … what is not counted?

So that is my first objection: the immensely complicated, arbitrary, and predictably contentious method for assessing and collecting the tax. However, thinking about it I finally understood what they meant when they said about their proposed law, that it:

Creates 2.1 million net new jobs by the 10th year.

If this mad law ever comes into effect, it will assuredly provide lifetime employment for easily that many accountants, lawyers, IRS agents, rent-seekers, tax advisers, emissions estimators, import-export analysts, and porkadelic bureaucrats and bureaucrettes of every stripe.

Now, this is a bizarre variant of tax called a “Pigovian Tax”. They are named after their inventor, the English economist Arthur Pigou (1877–1959). The most common example is the gas tax. They are designed to discourage behavior that the society disapproves of for some reason, by making it more expensive.

Here’s the bizarre part. According to this charming plan, they are going to first tax people … and then give the money back to the people paying the tax. Take their money only to give it back to them … it’s circular enough to make Ouroboros weep in envy.

Which brings me to my second objection: I don’t like hidden taxes. If I can see the tax on the price at the pump, then I can think about whether it is worth it. More to the point, I can add it up and see how much I’m paying in a year. But in this case, the consumer will never know how much this cockamamie energy tax is costing them.

My third objection is to the size of the tax. For gasoline, it starts at fourteen cents per gallon … next year it will be twenty-three cents per gallon, which is already larger than the entire current Federal gas tax of eighteen cents per gallon. And from there it rises such that in only ten years, in constant 2018 dollars, it’s already over a dollar a gallon. A dollar per gallon!

And of course, that’s just the start of the climb, it doesn’t stop rising. in twenty years the tax is two dollars a gallon. And it keeps on going. In thirty years it is over three dollars per gallon.

Who the heck thinks that’s a good idea? Paris is aflame from a twenty-five cent “climate change” energy tax, and these rocket scientists are proposing a three dollar tax?

Does it stop there? Nope. In this brilliant plan, the tax doesn’t stop increasing until greenhouse gas emissions for the entire US are down to 10% of the 2015 levels … down to TEN PERCENT of the 2015 value? That’s until the back side of forever, that will never happen! An infinitely increasing energy tax.

Who the heck thinks that’s a brilliant plan?

The same thing is true about the tax on electricity, which is based on the CO2 content of the fuel used to generate the electricity. Given the current US fuel mix, it will start at about a penny per kilowatt-hour (kWhr). The average cost of electricity in the US is about ten cents/kWhr.

But in ten years the tax will be five cents per kWhr In twenty years the tax will equal the cost of the electricity, ten cents per kWhr. In thirty years it will be 15 cents per kWhr, 50% more than the cost of the electricity itself. And just like the gas tax, it will continue increasing in perpetuity …

Finally, these are the minimum tax rates. That doesn’t include the “full fuel cycle greenhouse gas emissions”. I’ve only run the numbers on the direct CO2 emissions, not all the upstream emissions.

Obviously, this will hit the poorest people the hardest. The folks of the bloatocracy who will be making the law and enforcing the law won’t be bothered by the fuel prices doubling—they have government cars and gas allowances. But for the single mom who has to drive to work in an old car, a car that drinks gas faster than her useless ex-husband drank whiskey, doubling the gas price means her kids will give up something—food, clothing, medicine …

She can’t spend money twice, so something’s got to give. This tax will be EXTREMELY destructive to the poor. Look, if you want to fight CO2, I think you’re nuts … but if so, how about you don’t do it by taxing energy? A tax on energy is a hugely regressive tax that affects the poor more than anyone else. You’re not taxing the rich, you are taxing the poor.

Fourth Objection: Regarding taxes, as I mentioned above, the most important question is, who pays it. But the second most important question is, who gets the money? Cui bono?

In this case, in what appears equal but actually isn’t, they say that they will divide the money evenly (minus a mere 2% fee for their very valuable services) among everyone who has a Social Security Number … I can see the new market in fraudulent SSN cards forming as we speak …

And how much are we talking about? I did a rough calculation, using the tax per tonne times amount consumed annually of gasoline, diesel, jet fuel, coal, and natural gas. I came up with about seventy billion dollars per year …

And to round out the story, dividing that by the population means that every person with a social security number will get a check for $200.

Now this will lead to a curious situation. The more kids you have, the bigger your annual check will be. A couple with six children will get $1,000 … the law of unintended consequences …

And here’s the fifth objection. In addition to exporters having to figure out full fuel cycle GHG emissions, they want the importers and exporters of a host of primary materials like steel, aluminum, and glass to calculate the full fuel cycle greenhouse gas emissions of say a mix of steel sourced from a variety of mills in India … good fun. Or some exporter wants to get a rebate for exporting steel … but the steel comes from a producer who has gone out of business …

So who is going to do the months of research and travel to determine the greenhouse emissions just for that one product? Are you going to leave it up to the importer? Does it get done by the US Department of Useless Estimates? I foresee many more lawyers setting up shop to argue the toss.

Finally, the sixth objection: in order to hide the size of the tax from the consumer by avoiding having to post it on the gas pump,  they are taxing “upstream”. But taxing “upstream” instead of taxing the final customer has a hidden effect.

Businesses want to make a reasonable return on the money that they have to spend to bring a product to market. Typically, that’s about a ten percent profit. So if the all-up cost of a product is, say, ten dollars, they’ll want to sell it for one dollar more, or eleven dollars. However, if the product costs a hundred dollars, they don’t sell it for one dollar more. That would only give them a one percent profit. Instead, they’ll sell it for a hundred and ten dollars to make their ten percent profit.

Now, consider the effect of taxing “upstream” rather than having the final customer paying the tax. If a gallon of gas costs a refiner two dollars, they may sell it for twenty cents more. BUT if in addition there is a two-dollar energy tax that the refiner has to pay, they now have four dollars per gallon in the gas, so they’ll sell it for forty cents more … no bueno.

In other words, taxing the product “upstream” will add about ten percent to the tax that is paid by the final customer … and as they say on TV, “But wait! There’s more!”

There’s another step in the process. The refiner originally sold his $2.00 gallon of gas for $2.20 … but that’s the price to the gas station. They add on their 10%, so now it sells to the customer for $2.42

But if the refiner has to sell $4.00 gallons for $4.40 to the gas station, they add their 10% for their profit, and now it is selling for $4.84. So the final tax cost to the consumer is now the tax, plus ten percent, plus ten percent on that ten percent …

IN SUMMARY:

• The system for collecting the taxes, including the decision as to who pays it, is insanely complicated, very vaguely defined, will lead to endless fighting about what can and can’t be taxed, and is easily subject to bureaucratic misuse.

• It is a hidden tax, where even though the eventual consumer is the one who will pay the tax, the cost is concealed from those consumers.

• The tax is far too large, and there is no upper limit on how big it can get. By 2050, the tax alone will be three dollars a gallon. It will screw the poor right to the floor, and cause a huge increase in energy poverty.

• In terms of payout, it is biased in favor of people with large numbers of children. So it will represent a money transfer from the single, the elderly, and the childless to those who have lots of kids.

• It includes an impossible requirement that businesses importing primary materials pay tax on unknowable activities in distant countries.

• Because the tax is applied “upstream”, the eventual consumer will pay at least an additional ten percent above the nominal amount of the tax, and probably more like eleven or twelve percent once all the dogs are hung.

THE REAL PROBLEM

Now, while those are more than enough reasons to reject this horrible energy tax, let me close by discussing my biggest reason for opposing this piece of bad legislation—there is no evidence that it will make any perceptible change in the global temperature. There’s a simple explanation for that. As CO2 emitters, we are being overtaken by the emissions of China, India, Brazil, and the developing world.

In 1965, US emissions were 30% of the global total. We were the big fish. However, by 2017, US emissions were only about 15% of global emissions. At current rates, by 2030 they’ll only be 11% of global emissions, and 7% by 2050. So a change in US emissions in the year 2050 won’t make much difference to the global outcome.

How much difference? Well, by 2050 if the global CO2 keeps growing at the current rate (about 1% per year), the atmospheric concentration will be about 502 ppmv.

And under the extremely unlikely possibility that the Deutch Energy Tax does everything it is claimed to do, if by 2050 it reduces our CO2 emissions all the way down to ten percent of their 2015 values, the atmospheric concentration in 2050 will be lowered by only three measly ppmv, down from 502 ppmv to 499 ppmv.. That’s about a half a percent less atmospheric CO2 than without the Deuch Energy Tax.

And again, under the minuscule possibility that the Deutch Energy Tax actually does everything it is supposed to do, and assuming for the sake of calculation the IPCC estimate of climate sensitivity of 3°C per doubling of CO2 (which may be high), the Deutch Energy Tax will only make a temperature difference of … wait for it …

Three-hundredths of one degree Celsius (which used to be called Centigrade, and if you call it that today, scientific grammar Nazis will point and laugh). That’s 0.03°C. That’s what they are calling their “Climate Solution” … riiight.

How small is 0.03°C? Air gets cooler as you go up in elevation. Three-hundredths of a degree is the difference in temperature between the top and the bottom of a flight of stairs. In other words, far, far too small to even be felt, far too small to measure with a weather thermometer. Meaningless.

All of these bureaucrats, all of this taxation, all of the emissions calculations, all the lawyers and hangers-on, all of the people audited and penalized, all of the wasted hours of working time, all the overseas trips to determine overseas emissions, all of the new government employees drawing obscene payments and pensions, all of the kids going without necessities so mom can get to work, all the people thrust into fuel poverty, all of that … to achieve the amount of cooling you get from going from the bottom to the top of a flight of stairs.

And that is the main reason why I oppose this nonsense … because it won’t make any measurable difference in the 2050 temperature. It is a huge investment of time and money and human deprivation and suffering which will make NO PERCEPTIBLE DIFFERENCE to the 2050 temperature.

I am ashamed that our legislators wouldn’t bother to have one of their underpaid serfs actually run the numbers and see just how little their grand gesture would accomplish, compared to the huge amount it would cost.

So many clowns … so few circuses …

My highest regards to everyone, even the careless legislators who dreamed up this demon-spawn of a piece of legislation,

w.

[UPDATE} For those who would like to send a copy of this to interested stakeholders and friends, I’ve made up a PDF version which is available here.]

PS: When you comment please quote the exact words that you are discussing, so that we can all understand your subject.

ENDNOTE: EPA discussion of Global Warming Potential

CO2, by definition, has a GWP of 1 regardless of the time period used, because it is the gas being used as the reference. CO2 remains in the climate system for a very long time: CO2 emissions cause increases in atmospheric concentrations of CO2 that will last thousands of years.

Methane (CH4) is estimated to have a GWP of 28–36 over 100 years (Learn why EPA’s U.S. Inventory of Greenhouse Gas Emissions and Sinks uses a different value.). CH4 emitted today lasts about a decade on average, which is much less time than CO2. But CH4 also absorbs much more energy than CO2. The net effect of the shorter lifetime and higher energy absorption is reflected in the GWP. The CH4 GWP also accounts for some indirect effects, such as the fact that CH4 is a precursor to ozone, and ozone is itself a GHG.

Nitrous Oxide (N2O) has a GWP 265–298 times that of CO2 for a 100-year timescale. N2O emitted today remains in the atmosphere for more than 100 years, on average.

Chlorofluorocarbons (CFCs), hydrofluorocarbons (HFCs), hydrochlorofluorocarbons (HCFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6) are sometimes called high-GWP gases because, for a given amount of mass, they trap substantially more heat than CO2. (The GWPs for these gases can be in the thousands or tens of thousands.)