We offer the following memo from CTC to a legislative aide for a member of the House & Ways Means Committee, concerning the administration of a federal carbon tax.

To: [name removed]

From: Charles Komanoff & Dan Rosenblum, Carbon Tax Center

Date: March 22, 2007

Re: Carbon tax bill — technical issues

This memo is preliminary, for your review. Later iterations will include proposed language for the legislation.

Tax Upstream

We propose to tax fuels as far upstream as practicable, i.e., at the point where possession of the carbon-bearing fuel passes from the “producer” (e.g., coal mine; oil wellhead or tanker; gas wellhead) to the immediate next entity in the supply chain (e.g., coal shipper or utility; oil refiner or importer; natural gas pipeline). Presumably, each such transfer will be codified in a contract, or at least a bill of lading, specifying the attributes of the fuel.

This will minimize the number of points in the economy at which the tax would be levied. It will also simplify tax treatment of potential downstream carbon control technologies such as CCS (coal capture and sequestration), as discussed below.

Carbon Variability Requires Taxing by Btu, not by Fuel Weight or Volume

The tax rates will be stated in dollars per million Btu of heat content for each fuel. A more familiar approach based on physical quantities of fuel isn’t tenable, due to wide natural variations in carbon content within each fuel type. These variations are most stark for coal. A ton of lignite typically contains around 40% less carbon than a typical ton of bituminous coal, for example. To tax the two respective tons at the same dollar rate would be grossly unfair since combustion of the lignite ton releases 40% less carbon into the atmosphere than for the bituminous ton. Actual disparities would be even more pervasive and pronounced on account of variations in carbon content per ton within each major coal category (bituminous, subbituminous and lignite).

Fortunately, variations in carbon content of coals correspond fairly closely to variations in Btu content. This isn’t surprising, since it is the combustion of carbon into carbon dioxide that produces almost all of the heat energy released by burning any type of coal. Thus, lignite and bituminous coal differ by only 5% on average in carbon content per million Btu; differences in carbon per Btu among different batches of coals within the same category are probably less still.

Our approach, therefore, is to specify standard (and slightly different) tax rates for the three categories — bituminous, subbituminous and lignite — and to offer coal purchasers the option of applying for a lower tax rate than given in the standard schedule, on the basis of a coal assay performed and substantiated by a licensed, bonded entity, subject to random spot checks for accuracy.

Petroleum (Oil)

Taxing the carbon content of petroleum presents a different set of issues because of the dozen or more different petroleum products, each of which has its own carbon profile. For example, a barrel of residual fuel oil contains roughly 15% more carbon than a barrel of gasoline. This variability can be circumvented by (i) expressing the carbon tax for  petroleum in the same terms as the tax for coal, i.e., in dollars per million Btu of heat content, and (ii) levying the carbon tax on crude oil as possession passes from the producer to the refiner or pipeline. (Where one company owns both entities in the transaction, the tax can be charged at the point of transfer from the producing “business unit” tothe refining or pipeline “arm.”) This approach has the added virtue of maximizing incentives to refrain from flaring and venting of carbon-bearing gases and liquids and thus to maximize energy outputs per unit of carbon emitted.

At the same time, however, the United States imports significant quantities — several million barrels per day, overall — of refined petroleum products such as gasoline, heating oil, residual fuel oil and jet fuel. Because each has a distinct carbon profile, it is advisable to establish individual product tax rates, also in dollars per million Btu of heat content, to apply to imports of petroleum products. (Crude oil imports would be taxed at the standard “domestic” crude tax rate.)

The assay option noted above for coal, whereby coal purchasers could apply for a lower tax rate on the basis of a certified assay, and again subject to random spot checks for accuracy, would also be available to oil pipelines and refiners.

Natural Gas

(Note: the final memo will contain rates for another 8-10 petroleum products; each will be in the vicinity of the range shown here for gasoline, resid and crude.)

This fuel exhibits very little variability in carbon content per million Btu of heat content, and thus one figure should suffice, with the assay option still available to cover special cases. [I will check to ensure that LNG arriving by tanker has the same carbon-to-energy ratio.] The tax would be charged at the wellhead in order to maximize incentives to refrain from flaring.

Rebates for CO2 Control

The bill should provide the opportunity for partial or total rebate of the tax payments if the paying entity can prove that some or all of the carbon dioxide emissions will be kept from entering Earth’s atmosphere for millenia. This rebate approach has several virtues:

* It provides fair and workable treatment of “partial combustion” which will vary by user and use (e.g., unburned coal in ash that is returned to the mine for underground disposal; possibly also cement manufacturing, and plastics manufacture).

* It creates positive incentives to minimize emissions.

* It puts the burden on the fuel producer to demonstrate emissions avoidance (as opposed to a partial tax which allows the producer to reduce taxes unilaterally and burdens the government with substantiating a rebuttal case).

Procedures for producer documentation of CO2 avoidance and/or sequestration will be spelled out in the next iteration of this memo.

Tax Rates

Following are tax rates consistent with charging $50.00 per ton of carbon (not carbon dioxide) emitted. Consistent with the intent of phasing this level in over a five-year period, the rates for years 1 through 4 would be calculated by multiplying the rates in the table by 20%, 40%, 60% and 80%, respectively.

These amounts are derived in a spreadsheet developed by Charles Komanoff.

All rates are expressed in dollars per million Btu of fuel.

Bituminous coal           $1.40
Subbituminous coal      $1.45
Lignite                        $1.47
Crude Oil                    $1.12
Gasoline                      $1.07
Residual Fuel Oil          $1.18
Natural Gas                 $0.80

Last updated: March 22, 2011