Many public companies are keeping a close watch on potential GHG regulations because the shape of these regulations can significantly affect their regulatory and reporting obligations and thus affect their ESG obligations. There is a significant difference between two recent proposals on that front.
CARBON TAX: The concept of a carbon tax is simple: fossil fuels bear a cost — climate change, as well as air pollution — that is not reflected in their price and thus “hidden”. A carbon tax would increase the price to reflect that hidden cost — by, say for example, $50 per ton of carbon dioxide emitted — and the market would work its magic to move the entire economy away from fossil fuels.
Yet for all their elegance and push for by economists, carbon taxes are politically unpopular.
Opponents of carbon taxes argue that a carbon price affects all of society, and therefore it increases costs for every energy consumer, without providing an immediate alternative. That means a publicly traded company that would not normally worry about – or report regarding – EPA obligations in the abstract turns out would have reporting and compliance obligations under a carbon tax regime and, therefore, a larger ESG burden.
This is likely why Biden’s climate plan leaves out a domestic tax on carbon, which for decades economists have championed as the gold standard of climate change mitigation.
CLEAN ENERGY STANDARD: The second method for reducing emissions — and the one Democrats are embracing — is a clean energy standard, which would legally require utilities to draw 80 percent of their electricity from zero-carbon sources by 2030 and 100 percent by 2035. Utilities that meet their targets would receive subsidies; those that don’t would get slapped with a fee, which in turn would be reinvested in zero-carbon energy technology.
Many economists agree that a clean energy standard is a less cost-efficient method of curbing emissions. At the same time, the targeted subsidy approach has advantages for technological innovation that carbon taxes lack.
Most important, clean energy standards have a proven track record. Since 2015, ten (10) states have passed their own 100% clean electricity standards.
BUT BEWARE: CARBON TAX NOT QUITE DEAD. The idea of a carbon tax lives on in the Democrats’ plan in the form of a carbon tariff, which would tax imports from countries that are not significantly reducing their own emissions. The implementation of this tariff scheme is fraught with potential error because experts agree a fair bit of estimation and imputation will be involved, and there will no doubt be arguments about the amount of the tariff set. Nonetheless, this approach seems to have some support.
Thus, international companies with an eye on their ESG burden should keep careful watch on proposed carbon tariff taxes as part of their ESG planning.