Energy Innovation Act Q&A
What are the main features of the Energy Innovation & Carbon Dividend Act?
These are the main provisions:
- A carbon fee is assessed on coal, oil, and natural gas at the first point of sale.
- The carbon fee starts at $15 per metric ton (mt) of potential carbon dioxide equivalent (CO2-e) emissions and increases by $10/mt each succeeding year as long as statutory annual targets continue to be met.
- The carbon fee increases until net U.S. fossil fuel emissions have been reduced by 90 percent (see “What is the statutory emissions reduction schedule”), and then remains constant until emissions have dropped so low that there is essentially no more net revenue.
- All collected revenue, less expenses, is paid out to American residents, with adults getting a full share and minors under 19 years old getting a half-share.
- The carbon dividend is counted as regular income for federal taxation but not to determine eligibility for mean-tested social programs.
- A carbon border fee adjustment is applied to emissions-intensive, trade-exposed goods that are imported or exported.
How is H.R.2307 (the 2021 House bill) different from H.R.763 (the 2019 House bill)?
The changes to 2021's bill are detailed here in the Energy Innovation Act Comparison Chart resource. Here is the Congress.gov page for H.R.2307 and here is the Congress.gov page for H.R.763. Overall, several key elements were updated:
- The temporary suspension of EPA regulations on greenhouse gases was removed.
- The basis year for emissions reductions was changed from 2016 to 2010 and the basis was changed from “covered” to “net” emissions.
- The year of enactment was updated from 2020 to 2022.
- The emissions reduction schedule was updated to stay on target for 100 percent reduction of net emissions by 2050.
- The fluorinated gas fee was removed.
- Various clarifying words and phrases were added, such as ‘metric’ before all instances of ‘tons.’
What is the statutory emissions reduction schedule?
The Energy Innovation and Carbon Dividend Act mandates an annual reduction of covered greenhouse gas emissions starting in 2023. Starting that year, each year's emissions must hit a target that declines by 5 percent of 2010 net emissions (meaning total emissions minus emission sinks, per EPA accounting). For instance, 2023 emissions must end up 5 percent lower than 2010 emissions, 2024 emissions must end up 10 percent lower, and so on. That continues until 2030, after which the annual drop in the emissions target is reduced to 3 percent of 2010 emissions until 2050, when net emissions must drop to 100 percent below 2010 net emissions. This is essentially the “net zero” target that IPCC concluded is necessary to bring the global temperature increase below 1.5°C by 2100.
If the cut in emissions somehow fails to keep up with this schedule, the annual increase in the carbon fee will be ‘ratcheted up’ (see “What is the trigger …” below). This is the ‘‘environmental integrity” mechanism tied to the schedule.
This provision increases confidence that the carbon fee can activate innovation as intended. It not only gives additional assurance of the effectiveness of the policy, but also gives businesses an additional incentive to move decisively on climate-friendly investments.
How much does the carbon fee increase each year?
After the first year, when the fee is $15 per metric ton of CO2-equivalent, the fee increases each year by an additional $10 per ton, as long as emissions targets are met. The bill sets a target of 100% net GHG emissions reduction by 2050, with a set of interim targets that starts in 2023 as described above. Starting in 2023, if the emissions cuts don’t keep up with that emissions reduction schedule, the annual increase in the carbon fee will be strengthened from $10 to $15 per metric ton of CO2-equivalent.
What are adult and child dividends?
In the Energy Innovation and Carbon Dividend Act of 2021, all dependent children under 19 years old in an eligible household will be entitled to receive a carbon dividend that is half as much as an adult share. There is no limit to the number of child dividends paid to a household.
A minor whose 19th birthday occurs will become eligible for an adult dividend in that month. The Dividend Delivery Study provides some additional details on how this may be handled administratively .
What does it mean for the carbon fee to be adjusted for inflation?
The Energy Innovation and Carbon Dividend Act of 2021 indexes the carbon fee for inflation based on the Consumer Price Index (CPI). Without an inflation adjustment, the effectiveness of the fee would be weakened as the years went by and the value of a dollar diminishes.
The policy needs to remain strong, because the deeper emissions cuts go, the harder it is to get a little more. Making this adjustment brings the carbon fee within the range of carbon prices recommended in the IPCC SR1.5 report to hold global temperature below 1.5°C.
What are the special provisions for agriculture?
The Energy Innovation and Carbon Dividend Act of 2021 provides a refund of carbon fee costs in fuels — chiefly diesel fuel — used on farms. This is considered an extension of a fuel tax exemption that is already in place for agricultural fuels. It would not apply to other forms of energy such as electricity used on a farm. Although it will provide relief for farmers, in practice it would have little impact on total U.S. greenhouse gas emissions because agricultural fuel-generated emissions account for less than 1 percent of our total emissions.
Another provision related to agriculture concerns non-fossil greenhouse gas emissions. Since this policy is focused on fossil fuel emissions, it does not cover things like methane from livestock and manure or nitrous oxide from farming operations. Because of the technical difficulties of measuring and verifying these emissions in a farming operation, the text of this bill explicitly states that “non-fossil fuel emissions that occur on a farm” are not subject to the carbon fee.
It should also be noted that, although there are no specific provisions spelled out for fertilizer, the CCS refund covered above would give fertilizer manufacturers an opportunity to minimize their embedded carbon fee costs by sending their waste CO2, which is normally produced in the conventional process, to a sequestration site instead of into the atmosphere.
What are the special provisions for the military?
The Energy Innovation and Carbon Dividend Act of 2021 refunds carbon fee costs in covered fuels used by the military. This would include gasoline, diesel, and other fuels used for ships, planes, and ground transport, plus coal, oil, or natural gas used to generate electricity on military bases and in field operations.
Based on Defense Department fuel procurement reports here and here, greenhouse gas emissions from our military amount to about 1.2 percent of total U.S. emissions, but account for a significant part of taxpayer support for the armed forces. The U.S. military has also been aggressively pursuing alternative sources of energy for strategic and environmental reasons, so we can expect that they will take full advantage of new developments in renewable and low-carbon energy technologies, further reducing their emissions.
What about fluorinated gases which have global warming potential?
Fluorinated gases are potent greenhouse gases but are quite different from the others we are familiar with. Unlike CO2, methane and nitrous oxide, they are not produced from fossil fuel combustion or leakage from fossil fuel equipment and pipelines. They are produced industrially for refrigeration and some other applications.
After the Montreal Protocol was signed in 1987 to eliminate the use of Freon® and other chemicals that harm the protective stratospheric ozone layer, they were replaced by other fluorine-containing gases that don’t have that effect. Unfortunately, those replacements — hydrofluorocarbons (HFCs) — were later found to have global warming potential (GWP) many thousands of times greater than that of CO2.
In 2016, countries met in Kigali, Rwanda, and crafted an amendment to the Montreal Protocol that mandates a phasedown of HFCs. In December 2020, the $900 billion COVID relief bill that was signed into law included an amendment that essentially puts the U.S. on track to comply with the Kigali Amendment. Consequently, the fluorinated gas (F-gas) fee that was included in the 2019 version of the Energy Innovation and Carbon Dividend Act was dropped from the 2021 bill.
What is the provision to start carbon dividend payments before carbon fee collection?
The bill contains a provision for an “advance payment” of the first month’s dividend to all recipients in the month prior to the collection of the carbon fee. This additional payment will be deducted from the fund over the following 36 months so that the program remains revenue neutral. In essence, the fund would “borrow” from future carbon fee receipts to finance the first month’s dividends.
The objective of this provision is to ensure that the public receives funds to absorb initial cost increases before prices actually rise.
What is the provision for CO2 capture and sequestration?
If carbon dioxide can be captured or scrubbed out of an emissions source and “sequestered” in some permanent form, it doesn’t contribute to global warming. The greatest potential to sequester large amounts of CO2 is in deep underground storage, far below the earth’s surface. Recent research has shown that a common form of rock called basalt can lock up CO2 permanently. Scrubbing CO2 out of industrial gases is well known and widely used when necessary for engineering reasons, but it has not been practiced for environmental reasons because there is currently no financial reward for doing so.
The Energy Innovation and Carbon Dividend Act changes that by providing a refund for companies that collect and sequester CO2 produced by a covered fuel (coal, oil or natural gas) in a manner that is “safe, permanent, and in compliance with any applicable local, State, and Federal laws,” as determined by consultation with the EPA. The refund would be equal to the carbon fee that was in place when the CO2 was created (presumably through combustion). The Energy Innovation and Carbon Dividend Act also stipulates that the refund would be modified by any amount of “likely” escape into the atmosphere, as determined by the EPA.
In practice, CO2 capture and sequestration (CCS) could be applied to any power plant or manufacturing process that burns coal, oil or natural gas and vents the CO2 into the atmosphere. Another likely application is in ammonia fertilizer manufacture, where pure CO2 coming out of the process is often released into the atmosphere but could be compressed and sent to a pipeline that carries it to a sequestration site.
This provision in the bill allows CCS-equipped facilities to compete on a level playing field with low-carbon energy technologies like wind, solar, hydro and nuclear energy. It doesn’t subsidize or fund research into CCS but simply allows private companies to determine for themselves if they judge the carbon price to be sufficient to justify investing in CCS. The “safe, permanent” language ensures that any concerns about leakage or seismic disruption would be addressed before a sequestration site would be approved.
A new provision in the 2021 bill also allows facilities like ethanol plants to get a CCS refund for CO2 collected from their process, as long as they can balance it against an equivalent amount of CO2 coming from equipment like boilers that burn a covered fuel.
Why is a rising carbon price preferable to EPA regulation of greenhouse gases?
The Clean Air Act is the foundational EPA authority over greenhouse gases and was confirmed by the Supreme Court’s Massachusetts vs. EPA ruling in 2007. But trying to address climate solely via regulation is rife with obstacles and drawbacks. First of all, using CAA authority to regulate greenhouse gases requires not only writing the regulations, but then giving every State three years to develop its own State Implementation Plan (SIP). After that, it will take at least another year to finalize the regulations, and then it’s a near-certainty that some States will challenge the regulation in court.
This is what happened with the Clean Power Plan (CPP), which was first promulgated in 2015, but never went into effect because of court challenges.Eventually, it was replaced under the Trump administration by the Affordable Clean Energy rule (ACE), a weaker set of regulations that were themselves declared unconstitutional by a federal court in 2021.
There is overwhelming evidence from economic literature over many years that a policy like the Energy Innovation and Carbon Dividend Act will effectively reduce GHG emissions far more quickly and more deeply than any existing or proposed regulation. This is also supported by both the 2014 REMI report and by a review of 11 different revenue neutral carbon pricing plans in a February 2018 issue of Climate Change Economics. Furthermore, compared to the CPP’s 2030 emissions target, this bill’s statutory requirements would exceed it by a factor of nine.
What are the terms under which the program would end?
The carbon fee enacted by the Energy Innovation and Carbon Dividend Act will stop rising when U.S. net greenhouse gas emissions have fallen 90 percent below 2010 levels. This is different from the 2019 bill, wherein the target was 90 percent below 2016 levels, but this is separate from the net zero target stipulated in the bill for 2050. Although the fee will top out at the point where 90 percent reduction has been achieved, emissions are still expected to continue dropping due to the impact of the carbon fee and whatever complementary policies may have been enacted.
The bill has an additional provision for ending the program entirely when the monthly adult carbon dividend is less than $20 per month -- a dividend level that corresponds to about 90 percent emissions reduction -- for three consecutive years. This ensures no hard landing from the end of the program for families that might come to depend on it; it will ease people on with the gradual increase, and ease people off with the gradual replacement of fossil fuels by low-carbon alternatives.
Exceeding 90 percent reduction for as long as three years would mean that the transition away from fossil fuel dependency is essentially complete and irreversible. That’s a very high bar! Ending the program under those conditions is a reasonable requirement.
What does it mean for exported fossil fuels to get a refund?
In the Energy Innovation and Carbon Dividend Act, exported fossil fuels are considered eligible for the carbon border fee adjustment. Depending on carbon pricing (or lack thereof) in the destination country, exporters of fossil fuels may get a refund under the border fee adjustment.
Specifically, the bill stipulates that the U.S. exporter would get a refund equal to the difference between the U.S. carbon fee and the destination country’s carbon price, with the caveat that no exporter would ever get a refund of more than the embedded carbon fee. The effect of this would be to keep the price of exported U.S. fossil fuels on par with their foreign competitors regardless of the carbon price, primarily in order to avoid conflict with World Trade Organization (WTO) rules.
In terms of global climate mitigation, this would have little downside because it would only affect which country’s coal, oil or gas is burned, not the total amount burned. Besides, most of our major trading partners have already started instituting carbon pricing, and this policy should, just like the carbon border fee adjustment on emissions-intensive goods, increase the likelihood of more countries joining in.
What are the National Academy of Sciences studies mandated in the bill?
The bill stipulates that the EPA must engage the National Academy of Sciences (NAS) to conduct two studies once the bill has become law.
The first study, to be completed and made public within six years of enactment, will analyze the effectiveness of the carbon fee in meeting the law’s emissions reduction schedule, forecast the emissions out to 2050, and make recommendations on whether the carbon fee increases should be adjusted. The report will also detail the effectiveness of the carbon fee for different sectors of the economy and recommend any further actions to be taken, including regulations, to improve performance if necessary.
The second study, to be completed and made public within 18 months, will analyze how the carbon fee is affecting the use of biomass for energy and the resulting impacts on ‘carbon sinks’ and biodiversity. The term ‘carbon sinks’ refers to the removal of CO2 from the atmosphere through natural processes in plants and soil. Biomass energy is theoretically carbon-neutral as long as the CO2 released by its use does not exceed the amount that would have been released through natural processes, and that it does not result in land use change that increases emissions. The study aims to ensure that expansion of biomass energy does not upset this balance or increase threats to biodiversity. As with the first NAS study, this one will also make recommendations to mitigate any adverse impacts that are revealed. These two studies constitute the third environmental integrity mechanism built into the bill.
Why does CCL support this bill?
CCL is supporting this bill because it’s good for the climate, good for people, and consistent with the values we have always articulated to our volunteers.
The aggressive rate of carbon fee increase in this bill guarantees that it will exceed the U.S. emissions target written into the Paris Agreement. In fact, it will put us well on the way to net zero by 2050. It would also result in a reduction of fossil fuel emissions that tracks closely the IPCC recommendations for emissions reduction through 2040 in their October 2018 Special Report (see below).
The carbon dividend in this policy ensures that about two-thirds of families in the U.S. end up ahead, particularly lower-income families. This guarantees long-term support for the policy. The carbon border fee adjustment provides a real incentive for other countries to match the price in this bill, as a global response is needed to a global problem.
In short, CCL is supporting this bill because it is very nearly the carbon fee and dividend proposal we have advocated since 2010, and we believe it will bring us much closer to the livable world for which we strive. We are thrilled to see it in Congress and will work to help it pass.
Does this policy affect the ability to litigate based on greenhouse gas emissions?
No. This policy does not limit anyone’s ability to litigate based on greenhouse gas emissions.
How does the emissions reduction schedule work in light of the October 2018 IPCC Special Report?
The IPCC report recommends a reduction of global CO2-equivalent emissions of at least 40 percent from the 2010 level by 2030 to stay on track for staying below 1.5°C. As written, the emissions reduction schedule in this bill would hit that target for U.S. emissions in 2030 and would be within a few percent of the IPCC curve thereafter. Cutting emissions from the world’s second-largest emitter to net zero would be a huge boost to our chances of staying below 1.5°C this century. No other bill that’s been proposed would come close.
Additional perspective on the IPCC report can be found in a CCL presentation that was given in Washington, D.C., on November 12, 2018. CCL has also prepared a laser talk on the 2018 IPCC Special Report.
How does this bill relate to the Clean Power Plan?
The Clean Power Plan (CPP) was proposed by the EPA under President Obama but was never put in place due to lawsuits from several states that did not want to comply. The Trump administration replaced the CPP with a weaker policy called the Affordable Clean Energy (ACE) Rule, which was struck down by the Supreme Court in January 2021. So, essentially, there is no active regulation of electric sector greenhouse gas emissions, and the Biden administration would have to start from scratch if they wanted to reprise the effort to control emissions purely through regulations.
The Energy Innovation and Carbon Dividend Act would provide for emissions reductions far in excess of the CPP and would furthermore cover all sources of fossil fuel emissions, not just the 27 percent from the electric power sector.
This policy would not touch EPA or local regulations affecting pollutants like NOx, sulfur, ozone, particulates and mercury; CAFE mileage standards for cars and trucks; GHG authority over non-road vehicles and aircraft; and the methane abatement program that applies to the oil and gas industry. Additionally, states would retain authority to pass GHG regulations within their borders.
How does this policy deal with fugitive (leaked or vented) methane from natural gas production?
Under this policy, natural gas, like other fossil fuels, is assessed a fee based on the greenhouse gases expected to be released when it is burned. But natural gas can also leak directly into the air, and its main component, methane, is a greenhouse gas with a global warming potential 28 to 36 times that of CO2 over a 100-year period.
Since there are no widely accepted methods to accurately measure methane leakage, this policy is not likely to assess a fee on it, but it explicitly preserves federal authority to regulate fugitive methane from oil and gas operations.
For more information see our laser talk on natural gas.