Another Tax Proposal by California’s Air Regulators

Loren Kaye
President of the California Foundation for Commerce and Education

Not satisfied with a $60 billion new energy tax, disguised as a cap-and-trade auction and pegged to increase gasoline prices by 70 cents a gallon. Not satisfied with an untested “low-carbon” fuels regulation that will likely reduce refinery capacity in California (and we just saw how well that works out for California).

Now, the Air Resources Board is considering a new regulation (sub. req’d, posted 10/4/2012) creating a “border adjustment fee” on California fuels. This is an explicit acknowledgment that their regulatory actions will substantially increase the price of fuels, creating “leakage” of both jobs and GHG emissions to other states. So the Board’s natural response is – no, not reducing the cost impact of their regulations – but attempting to increase the cost of competing fuel imports.

That’s right, the Air Board is considering frustrating a natural and healthy response by the private market, which will attempt to respond to high-priced California products by importing lower-priced fuels (but with the same quality and environmental impact).

This development may be the strongest evidence yet that the Air Board is deeply concerned about the inevitable gasoline price increases flowing from its new regulations. After all, the legal hurdles are daunting:

  • World Trade Organization rules forbid national and subnational governments from enacting discriminatory tariffs or trade barriers.
  • The Interstate Commerce Clause of the US Constitution forbids states from erecting protectionist barriers against imports from other states.
  • The California Constitution requires a 2/3rds legislative vote to enact new taxes. Though called a “fee,” this border adjustment levy does not meet any of the criteria to justify such a designation.

The border adjustment tax would ostensibly be intended to mitigate jobs and emissions “leakage” by making out-of-state or offshore fuel production more expensive. This is a dream solution for regulators: eliminate any competitive disadvantage that a domestic producer might suffer from your regulation by making the competitor’s product just as expensive. Never mind the enormous economic inefficiency: as long as the ultimate consumer faces a price increase, mission accomplished!

Scholars who have studied border adjustment taxes agree that, even if legal and wise, it would simply not work in California.

Rob Stavins of the Harvard and Todd Schatzki of the Analysis Group have written extensively on this subject, finding that,

Import adjustments would reduce or eliminate any competitive advantage for importers into California by requiring that importers of designated goods obtain and surrender allowances or pay “tariffs” to cover the goods’ embodied GHG emissions. Implementation of border adjustments requires administrative systems to monitor the flow of all designated goods across the relevant regional boundaries. Such systems may be impractical and/or costly for many goods. In addition, implementation of border adjustments at either the federal or the state level could raise legal issues associated with interstate trade (i.e., the Commerce Clause) or international trade laws. Border adjustments would also require accurate measurement of the GHG emissions embodied in products that may originate from different facilities with different emission rates.

On the other hand, there is a simple, even elegant solution to economic and emissions leakage, created by the cap-and-trade auction: stop the auction. A free allocation of all emissions allowances will reduce the compliance costs by billions of dollars, without foregoing a single molecule of reduced carbon emissions. That’s because the “cap” part of cap-and-trade is what reduces emissions. The auction is merely a way to raise billions for politicians’ and regulators’ pet projects.

Follow Loren on Twitter: @KayeLoren

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