This document summarizes the key differences between state cap-and-trade programs and a federal carbon pricing program. It notes that state programs like California's and RGGI generate billions in annual revenue from auctioning emissions allowances. However, a federal carbon price could reduce revenues for state programs by meeting part of the overall carbon price. The document also cautions that a carbon tax may only qualify as "fiscal reform" if paired with broader tax changes, otherwise it risks being seen as just another tax.

1. Carbon Pricing and Fiscal Reform:
State Cap and Trade vs Federal
Carbon Pricing
Billy Pizer
North American Climate Policy Forum
June 23, 2016

2. Main Points
• Over the last decade, cap and trade programs
increasingly use auctions and allowance value
for “policy purposes” not just distributing cost.
• Unless a carbon tax is part of large package of
tax reforms, may be hard to distinguish fiscal
reform from fiscal policy.
• While cost‐effective, federal carbon pricing
threatens state‐level revenues from cap‐and‐
trade.

3. 2015 Cap‐and‐trade Revenue
• California
– $2B in “auction revenue” (not including consignment)
– 50% of total allowance value
• Regional Greenhouse Gas Initiative
– $0.4B in auction revenue
– 100% of total allowance value
• European Union
– $5B in auction revenue
– 40% of total allowance value
• Both auction revenue and non‐auction
allowance value is used in a variety of ways

4. Use of “Auction Revenue”: CA
Source: McCormack and Burtraw (2015)

5. Use of Total Allowance Value: CA
Source: McCormack and Burtraw (2015)

6. Use of Total Allowance Value: RGGI
Source: McCormack and Burtraw (2015)

7. Use of Auction Revenue: EU
Source: Löfgren, Burtraw, Wråke, and Malinovskaya (2015)

8. Fiscal reform versus fiscal policy?
FISCAL REFORM
Introduce carbon tax
Cut labor and other taxes
BUT THEN…
Raise labor and other taxes
Increase spending on necessary policies
versus: CAP AND TRADE PROGRAM
Introduce cap and trade
Use revenue for necessary policies

9. What happens to state cap and trade
programs with a federal carbon price?
• Say you need $15 total carbon price to meet CA cap.
• Could be met by a $15 CA allowance price and $0
federal price.
• OR, could be met by a $5 CA allowance price and $10
federal price.
• OR, could be met by a $0 CA allowance price and $15
federal price.
• A federal carbon price will eat away at state carbon
revenues.

10. Concluding thoughts
• Unless one key piece of major tax reform, “fiscal
reform” may not be a strong argument for carbon tax
versus auctioned cap and trade program (though
many other distinctions b/w tax and trading)
– Carbon pricing with a carbon tax or cap and trade can raise
revenue. Any use of those revenues can be changed in the
future.
• Federal carbon pricing is more cost‐effective than a
patchwork of state programs.
• Existing state programs are using cap and trade
revenues. These could be diminished by federal
carbon pricing.