EHS Administration, Sustainability

Cap-and-Trade Programs—Is It a Fee or a Tax?

On November 16, 2022, the Pennsylvania Commonwealth Court heard arguments in two separate but related cases regarding Pennsylvania joining the Regional Greenhouse Gas Initiative (RGGI) program, an interstate carbon cap-and-trade program.

Earlier this year in April, Pennsylvania Governor Tom Wolf’s administration finalized regulations for the state to join the RGGI program.

Wolf’s time in the governor’s office ends next year, as the position is term-limited.  Pennsylvania Attorney General Josh Shapiro (D) won the election to replace Wolf and has expressed doubt about the RGGI program in the past.

Wolf pushed the regulation through over strong Republican and industry objections, which has made Pennsylvania the litmus test for the durability of U.S. carbon pricing programs, says an article in Scientific American.

“It is a really significant expansion and one that the RGGI states have been pulling for a long time,” said Brian Murray, a research professor at Duke University’s Nicholas School of the Environment and Sanford School of Public Policy, in the Scientific American article. He added, “This could have the weakest footing of any of the now 12 states that have joined RGGI. … Pennsylvania-style RGGI is largely the work of a term-limited governor who can’t choose his successor and doesn’t have a basis of support currently in the Legislature.”

RGGI program

In addition to Pennsylvania, the other states in the RGGI are Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont, and Virginia. Together, these states cap and reduce their power sector carbon dioxide (CO2) emissions by setting a regional cap, or limit, on CO2 emissions from electric power plants in the participating states.

“Qualifying power plants must acquire CO2 allowances equal to the amount of CO2 emitted,” the Pennsylvania Department of Environmental Protection (DEP) website says. “And while each state has its own allowance budget, the only firm cap is the regional one. Entities in each of the qualifying states can purchase and trade allowances- allowing for the most efficient and cost-effective emissions reductions. Also, since RGGI is a market-based approach, the quarterly auction sets the price for the purchase of allowances- ensuring transparency. Furthermore, the revenue from the quarterly auctions [is] returned to the states for reinvestment in efficiency, and other GHG reduction programs that further reduce power sector emissions.”

Litigation history

Legal challenges quickly arose against the Pennsylvania RGGI regulation, with opponents claiming the Wolf administration’s actions were a classic example of executive overreach because it was pushed through without state legislative approval.

In July, the Commonwealth Court of Pennsylvania issued an order to vacate the regulation, which effectively blocked Pennsylvania from participating in the RGGI program.

“Officials at the state Department of Environmental Protection and the Environmental Quality Board appealed the decision to the state Supreme Court, which has yet to issue a ruling,” says news site Pennsylvania Capital-Star.

In the cases heard on November 16, 2022, petitioners, including representatives from labor and energy groups and lawmakers, argued before five of the seven Commonwealth Court justices “in the hope that the court will find the state’s entrance into RGGI ‘unconstitutional,’ and that the Wolf administration’s [DEP] is ‘unauthorized’ to oversee such an effort,” according to the Capitol-Star article.

The Wolf administration says it has the authority to enter the regional cap-and-trade program under a pollution law dating back to the 1960s.

“In a virtual press conference following the hearing on Wednesday, Robert Routh, public policy and regulatory attorney at the Clean Air Council, and Jessica O’Neill, Senior Attorney for PennFuture, said one of the determining factors in the case could be how the court views the charge for the auctioned carbon allotments — as an ‘unconstitutional tax or permissible fee.’

“RGGI’s challengers argued that DEP can impose a fee, but not a tax.

“Based on the questions being asked by the sitting judges, O’Neill said it was clear that the bench was really locked in on the ‘tax vs. fee argument,’ and how the money generated by RGGI would be spent,” continues the Capitol-Star article.

Tax or fee?

The legal argument on whether the funds generated from the RGGI program are a fee or a tax is crucial to determining the outcome of the case. Regulations imposing taxes are required to be enacted by the legislature.

Lawyers representing the defendants of the RGGI program regulation argue the funds are a fee because those funds go into pollution control efforts instead of into the state general fund, where tax funds are typically stored.

Climate Change Resources defines the differences between carbon taxes and cap-and-trade programs as follows: “A carbon tax directly establishes a price on greenhouse gas emissions — so companies are charged a dollar amount for every ton of emissions they produce — whereas a cap-and-trade program issues a set number of emissions ‘allowances’ each year. These allowances can be auctioned to the highest bidder, as well as traded on secondary markets, creating a carbon price.”

Regarding the appeal on the preliminary injunction case, briefs are scheduled before the Pennsylvania Supreme Court in the next few weeks.

While waiting for the Pennsylvania Supreme Court to issue a ruling in the matter, Pennsylvania lawmakers are discussing the allocation of the funds and have introduced a bill (SB 15) to direct the proceeds, according to an October 7, 2022, Pennsylvania Capital-Star article.

The bill, RGGI Investments Act, directs the following disbursement of the funds:

  • 37.5% to the Energy Communities Trust Fund
  • 12.5% to the Environmental Justice Communities Trust Fund
  • 46% to the Clean Air Fund, divided as follows:
    • 56% to the Greenhouse Gas Abatement, Energy Efficiency, and Clean and Renewable Energy Investments Account
    • 44% to the Commercial and Industrial Energy Efficiency Account
  • 4% for administration of the program

Leaving money on the table

Meanwhile, those who are counting are outraged at the amount of money Pennsylvania is missing out on while the regulation is held up in court.

The third quarter RGGI auction was held in September 2022 and generated $301.3 million in revenue for participating states, according to a statement issued by RGGI Inc.

The funds collected for the third-quarter auction by state were:

  • Connecticut—$12.6 million
  • Delaware—$9.2 million
  • Maine—$6.5 million
  • Maryland—$37.9 million
  • Massachusetts—$31.5 million
  • New Hampshire—$10.5 million
  • New Jersey—$38.6 million
  • Ney York—$73.9 million
  • Rhode Island—$5 million
  • Vermont—$1.5 million
  • Virginia—$73.9 million

“‘It’s disappointing that attempts to delay RGGI are resulting in Pennsylvania missing out on significant economic benefits, not to mention crucial time to cut our carbon emissions,’ state Sen. Carolyn Comitta, of Chester County, the ranking Democrat on the Senate Environmental Resources and Energy Committee, told the Capital-Star.

“‘Unfortunately, delays to RGGI are also significantly limiting our response to the growing impacts of climate change,’ Comitta said.”

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