Industry Market Trends

U.S. Carbon Tax Idea Puts Manufacturing in the Crosshairs

Nov 19, 2012

Credit: nathanmac87, CC BY 2.0

In recent weeks, various policy players have been discussing the possibility of implementing a carbon tax in the U.S., that is, a pricing regime designed to increase the cost of fossil fuel usage and bring badly needed revenues to close the nation's budget.

On Nov. 13, the Brookings Institution released a report entitled "Institute a Modest Carbon Tax to Reduce Carbon Emissions, Finance Clean Energy Technology Development, Cut Taxes and Reduce the Deficit," recommending imposing a levy on carbon dioxide emissions starting at $20 per ton and raising it by 4 percent per year.

Such a tax would raise an average $150 billion a year over a 10-year period, while reducing carbon dioxide emissions 14 percent below 2006 levels by 2020 and 20 percent below 2006 levels by 2050, according to the organization. Brookings recommends investing the funds in clean energy and energy efficiency initiatives, along with tax cuts, deficit reduction and rebates to low-income households.

Many environmental groups favor the idea of a carbon tax, and comments from advocates appeared in the press following Brookings's announcement. But any proposal is likely to be fiercely fought if it comes up in the legislature.

Manufacturing is an inherently energy-intensive process. According to the U.S. Energy Information Agency, (EIA), the U.S. adds about 5.5 billion metric tons of CO2 to the atmosphere every year, and the U.S. industrial sector, encompassing manufacturing, construction, mining and agriculture, accounts for about 1.5 billion metric tons of energy-related CO2 yearly. A carbon tax on U.S. manufacturers and industrial firms could therefore have wide-ranging ramifications.


Credit: Natural Resources Canada

The Heritage Foundation asserts that a carbon tax would harm U.S. competitiveness. A report from the group says that for manufacturers "that emit greenhouse gases in significant quantities, such as steelmakers, a tax on a major input would be devastating."

Companies that use carbon-intensive fuels for feedstocks, such as chemical and fertilizer manufacturers, would also be significantly affected. "A carbon tax would especially hurt states with higher concentrations of manufacturing and that use coal for electricity generation," the report says.

Chemical producers, which rely on fossil-fuel-based feedstocks, would be impacted significantly by a carbon tax. Credit: the.Firebottle, CC BY-SA 2.0

The organization also points to another problem: "A carbon tax in the United States that reduces emissions domestically would have zero direct effect on foreign emissions if we acted alone. In fact, unilateral action by the U.S. would have very little effect on total global emissions." A cynic might ask, however, whether the Heritage Foundation would be in favor of an enforceable international regime for limiting greenhouse gas (GHG) emissions.

A 2008 study by Resources for the Future, an environmental research organization, looked at the impact of carbon pricing on various U.S. industries. The study's authors commented:

The industry-level impacts are fundamentally tied to the energy (more specifically, the carbon) intensity of those industries and the degree to which they can pass costs on to consumers of their products (often other industries). The strength of competition from imports and consumers' ability to substitute other, less carbon-intensive alternatives for a given product play crucial roles in determining the ultimate impacts on domestic production and employment.

The study assumed a unilateral price of $10 per ton of CO2 emissions and examined its effects over four different time horizons. Researchers measured impacts on industries in terms of costs, profits, employment and trade effects.

Measuring domestic output, the study found that the hardest-hit manufacturing industries over both short and long terms would be petroleum refining, chemicals and plastics, primary metals and nonmetallic minerals. Over the long term, output would recover as companies adjusted inputs and adopted new technologies. In the near term, cost increases would be seen in petrochemical and cement manufacturing, steel mills, aluminum and lime products.

Carbon Taxes and Manufacturing in Other Nations

What effects that carbon pricing might have on industrial firms in the U.S. is not entirely certain, but established regimes in Sweden and Australia shed some light.

Sweden enacted a carbon tax in 1991, and an important feature of its tax system is that taxes are lower for industry and electricity production than for other sectors. Industrial consumers pay only 50 percent of the general carbon tax and are exempt from Sweden's general energy tax. As a result, Bengt Johansson of the Swedish Environmental Protection Agency, says the effect of the carbon tax on industry "has been rather small."

In July, Australia began its carbon taxation scheme. The Australian Climate Commission believes a tax on carbon pollution is the most efficient way to curb the country's greenhouse gas emissions. The tax applies to the country's 500 largest CO2 emitters. For the 2012-2013 fiscal year, the country set the price at A$23 (approx. $24) per ton.

This will rise to $A25.4 for 2014-2015. After July 2015, the country will shift to a cap-and-trade system with the price to be determined by the market. Australia's goal is to reduce its CO2 emissions to 5 percent below year-2000 level by 2020.

The carbon tax implementation provoked strong criticism from Australian industrial businesses and groups. A survey of the country's industrial companies released in July found that 42 percent of businesses across the manufacturing, services and construction sectors planned to increase their prices in the short term as a result of the carbon tax.

Nev Power, CEO of Fortescue Metals Group, told the national paper the Australian that carbon pricing is going to "put a clog on the economic growth of the country," noting that it will "kill off a lot of downstream industries in Australia." He warned, "It is the unintended consequences of a tax ... that are very difficult to understand, and the impact will be felt for generations to come."

However, in October, the Sydney Morning Herald reported that an increase in power prices seems to have been the only effect so far of Australia's carbon tax. Unemployment has fallen and consumer confidence has risen since the tax went into effect. And an Oct. 1 announcement from the Melbourne Institute of Applied Economic and Social Research quoted Annette Beacher, head of Asia-Pacific research at TD Securities, as saying, "We have still not noticed any broad-based impact of the [July 1] introduction of carbon pricing spilling over into prices this month. However, we will continue to watch for any evidence of more pass-through to consumers in the months ahead."

But here in the U.S., both environmental groups and political groups are mobilizing, regardless, around the possibility of a carbon tax. According to a Nov. 15 Reuters report, the group Americans for Prosperity said House Republican leaders had signed a pledge to oppose a carbon tax in any new energy bill package introduced on the Hill.