The Kerry-Graham-Lieberman Bill – Was it a Tax too Far?

Monday April 26 was supposed to be the day that the much anticipated Kerry-Graham-Lieberman climate change bill was to be proposed in the Senate. Hopes had gone up that there could be a legislative solution to putting a price on carbon. The carbon markets themselves had responded, pushing up the price of allocations on RGGI in the hopes that these would be allowed to qualify for the expected federal cap and trade. Then over the preceding weekend, it fell apart. Senator Graham criticized the call from Majority Leader Reid to also take up a comprehensive immigration reform bill, claiming that it was driven by Senator Reid’s own political needs to increase his chances of retaining his Nevada Senate seat.

There is no doubt that this played an important piece in the very difficult political dance that has surrounded the emergence of the KGL plan. Senator Graham has positioned himself as the leading Republican supporter of both comprehensive climate change legislation and immigration reform. It is clearly too politically difficult for him to carry both of these simultaneously.

However, it may be that the proposal for immigration reform was not the only culprit. It was anticipated that KGL would have a cap and trade system for stationary sources (phased in over time), and a "tax" on fuels that will be linked to the market clearing price of the cap and trade sector. Ostensibly this was the only price on carbon that the oil and gas industry was willing to accept.

Why such a complication? If the fuel tax would be approximating the cost of the oil and gas providers having to purchase an emission allowance for the downstream emissions (because it is linked to the market clearing price), why not simply be part of the cap and trade sector? That would allow the oil and gas industry to take advantage of the efficiencies of a larger market.

Perhaps the answer can be gleaned from the pre-publicity ahead of the proposal. The LA Times on April 14 simply called the proposal a new gas tax, rather than a part of the climate change proposal, even though in the body of the article, it notes that the tax would be linked to the market.

Though theoretically one might prefer the full market (larger and more economically efficient) to a linked tax, perception matters, and the oil and gas industry may have struck gold. If the industry had to pay for allocations to pass along to consumers, they could not "blame" the government as easily for the price increase. It is much easier to segregate a "tax" in the minds of the public. Moreover, some state and local laws may allow preferential accounting procedures for "taxes."

Most importantly, could the energy industry’s call for a "tax" be a way of sinking the whole bill? While it appears that KG and L originally did not think so, it now seems that this played a part in the abrupt unraveling of the bill. In an interview with the Washington Post's Ezra Klein, Senator Graham admitted as much, noting that he was indeed concerned about the label being affixed to the linked fuels portion of the proposed climate bill.

Whether this means the entire linked fee idea was a set-up is unclear, but it suggests that even the mention of “tax” is poison for climate change progress.