A recent Commonwealth Court of Pennsylvania decision has thrown Pennsylvania’s actions on climate change into further disarray.
In 2021, through regulatory action by its Department of Environmental Protection, Pennsylvania became a member of the Regional Greenhouse Gas Initiative (RGGI). RGGI is a collection of Northeastern and Mid-Atlantic states that have agreed to cap emissions of carbon dioxide (CO2) from electric power plants with 25 megawatts or more of generating capacity. The cap includes an overall regional limit and a cap for each state. Power plants must purchase allowances or offset their emissions (or pursue other options noted below) to collectively meet the state cap.
But lawsuits have challenged Pennsylvania’s entry into RGGI, and on November 1, a memorandum opinion of the Commonwealth Court declared that Pennsylvania’s scheme for auctioning CO2 allowances under the state’s RGGI cap was an unconstitutional tax. The court voided the rulemaking.
This ruling could prove incredibly consequential. Pennsylvania is a leading energy state and could be a major player in the clean energy transition as the impacts of climate change become clearer. In one recent example, Pennsylvanians experienced “code red” air quality during the summer of 2023 as a result of wildfires in Canada. Drought and high temperatures partially contributed to these fires.
Most human activities have externalities, or costs that we impose on others and do not pay for ourselves. If I throw litter out my car window, it’s aesthetically unpleasing, it could pollute a local waterbody, and it might harm wildlife. These are all costs that I have placed on someone else, instead of internalizing them by paying damages or cleaning up my litter.
Regulations are designed to limit externalities by making those who cause harm internalize its costs. Bans on littering, with fines and penalties, might make me stop altogether. But in other cases, harm-producing activities are essential, at least to some degree. While I can avoid littering, I still produce trash that needs to be disposed of. I therefore pay a monthly bill that covers the costs of transporting my garbage to a landfill and operating the landfill to limit environmental and health impacts of garbage disposal. If I am charged by volume (a higher bill for a larger garbage barrel), I can choose to reduce the garbage I generate, or I can stay the course and accept a higher monthly payment. This payment is not a “licensing fee” or a “tax” — it is a charge within a monthly bill or invoice.
RGGI is analogous to a massive “garbage collection” plan for CO2 emissions. Power plant owners and operators have several ways to comply: they can switch to carbon-free generation (thus needing no allowances); they can purchase allowances from a state-regulated RGGI auction; they can purchase secondary allowances from other power plants privately; and they can cover some of their emissions through projects that offset emissions elsewhere.
RGGI opponents have tried to characterize the state-led allowance system (where auction revenues flow to the state’s Clean Air Fund) as a “tax” or a “fee.” It’s neither of those things, exactly, although its actual form defies easy characterization. Unlike a mandatory tax or licensing fee, power plants have alternatives to purchasing allowances, and the complexities of the secondary market show just how far the RGGI allowance system is from traditional government taxes or fees. After a power plant has purchased an allowance at auction, it can sell it to another plant or as “financial derivatives, such as futures, forward, and option contracts.”
The November ruling, Ziadeh v. Pennsylvania Legislative Reference Bureau, characterizes Pennsylvania’s RGGI rulemaking for CO2 allowances in a way that fails to adequately consider these nuances. In Ziadeh, the court determined that the allowance system constitutes a fee, and that fees that generate more revenue than necessary to cover a program’s administrative costs become a tax — which the Pennsylvania Legislature alone may authorize. This is an unreported opinion, meaning it does not set precedent, but it nonetheless voids Pennsylvania’s RGGI Trading Program Regulation and blocks enforcement of the program.
A classic administrative fee involves money that one must pay to get a driver’s or marriage license — money that helps pay for the staff time required for reviewing applications and issuing licenses. Yet money within the Clean Air Fund is not constrained to covering operational costs; it also “support[s] the air pollution control program” more generally, and the legislative purpose of money in the fund is “for use in the elimination of air pollution.”
Moreover, carbon allowance proceeds are simply dollars generated from a market and are not part of a traditional fee structure. They are also not taxes because they have none of the traditional attributes of a tax: They are not collected through a return; they flow into a specific fund within the general treasury; and tax liability is not determined by factors such as the value of property owned or income earned.
Carbon allowances lack other key attributes of a tax. As a California court has noted, taxes are compulsory and do not yield benefits for those who have to pay them. RGGI allowance systems, in contrast, are voluntary and provide important benefits. They offer a less expensive way of complying with RGGI caps than a straight command-and-control directive to reduce pollution, and proceeds go directly toward air quality improvements. In fact, this distinguishing feature between allowances and taxes is one reason that many economists favor them as an explicit alternative to a tax.
Just as landfills are not free, it is time to start charging — in one way or another — for the use of Earth’s atmosphere as a dumping ground. RGGI allowances give power plants options to pay for use of the atmospheric landfill rather than immediately cease sending their wastes to that landfill.
No matter how one dresses these programs, they are not reasonably characterized as taxes in fee clothing. They are one option for more cheaply complying with new limits on the dumping of CO2 into the atmosphere.