Carbon Fees Could Lead to Substantially Lower Emissions

Sustainable Investment

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by | Nov 29, 2021

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Carbon fees implemented across industries could significantly reduce energy-related emissions in the United States, according to an analysis by the US Energy Information Administration (EIA).

The EIA says that the fees, which is a tax implemented on the sale of fossil fuels based on the amount of carbon emissions they generate, could reduce emissions by 19% based on 2020 levels by 2050. The agency says the emissions drop would occur the fastest over the first five to 10 years the fees are implemented and then slow after that.

The analysis specifically looked at the electricity, transportation and industry sectors and the EIA considered three levels of fees for its analysis, starting in 2023 and ranging from $15, $25 and $35 per metric ton of carbon dioxide. The fees would grow by 5% each year through 2050.

Fees reduced emissions in the electric industry the most, showing them falling by 82% by 2050 with a $35 per metric ton of carbon emissions. As for transportation, a $35 fee helped drop energy-related emissions by 6% through that period. For light-duty vehicles it shows an 11% improvement and for heavy-duty vehicles it shows an improvement of 2% when previous predictions showed that area to increase emissions through 2050.

In other areas, improvements in emissions were dependent on the type of industry. The EIA says electricity purchases play a smaller role and natural gas is a primary use of fossil fuels. That will keep emissions fairly level until 2040, when they increase due to increased economic output, the agency finds.

For other energy-intensive areas, such as the chemical industry, the agency says without readily available alternative fuels, a smaller reduction will take place. Industry uses more than a third of the US’s energy, according to the EIA, with manufacturing taking up 77% of that.

The analysis comes as a different report shows that the electric and automotive industries are lagging in hitting their carbon budgets based on EIA standards. Still, automakers and governments are increasing their net zero efforts by pledging at the recent COP26 event to phase out gas-powered vehicles by 2040, while there may be resources to improve emissions and efficiency when it comes to distributing power, such as carbon accounting.

“In all the cases we considered, carbon fees would have a significant initial impact on CO2 emissions, though we do not see significant additional reductions after the first decade,” says acting EIA Administrator Steve Nalley.

The analysis finds that carbon fees would impact the energy sector beyond emissions. The EIA says it finds that the US nuclear power capacity would be less likely to retire as a result, but that renewable energy capacity would be more likely to increase rapidly with fees in place.

The EIA projects that 280 gigawatts of additional renewable energy capacity would be created by 2050 with a carbon fee compared with current projections.

“The US electric power sector is most responsive to the carbon fees in our projections, as coal would lose market share to less carbon-intensive options such as natural gas and renewables,” Nalley says.

The agency says carbon fees of $15 would decrease carbon emissions by 13% through 2050, at which time the fees would increase to $56. At $25 emissions levels would drop 17% and fees would eventually hit $94. A $35 fee would increase to $132 in 2050 but reduce carbon emissions by 19% over that period.



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