UN reports show that emissions must be reduced by 43% by 2030 to reach the goal established at the 2015 United Nations Climate Change Conference (COP21) of limiting warming to 1.5°C. Outside the COP and other international climate agreements such as the Paris Agreement, the European Union has implemented its Carbon Border Adjustment Mechanism to encourage its trading partners to decarbonize. 

To move the U.S. towards achieving this goal, this week, Representatives Brian Fitzpatrick (R-PA) and Salud Carbajal (D-CA) reintroduced the MARKET CHOICE Act (MCA) of 2023. The bipartisan bill aims to fund infrastructure and reduce greenhouse gas emissions (GHG) through a tax swap and a conditioned moratorium on Federal emissions regulations. Similar versions of this bill have been introduced in two previous Congresses (2019 and 2021). The Niskanen Center has provided an in-depth analysis of prior versions of the bill.

The MCA includes several key provisions:

  • A tax swap that eliminates existing gas, diesel, and commercial jet fuel taxes in favor of a tax of $35 per metric ton of CO2 emissions
  • Establishment of a carbon border adjustment mechanism (CBAM) to keep American producers competitive on the global market
  • Allocation of funds to key infrastructure projects and research and development programs on carbon capture and grid-scale battery storage
  • A conditioned moratorium on emissions regulations from the Environmental Protection Agency dependent upon on meeting emissions reduction milestones

Tax Swap

The MCA repeals the federal excise tax on motor and aviation fuels in exchange for levying a tax on GHG emissions from fossil fuels and other sources. The excise tax on these fuels is 18.4 cents per gallon on gasoline, 24.4 cents per gallon on diesel, and 4.4 cents per gallon on commercial jet fuel. In its place, a tax of $35 per metric ton of CO2-equivalent emissions will be levied. After the first year, this rate will increase by 5 percent annually while adjusting for inflation. 

Who Pays?

The MCA carbon tax will affect sources of GHG emissions, such as the combustion of fossil fuels, process-based emissions, and emission sources. It’s also designed to minimize the number of taxed entities–that is, it will be levied farther up the supply chain, such as at the mine mouth for coal or at the refinery exit for petroleum products. MCA also provides several rebates for manufacturers that use fossil fuels as raw materials (plastics) or those that capture CO₂ using carbon capture and storage. Taxpayers will receive a credit for taxes already paid to state governments for GHG emissions.

Carbon Border Adjustment

MCA includes a carbon border adjustment mechanism (CBAM) to maintain the U.S.’s competitiveness against foreign producers. It functions by charging a carbon tax on imported goods and providing a rebate to U.S. producers exporting their goods. In doing so, a border-adjusted carbon tax creates a level playing field for U.S. and foreign producers.

Expected Revenue Uses

The MCA proposes the creation of the Rebuilding Infrastructure and Solutions for the Environment (RISE) Trust Fund, designed to receive and disburse 75% of the revenues from the new carbon tax. It will be distributed for infrastructure funding, energy assistance to low-income households, energy transition assistance, climate adaptation, and advanced energy R&D.

Most of the disbursements from the RISE Trust Fund (70%) will be allocated to the Highway Trust Fund since it will no longer be receiving revenue from the existing gas and diesel taxes mentioned above. Similarly, 2.5% is allocated to the Airport and Airway Trust Fund. The second largest portion (10%) will help offset the increased energy cost for low-income households due to the carbon tax, with additional funds going to help displaced energy workers (3%) and abandoned mine reclamation (1.5%). Climate adaptation programs such as forest restoration and coastal zone management will receive 1% and 4%, respectively. The remaining 8% is dedicated to the research and development of energy projects such as carbon capture technologies and grid-scale battery storage.

Expected Emissions Impacts

MCA is expected to reduce the overall carbon emissions for goods and services consumed within the U.S. by internalizing the negative externalities associated with carbon-intensive goods, reducing the demand for these goods as consumers shift purchases toward cheaper products with lower emissions. Prior Niskanen research demonstrated promising reductions in emissions from fossil fuel combustion under the 2019 version of the MCA.

With the ongoing implementation of the clean energy tax credits in the 2022 Inflation Reduction Act (IRA), it is still early to assess the emissions impact of the new MCA. Niskanen published an analysis explaining why it is critical to enact a carbon tax to build upon the emissions reductions from the IRA, which would also allow for repealing repetitive clean energy tax credits.

Conditioned Regulatory Moratorium

The final significant provision is a conditioned moratorium on federal regulations relating to GHG emissions. Upon collecting the carbon tax, the MCA will impose a conditional 12-year moratorium on regulations from the Environmental Protection Agency (EPA) to limit GHG emissions. The moratorium may be revoked early if cumulative emissions targets are not met in the specified timelines. Additionally, the EPA maintains its authority over GHG emissions from a limited number of sources, specifically natural gas and petroleum systems and motor vehicle emissions. EPA also maintains authority to regulate GHG emissions for monitoring and reporting requirements and non-GHG effects.

Key Takeaways

If enacted, the MARKET CHOICE Act will enable robust infrastructure funding and climate adaptation, facilitate the transition of energy workers, and fund research and development in low-carbon energy. It will support various programs to mitigate the impact of a new carbon tax on low-income households and spur efficient GHG emission reductions through the carbon price mechanism. Now more than ever, it is essential for the United States to be a global leader on climate action and implement effective climate policies back here at home. Overall, the provisions in MCA seek to achieve this goal and prove to be vital for the 21st-century energy transition.