Report: Analysis of Michigan’s Options Under the EPA’s Clean Power Plan
Director of Communication
The Niskanen Center
Washington D.C. – April 20, 2016. Today the Niskanen Center released a report that evaluates the potential regulatory scenarios that would allow Michigan to achieve compliance under the EPA’s Clean Power Plan (CPP) rule. The Niskanen Center retained research and consulting firm Anderson Economic Group, LLC (AEG) to prepare the report. The report concludes that the costs of meeting the CPP for state consumers are substantial, using the EPA’s favored cap and trade approach. However, these costs can be reduced by adopting a carbon tax policy in which revenues are returned to taxpayers in the form of other tax reductions.
The report’s authors, Patrick L. Anderson, Principal & CEO and Traci Taylor, Senior Analyst at AEG, performed a multi-year analysis of the economy and electricity demand in Michigan under three scenarios: A no new policy baseline, a cap and trade approach and a state carbon tax.
Among the key findings are:
- Compliance with the CPP by 2030 will require Michigan to reduce its CO2 emissions by 14 million tons (22.5%) from the “no new policy” baseline (62 MT).
- Regulatory costs associated with achieving this reduction are around $2.2 Billion per year in 2030.
- If the target is achieved by using the EPA’s favored cap and trade mechanism, the allowance price (cost) in 2030 will be $53 per ton of CO2.
- If the target is achieved using a carbon tax, the tax rate would be $46 per ton in 2030.
- In both cases AEG determined that about half of the revenue the state raised, by either auctioning cap and trade allowances, or through the carbon tax, could be used to reduce the State sales tax rate from 6.0% to 5.5%. Recycling this revenue has significant benefits in minimizing the economic impacts of the CPP.
- Further reduction in other taxes could also be achieved by recycling the rest of the revenue, particularly under the carbon tax option since its revenues would be more predictable. (The positive economic impact of such further tax cuts was not modeled, given the wide range of possible options.)
- Achieving the EPA targets under either of the regulatory approaches would significantly reduce personal income in Michigan. The reduction is significantly less under the carbon tax scenario (10% vs 12%) even without the positive impact of additional state tax reductions.
- Electricity prices would be 18% higher under the carbon tax and 20% higher under EPA’s cap and trade approach.
“The report indicates that there is no such thing as a free lunch when it comes to implementing the CPP,” said David Bailey, an adjunct scholar at the Niskanen Center. “Other states facing the challenging targets under CPP will wish to explore the benefits of a carbon tax. Those benefits will be maximized by fully returning revenues to consumers.”
You can read the full report here.
The Niskanen Center is a libertarian 501(c)(3) advocacy organization that was established in 2014 that works to change public policy through direct engagement in the policymaking process.