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Four Feasible Ways Obama Can Work on Climate Change

By Evan Soltas

The political death of climate-change policy could have come in 2009, when the Waxman-Markey cap-and-trade emissions bill failed in the U.S. Senate. But it didn't.

In fact, President Barack Obama's first term has brought substantial progress on climate change. Two of the biggest successes were fuel-economy standards and emissions limits on new power plants. For passenger cars and light trucks, corporate average fuel economy will rise from 29 miles per gallon in this year to 35.5 mpg in 2016 and 54.5 mpg in 2025.  In 2014, fuel-economy standards will cover medium-duty and heavy trucks for the first time. For power plants, the Obama administration has established limits on emissions of mercury and particulate matter and is working on new caps for carbon dioxide.

As the president looks toward his second term, he has pledged that climate change will be one of his top three priorities. Given that a carbon tax or cap-and-trade program still seem to be remote possibilities, what else can be done? Here are four plausible policy options.

1. Extend emissions limits to cover existing power plants.

On Dec. 20, a federal appeals court upheld that the Environmental Protection Agency has the power to regulate greenhouse-gas emissions. With its regulatory authority better established, the next step for the EPA could be to extend its emissions limits to cover existing power plants, not just new ones.

This is precisely what a recent report from the National Resources Defense Council has proposed. The NRDC plan would set emissions targets and allow utility companies to average their emissions across plants by building new alternative-energy plants or retrofitting old ones.

2. Increase the penalties for missing fuel-economy standards.

The National Highway Traffic Safety Administration fines car manufacturers $55 per vehicle for every mile per gallon the manufacturer's fleet falls below fuel-economy standards. In recent years, the fines have hit European luxury carmakers such as Ferrari and Porsche, but the amounts are trivial compared to the purchase prices of these cars.

The coming increases in fuel-economy standards, however, could endanger compliance from a broader array of carmakers. Under current law, the NHTSA has the authority to increase penalties to $100 for every mile-per-gallon shortfall. That means the Obama administration could, without congressional action, nearly double noncompliance penalties to keep fuel economy on track.

3. Update the "gas-guzzler tax" to track fuel-economy standards.

The federal government collects a "gas-guzzler tax" on cars with fuel economy below 22.5 mpg. Neither the penalties nor the thresholds for the tax, however, have been updated since 1991. That means that the penalties have fallen 40 percent in inflation-adjusted terms. The gas-guzzler tax is also not scheduled to follow the increases in fuel-economy standards, meaning that this market incentive for fuel efficiency will become irrelevant without corrective action.

The Obama administration could propose that the tax penalty be indexed to inflation and that the thresholds track the increases in fuel-economy standards. The most straightforward option is set the tax threshold at about 5 mpg below the fuel-economy standard, where it stood for over two decades.

The gas-guzzler tax, furthermore, could be extended to all vehicles now that fuel-economy standards have been expanded. A broader alternative would be to turn it into an annual vehicle tax, similar to the one that exists in the U.K.

4. Reform the gasoline tax.

The federal gasoline tax has stood at 18.4 cents per gallon since 1993.  Though direct increases in the tax may be politically difficult, there could be room for technical reforms.

One option is to index the tax to inflation. By maintaining the real value of the excise duty, this would generate gradual increases of the tax in nominal terms over time.

Another option is to replace the gasoline tax with an oil tax. While the gas tax is limited to transportation, an oil tax would affect a larger tax base and adjust economic incentives more broadly across the economy, according to a 2011 study by the RAND Corporation, a think tank. In this sense, it would come closer than current policies to a carbon tax.

Evan Soltas is a contributor to the Ticker. (Follow him on Twitter.)

Read more breaking commentary from Bloomberg View at the Ticker.

-0- Dec/21/2012 23:56 GMT

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