With the election of President Obama in 2009, the American oil and gas industry found itself facing an administration that was less interested in promoting domestic production and exploration, and instead focused on pushing heavy-handed regulations and taxes. Now, with the election of Donald Trump, the industry is looking at a new era in domestic energy production and exploration, as the White House and Congress have already begun rolling back a number of Obama era regulations that discouraged energy production and use.
While the overall outlook for the U.S. energy industry is positive under Trump, there are still areas of concern, such as calls from some former lawmakers for a federal carbon tax, and plans to tax energy consumption and carbon emissions that are making a resurgence among state legislatures from Alaska to South Carolina.
A federal carbon tax?
Recently, a group of GOP economic advisers and statesmen, among them James Baker, George Schultz, and Henry Paulson, have begun advocating for a burdensome new federal carbon tax outlined in a plan called the "Conservative Case for Climate Action."
The Carbon tax pushed by the group is strikingly reminiscent of the $42/ton fee that Hillary Clinton refused to support during the election. Emails from the hacked inbox of John Podesta show that the Clinton campaign believed the tax to be unpopular and regressive. It is highly unlikely that Donald Trump or Congressional Republicans would ever support an environmental policy that even Hillary Clinton found to be too extreme.
On the campaign trail, President Trump came out firmly against the idea of imposing a carbon tax, and in May he tweeted, “I will not support or endorse a carbon tax!” These sentiments have thus far been echoed during the Trump presidency by his choices of Scott Pruitt for E.P.A. Administrator and Rick Perry to lead the DOE—both oppose government overreach and regulation. These appointments indicate a continuation in the president’s policy of deregulation; a senior White House advisor reportedly told Bloomberg News that the president rebuffed Elon Musk’s suggestion for implementing a federal carbon tax. As a businessman by trade, Donald Trump likely appreciates the fact that imposing a carbon tax at the proposed rate of $40/ton would create economic shockwaves that would not be confined to the energy sector. Modelling a $20/ton tax, the National Association of Manufacturers found that “the increased costs of coal, natural gas and petroleum products due to a carbon tax would ripple through the economy and result in higher production costs and less spending on non-energy goods.” The study further reported that a carbon tax would reduce real wages and manufacturing output, and would generate minimal tax revenue for the federal government.
Baker, Schultz, Paulson et al. rightly point out that the extensive body of environmental regulations passed under the Obama administration have had a deleterious effect on the energy sector’s ability to plan for the future, and that capital investment has consequently decreased. Calling the elimination of excessive environmental regulations the “final pillar” of their plan, these Republicans hit upon one area of policy reform likely to be enacted, though not in the manner they prefer.
With Scott Pruitt at the E.P.A., environmental regulations such as the Clean Power Plan, which Pruitt has spent his career challenging in court, will undoubtedly be on the chopping block. Thus, while deregulation is a positive for the energy sector, there is no need for it to be used as a bargaining chip for imposing a carbon tax as some are advocating. This regulatory rollback will likely happen regardless under Pruitt and Trump, no need for a grand carbon tax bargain.
As a businessman by trade, Donald Trump likely appreciates the fact that imposing a carbon tax at the proposed rate of $40/ton would create economic shockwaves that would not be confined to the energy sector
Progress on deregulation
Trump has proven himself to be consistently amenable to deregulation, beginning with the issuance of his “1-in-2-out” executive order in the first three weeks of his presidency. Moreover, energy advocates are already celebrating the recent repeal of the Securities and Exchange Commission’s (S.E.C.) Resource Extraction Rule (Section 1504 of Dodd-Frank), a regulation that had the potential to subvert the IP advantages of American companies. The rule would have required U.S. companies to disclose proprietary information, and its enforcement was estimated to cost as much as $385 million per year. Congress’s repeal of the Resource Extraction Rule is an encouraging sign that the Republican legislature will support domestic companies and create the conditions for a thriving energy sector.
Another promising step forward in energy policy is the House’s repeal of the Bureau of Land Management’s (B.L.M.) Methane Rule, a duplicative and costly restriction on methane emissions during the extraction of natural gas. The rule was passed during the final year of the Obama administration despite concerns that it would impose a heavy financial burden on energy producers and American families. Although the rule is still awaiting a vote in the Senate, current conditions indicate that the time is ripe for the Methane Rule’s repeal.
Additional restrictive and economically inefficient regulations that may be rolled back during the new administration include the E.P.A.’s Ozone Rule, the Corporate Average Fuel Economy (CAFE) standards, which are certain to be reviewed no later than 2018, and the Obama administration’s ban on Arctic drilling. The repeal of this final policy could make an estimated 130 trillion cubic feet of natural gas available to American energy producers, and could usher in a new era of prosperity within the energy sector.
All in all, the repeal of costly and burdensome energy regulations would have an immense impact on American jobs and economic prosperity, and we are already beginning to witness the inexorable deconstruction of the Obama administration’s vast regulatory apparatus.
Trump’s promised “phenomenal” tax proposals will also have a huge effect on businesses operating within the energy sector. Trump’s stated priorities include lowering the corporate tax rate to 15 percent while moving toward a “territorial” tax system and allowing businesses to fully and immediately deduct the cost of business purchases like equipment and buildings. These policies present the potential for explosive growth in every sector of the American economy, but especially among companies that are engaged in producing and exporting shale gas. Hydraulic fracturing is the fastest growing sector of U.S. crude production and is expected to reduce the trade deficit to the tune of $180 billion by 2022. By 2025, this innovative process of oil extraction will support 3.9 million jobs.
In sum, the hydraulic fracturing industry is leading the charge on the economic issues that are most important to the president. The Trump administration’s focus on fostering the domestic economy will certainly lead to a mutually beneficial economic partnership between the administration and oil and gas producers. At the state level, there is renewed potential for pro-growth energy policy.
This year, Republicans will have full control of the legislative and executive branches in 26 states, while Democrats will have full control of the legislative and executive branches in just four states. This means a majority of states will likely have the support they need to advance productive legislation, while alternatively stopping legislation that seeks to grow the regulatory burden and increase taxes on American businesses and residents. Such a shift in Republican control in the states is key this year; a number of state legislatures are considering legislation that would impact energy producers and, thus, increase costs on the businesses and residents that depend on affordable and reliable sources of energy.
The repeal of costly and burdensome energy regulations would have an immense impact on American jobs and economic prosperity, and we are already beginning to witness the inexorable deconstruction of the Obama administration's vast regulatory apparatus
Threats from state laws
While Republicans do control the executive and legislative branches in a majority of the states, there are still some threats to pro-energy policy. In fact, twenty-one state legislatures are considering new proposals for fuel taxes—including traditionally red states like Tennessee, Mississippi, South Carolina, Oklahoma, and Alaska. During the first of their hearings on the bill, the House Transportation Committee in Alaska found that the average Alaskan commuter may see the total price he pays in gas taxes triple, jumping from $133 to $399 per year. Drivers in Alaska already face some of the highest gas prices in the country, and such a substantial tax increase would necessarily impact oil consumption within the state.
Another alarming trend is a push in some states for the implementation of carbon taxes. In Massachusetts, Senator Mike Barrett introduced S. 1747, a bill that would establish a carbon fee of $10 per ton, increasing by $5 annually, with a $40 ceiling. In New York and Rhode Island, the situation is even more dire. New York’s carbon tax legislation proposes an introductory fee of $35 per ton, increasing by $15 annually with a ceiling of $185 per ton. The New York proposal is projected to increase the state gas tax by $1.58, more than doubling the current gas tax and pushing the state closer to having the highest gas tax in the nation. Meanwhile, the Rhode Island proposal for a $15 per ton carbon tax is unlikely to face significant opposition within the state’s Democrat-controlled House or Senate. In addition, the Governor of Rhode Island, Gina Raimondo, has aggressively pursued a reduced carbon footprint.
Even in Washington State, where in November voters overwhelmingly rejected a referendum to institute a carbon tax, climate activists continue to push legislation that would stifle the energy sector. The irony of the failure of the Washington carbon tax referendum in 2016 is that the majority of opposition came from the environmental left, who thought the tax proposal did not go far enough. This serves to highlight just how implausible any bipartisan agreement on a “carbon tax bargain” would be.
The group “Alliance for Jobs and Clean Energy” already released a plan to introduce in the legislature a new tax on carbon emissions. Opposing the carbon tax will be an uphill battle in Washington State, where Republicans very narrowly hold the Senate (25 Republicans, 24 Democrats, 1 Independent) but Democrats control the House and the executive. Additionally, Washington’s governor, Jay Inslee, has previously advocated for a cap-and-trade system. Even if the carbon tax fails to pass the legislature, the Washington Environmental Council is already discussing a renewed carbon tax ballot measure next year.
A final policy to watch at the state level will be cap-and-trade, or, as Oregon chooses to brand it, “cap and invest.” This optimistic and pro-growth rhetoric however, cannot conceal what is just another iteration of the same misguided policy that has already been implemented in California. Oregon policymakers admit that the “invest” portion of the policy’s title refers to how the revenues from permit auctions will be used; this does not in any substantive way affect the model by which cap-and-trade programs operate. Oregon senators plan to introduce this “cap and invest” legislation later in 2017, and since Democrats currently control the legislature and the executive, their proposal may have a profound impact on companies’ ability to operate in Oregon.
No one will be surprised to learn that during the Trump presidency, California will continue to be a thorn in the energy sector’s side. As companies adopt new technologies that make harnessing energy easier, cheaper, and safer, and as the federal government removes regulations that serve as barriers to economic progress, California continues to resist the changing fiscal climate. Still embracing environmental activism at the expense of local businesses, the California Air Resources Board aims to tighten the carbon cap beyond what is required by state law. Although the cap-and-trade system is currently being challenged in court, California lawmakers have a number of contingency plans in the event that the policy is overturned. These contingencies include a potential carbon tax, and in 2016, the legislature passed a resolution to urge the U.S. Congress to enact a carbon tax.
An auspicious start
California aside, entrepreneurs in the energy sector should be reassured that when it comes to energy policy, the Trump administration is off to an auspicious start. Despite the urgings of former leaders within the GOP, the Trump administration does not seem amenable to implementing a carbon tax. The president’s campaign was successful precisely because he is different from the career politicians who have grown so out of touch with the real economic needs of everyday Americans, and he has persisted in his own maverick brand of politics during the first few weeks of his presidency. He has also remained committed to the tenet of deregulation, and early successes in repealing misguided regulations indicate that we may soon see a repeal of the Ozone Rule, the Methane Rule, and other harmful policies.
Although fuel taxes, carbon taxes, and cap-and-trade systems will remain a persistent concern in the states over the next few years, the difference in economic policies between the Obama administration and the pro-growth, pro-energy Trump administration cannot be overstated.
*Justin Sykes: Director of Energy Policy at the Americans for Tax Reform.