Jonathan Klick (University of Pennsylvania Carey Law School) has posted You Can’t Tax the Past Without Pricing the Present: The Hidden Costs of Climate Superfund Laws on SSRN. Here is the abstract:
State climate change superfund laws aim to retrospectively tax producers of fossil fuels to defray the costs associated with climate change. Supporters of these laws suggest that companies like ExxonMobil and Chevron are responsible for the damage caused by the emissions generated when their products are extracted, processed, and ultimately used by end consumers. Following the “polluter pays” principle, advocates of the laws assert producers should pay the associated costs that come with remediation and mitigation of climate change harms.
Fearing backlash from consumers, politicians have been quick to insist that these backward-looking surcharges will not affect the prices people will face for fossil fuel products. They argue that because the fines will be levied as a fixed amount based on past production and sales, marginal cost is unchanged, leaving current prices unaffected. Instead, they argue, the costs will come from the ample profits of the oil and gas industry, falling on shareholders, not consumers.
There are a number of problems with these arguments. First, while the fines are retrospective, they set a clear precedent that production will inevitably entail costs in the future. Those expected costs do constitute a current increase in marginal cost, leading prices to go up today. Second, given how widely oil and gas industry stocks are held (including in most public pensions funds), the portion of the costs borne by shareholders will fall not just on modern-day Rockefellers but also on teachers, garbagemen, cops, and fire fighters.
Further, even the widely invoked “polluter pays” principle is a poor fit in the context of state climate change superfund laws. A large part of the principle’s motivation is the desire to build external costs into the supply and demand curves faced by decisionmakers in a market. By ensuring that all social costs are internalized, buyers and sellers face the right incentives leading them to make value maximizing choices. However, as suggested, supporters disclaim the idea that costs will be internalized. This precludes the main efficiency benefit of the polluter pays principle. If producers do prospectively incorporate future fines, as foreshadowed by the current state superfund laws, the polluter pays principle could be back on track. That said, given the way emissions are allocated to producers in current models, there is no mechanism to encourage producers to engage in pollution-minimizing extraction and production methods, nor is there any incentive for consumers to favor emission-minimizing suppliers. Current climate change attribution models make little allowance for anything other than quantity decisions by suppliers.
Indeed, the existing attribution models primarily allocate emissions to the end-use (i.e., burning) of fossil fuels, which highlights a normative or fairness problem with the use of the polluter pays principle in the context of the state superfund laws. The motivation used by the laws’ advocates paint producers as the cause of emissions when the attribution models themselves indicate that consumption is the primary cause of the emissions at the root of climate change.
Furthermore, returning to the potential efficacy of the laws in terms of reducing emissions, most economic models suggest that individual firm supply responses have little effect on overall production, as other firms offset marginal reductions of a given firm. Demand side effects, however, can have a durable effect on overall output. From both fairness and efficiency perspectives, focusing primarily on producers seems misguided.
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