As American motorists reel from gasoline prices averaging more than $4.20 nationally, it’s important to shine a critical light on so-called climate policies that would drive prices up even higher. Consider for example the provocatively-named “Polluters Pay Climate Fund Act,” originally introduced last August by Senator Chris Van Hollen (D-MD) along with Bernie Sanders and a coalition of other Senate Democrats. The Act would apportion a $500 billion “assessment” over ten years among the largest fossil fuel extractors and refiners operating in the US, according to their estimated contribution to emissions during 2000-2019. The senators claim that their plan would fund the necessary government response to climate change that these large companies helped cause, and moreover that because the assessment is based on past activity, it would have no influence on future production and therefore wouldn’t raise prices for consumers.
Despite the senators’ claims, their proposal makes no sense, whether from the perspective of legal liability or climate policy. Furthermore, if passed the Act would indeed raise gasoline prices for consumers, and on that score would violate President Biden’s campaign pledge to avoid tax hikes on any household earning less than $400,000.
Even on its own terms, the Act makes no sense. The $500 billion “assessment” for emissions over the last twenty years is obviously a number pulled out of a hat. Furthermore, the entire premise behind the Act—namely, that the corporations who have profited the most from fossil fuel emissions should bear the cost of the associated clean-up—is flawed. ExxonMobil, BP, Shell, etc. were not the sole beneficiaries of their oil-and-gas activities. Their customers all participated in the gains, too. The consumers were part of the voluntary process by which major oil companies provided valued goods at reasonable prices. It is economically incorrect to attribute any liability to damages (allegedly) caused by these market activities solely to the supply side, while ignoring the beneficiaries on the demand side.
Van Hollen et al. invoke basic economics to argue that their bill won’t raise gasoline prices for average consumers. As their white paper puts it: “[T]he assessment would not be passed on to consumers. The assessment is based on past, not current, activity, so it does not impact the ongoing costs of production.”
Van Hollen et al. are correct when they claim that a truly one-time wealth transfer—in this case, from particular corporations to the Treasury—shouldn’t affect the future business decisions of those corporations. But there is a glaring problem with this argument: Why in the world would we expect this to be a one-time wealth transfer, with no relevance to current or future production decisions? After all, look at how the Act is justified in the white paper itself: “Congress can generate significant revenue to address our climate challenges by turning to the industry that caused them…Fossil fuel companies have never been held to account for the societal costs of their emissions.”
If ExxonMobil, Chevron, and Shell are today going to be assessed billions of dollars in payments owed to the Treasury because of their “fair share” of emissions from 2000 through 2019, why wouldn’t they expect a future Congress in (say) the year 2030 to assess them billions of dollars for emissions during 2020 through 2029?
Putting aside the nod-and-winking from the sponsoring senators, it is clear that if they succeed in wringing $500 billion out of major oil companies in the name of climate justice, that there is nothing stopping them from going back to the well (pun intended) in the future. They have titled their bill the “Polluters Pay Climate Fund Act”—not the “Polluters Pay Through 2019 Climate Fund Act.” Every decisionmaker at major oil companies would know that their output decisions would likely be retroactively “assessed” down the road. This extra implicit tax would reduce current and future supply, thus raising crude oil and gasoline prices for consumers.
Even the sponsoring senators agree that their $500 billion assessment will cause pain to people who don’t literally write out the checks to the Treasury; namely, to the shareholders of the affected corporations. But in so doing, the senators are implicitly admitting that their proposal would violate Biden’s tax pledge. Although liberal Democrats like to pretend that only blue-blooded fat cats own stock in oil companies, the inconvenient (for them) truth is that tens of millions of regular American households indirectly own shares in oil and natural gas companies through mutual funds and IRAs.
For specific impacts, in a recent study I estimated that in the short run, passage of the PPCFA would lead to a 42 percent drop in earnings to oil and gas shareholders. In the medium term, workers in the oil and gas industry would suffer an 8 percent drop in income. In the long run, as labor and capital adjusted to the new implicit tax, consumers would bear the brunt of it, suffering from gasoline prices that were 40 cents per gallon higher than they would otherwise be.
Senators Van Hollen, Bernie Sanders, and a few other Democrats have proposed a $500 billion grab at Big Pockets. Their plan has no relation to actual numbers coming from climate science, and neither does it make sense as “strict liability” compensation for damages, since it ignores the billions of consumers who also participated in the emissions related to the companies being targeted. Furthermore, the senators are bluffing when they argue that their Act, based on past action, won’t have a chilling effect on future oil and gas production. Of course it would, since its foundational principles apply to future output as well. If passed, the Polluters Pay Act would implicitly tax consumers and hence violate Biden’s campaign pledge.
