Make Federal Fuels Pay Their True Cost by U.S. Climate Plan
The BLM should include climate damages in estimating the Fair Market Value of auctions of fossil fuels extracted on Federal and Indian lands
Significant development of domestic fossil fuel reserves reduces the possibility of limiting the global average temperature increase to under 2˙C, the “safe upper limit” agreed upon by many scientists and policymakers. Economists also agree that the most efficient way to achieve such an end is through the pricing of greenhouse gas emissions (through a tax, fee, or cap). Given Congress' inability to enact any such economy-wide legislation to price carbon, we must look for second-best options that can be enacted now by the Administration. We propose that the Bureau of Land Management (BLM) can and should account for the benefit of not combusting fossil fuels through its leasing program in order to prevent fossil fuel over-extraction in the absence of an economy-wide carbon price.
Law states that federal coal, oil, and gas must be auctioned off according to their "Fair Market Value. We know, however, that this process has been sufficiently flawed. For example, in 2012 Peabody Energy acquired mining rights to 402 million short tons of coal in the Powder River Basin in Wyoming at $1.11/ton. We now know these rates were drastically undervalued by the BLM — by some estimates as much as $1 billion annually over the past 30 years.
However, the American people have been shortchanged even further by not accounting for the social costs that the sale and ultimate combustion of these fuels bears. Applying the U.S. Government’s value for the Social Cost of Carbon ($37/tonne) used throughout regulatory cost/benefit analysis yields damages close to $70 per short ton of coal, or over $31 billion each year.
In 2013, 26.4% of all fossil fuels sold in the U.S. came from Federal and Indian lands. This includes 24.6% of total oil production, 16.9% of all natural gas production, and 44% of all coal production. Including the Social Cost of Carbon in the Fair Market Value estimation of federal fossil fuel reserves could greatly reduce emissions in the absence of a more comprehensive solution.
Category of the action
Mitigation - What U.S. Federal Agencies can do to mitigate climate change
What actions do you propose?
We propose that the Bureau of Land Management (BLM) include the social cost of carbon in its estimation of the Fair Market Value (FMV) of the starting bid for auctions of fossil fuel reserves on Federal and Indian lands. This will serve as a pseudo-carbon price and will disincentive the extraction, sale, and combustion of fossil fuels while leveling the playing field for low-carbon alternatives.
Who will take these actions?
Where will these actions be taken?
The actions will be taken by the U.S. Department of Interior's Bureau of Land Management and will effect onshore and offshore reserves of oil, coal, and gas on Federal and Indian lands within the United States of America.
How much will emissions be reduced or sequestered vs. business as usual levels?
What are other key benefits?
What are the proposal’s costs?
This action is likely to increase U.S. energy prices as a result of restricted supply and increased fossil fuel prices. The economic costs, however, will depend largely on how the tax revenue from royalies of the federal fossil fuels is used. The most likely scenario is that the revenue will simply be absorbed by absorbed by the general fund or go towards deficit reduction. In this case, increased energy prices would result in limited welfare losses to American households, but this would have a disproportionate impact on low-income households.
However, another scenario is possible in which Congress uses the increased revenue to offset other distortionary taxes (on capital, income, payroll, etc.). If that were to occur, then economic growth would be likely.