Legal Bulletins

Maryland’s greenhouse gas reduction goals are the most aggressive of any state in the country. No other state plans to seek a 60% reduction in emissions by 2031 combined with a net zero goal by 2045. Many have doubts that the goals can be achieved, but studies by the University of Maryland – and embraced by the Maryland Department of Environment – concluded that the goal could be reached if (and only if) the state raised a billion dollars a year in new revenues to support climate programs. “We have a $1 billion price tag, and we don’t have $1 billion today,” said MDE Secretary Serena McIlwain. “We just have to figure out a way to pay for it.”  

This additional public investment must be viewed against the backdrop of a state fiscal situation that is already deteriorating. Maryland faces a huge structural deficit.  The deficit is projected to reach $1.3 billion by fiscal 2027 and then double to $3 billion by the following year. To put that in perspective, the projected deficit is equivalent to nearly 12% of the total budget of the state.  

The budget issues have already led to Moody’s changing the state’s treasured triple A bond rating to a negative outlook. The Administration provided a “down payment” this fiscal year by utilizing a one-time source of reserve funds from the state’s participation in the Regional Greenhouse Gas Initiative. That money is no longer available and that begs the question – where will this massive amount of public money be found?

Much of the projected budget shortfalls are driven by the state’s commitment to education through the Blueprint for Maryland’s Future.  The Administration and General Assembly are unlikely to back away from those commitments, but the solutions seem likely to involve tax increases.  Faced with the likelihood of raising taxes to pay for education and existing programs, raising large amounts of additional funds through tax increases will be a difficult lift. 

To put this in perspective, climate commitments already in place or proposed by the Department of the Environment will be very expensive for Maryland businesses and citizens even without additional revenue-raising proposals.  For example, the Building Energy Performance Standards (BEPS) for large buildings will cost owners $15 to 25 billion.  The transition to electric vehicles mandated by the adoption of the Advanced Clean Cars II rule will require the installation of enormous numbers of additional vehicle charging stations at an estimated cost of $42 to $47 thousand dollars per parking space for multi-family housing.  There are also competitive issues – such as the concerns of car dealers who fear that demand for new vehicles will flag as they compete with the neighboring states that have not adopted the same electric vehicle mandate.

The transition to renewable energy also threatens significant increases in the cost of energy.  Despite Governor Moore’s commitment to 100% “clean energy” by 2035, Maryland is not building new solar farms at a sufficient pace to replace fossil fuel power plants. Even if the speed of solar development is vastly increased, the state would also need huge investments in battery backups to cover daily and seasonal variations in supply and demand. 

The PJM Regional Power grid has concluded that the planned closure of the state’s last coal-powered plant would risk brownouts and blackouts in the Baltimore region because of these shortcomings. Yet continuing to operate the plant will cost millions and force compromises on the state’s climate goals.  PJM’s suggested solution is the upgrade of transmission lines to bring in power from neighboring states at a cost to ratepayers of as much as $800 million. The state is investing heavily in offshore wind, but that source is expensive, requires significant subsidies (again, from ratepayers) and will require years to develop.

Against this backdrop, advocates have floated four fund-raising proposals in the General Assembly. The Maryland Climate Change Commission tasked the Mitigation Working Group with examining those alternatives. Each proposal faces significant opposition. As often said, there is no such thing as a free lunch. All the proposals raise serious issues about potential impacts on the competitiveness of the Maryland economy since none of the proposals have been widely adoptedly or, for that matter, adopted by any neighboring state.  At the same time, there is reason to doubt that the proposals would raise significant funds in the near term.

 The proposal with the widest impact is called “Cap and Invest.”  House Bill 1272 would have required the state to study the implementation of the proposal.  Although the bill failed, the Department is actively studying a similar scheme since it is essential to the Pathway plan adopted by the Department.  

The plan would impose a cap on statewide carbon emissions. Except for specific exceptions, the right to emit carbon below the cap would be auctioned to the highest bidder.  Emissions above the cap would be forbidden. 

Because the tax would be set by auction, the cost implications can only be estimates.  Estimates of the money raised vary depending on details – such as the stringency of the cap – but at least $300 million a year is estimated.  These costs would be in addition to the cost of other climate initiatives such as the Building Energy Performances Standards and would surely increase the cost of gasoline, natural gas and other fossil fuels.    

The plan is modeled on the Regional Greenhouse Gas Initiative (RGGI) which utilizes a similar cap and auction system to regulate power plant emissions.  However, that program takes a regional approach in which eleven eastern states participate.  Although the advocates are pushing for adoption in other states, only California has moved quickly on the concept.  Opponents are concerned that Maryland businesses would simply relocate to Virginia, Pennsylvania, West Virginia or Delaware to avoid the additional “carbon tax.”

The General Assembly declined to even allocate the funds to study the proposal in depth – so it seems unlikely that a cap and invest program would be implemented quickly enough to yield a billion dollars in the near term.

A second proposal, labeled the RENEW Act (Responding to Emergency Needs from Extreme Weather) was introduced in the 2024 legislative session by House Bill 1438 and Senate Bill 958.  It was projected to eventually raise $900 million a year by imposing costs on large fossil fuel companies.  

The theory pushed by the advocates is that the fossil fuel companies are “responsible” for past emissions. Opponents point out that much of the fossil fuel was (and still is) used by ordinary citizens for daily activities. Suggesting that only the suppliers, and not the consumers, of the product are “responsible” may therefore be disingenuous. “Punishing” past activities which were legal when performed is also likely to face legal challenges despite the advocates insistency that the proposal is modeled on the federal Superfund program.

To date only Vermont and New York have moved to adopt a similar program and legal challenges are likely. Even if potential impacts on the business climate are ignored, the litigation over the proposal would surely delay any collections. In fact, the Department of Legislative Reference concluded that it was “unlikely that cost recovery payments are actually paid within the timeframe established by the bill.”   Implementing the bill would require at least two million dollars of new appropriations each year as well as impose costs for litigation. It seems likely that, in the near term, the proposal would cost more money that it produces.

A third proposal, entitled the “Climate Crisis and Environmental Justice Act,” would raise $1.25 billion dollars a year by imposing a tax on many fossil fuels imported into the state.  The proposal, reflected in House Bill 516, would tax shipments of natural gas, gasoline, coal and other fossil fuels.   

The bill contained language stating that the tax could not be passed on to consumers, but it is difficult to see how that would be accomplished for natural gas since utilities are entitled, by law, to recover costs that they are obligated to incur. Petroleum distributions may or may not have the same legal protection, but it is again hard to see how the cost would not filter down to drivers and consumers. 

Given the reluctance of the General Assembly to raise the existing gasoline tax, it seems unlikely that the legislature would increase the cost of gasoline through a carbon tax. Maryland has few consumers of coal so much of that tax would fall on coal being shipped from West Virginia through the Port of Baltimore. It is unclear to what extent a carbon tax would simply result in those shipments being diverted to Norfolk.  It is hard to see how this tax would raise significant funds without consequences in rates and competitiveness. 

The last proposal, introduced as House Bill 1008 during the last session, is the most nuanced, and limited, of the alternatives.  It was intended to impose a fee on coal and gas imported into the state and would raise $250 to $300 million dollars a year. Compared to the Climate Crisis Act, the bill contained significant carve outs to reduce impacts on Maryland consumers – including exemptions for gasoline, diesel, heating oil and propane. 

The primary impact on Maryland consumers would be on electric and natural gas rates – especially the later.  One difficulty that the proposal presents is that impacts on energy prices can fall the hardest on lower income households. The bill tries to reduce that impact by dedicating 40% of the proceeds to those customers. 

However, it is clear the proposal would put further stress on energy prices that are already predicted to rise as the result of other climate policies – including the phase out of fossil fuel plants.  For example, the Department of the Environment has issued (and will soon issue additional) regulations designed to reduce or phase out the use of natural gas for heating. If those proposals are successful, the cost of natural gas delivery will increase as fewer customers are available to share the cost of distribution infrastructure. Adding an additional fee to natural gas deliveries will simply inflate the cost further.  Exempting natural gas from the proposal would significantly limit the impact – and the funds raised.

In summary, all the proposals would have significant impacts on Maryland’s economy and would not raise the billion dollars of additional revenue suggested by the Pathway report in time to assist the state in meeting the 2031 deadline.  Since the Pathway report concluded that the 60% reduction in greenhouse gas emissions by 2031 could not be achieved without that additional revenue, it appears unlikely that Maryland can meet that aggressive goal. Certainly, the goal cannot be reached without significant impacts to the state’s economy. As Maryland tries to transition to a net-zero carbon economy, the state must carefully examine the feasibility and affordability of the aggressive 2031 interim goal.  The 2045 net-zero goal, of course, permits the state more time to make economic adjustments and consider less drastic measures to raise funds.

Note: Michael Powell is a business representative on the Maryland Climate Change Commission and co-chairs the Mitigation Working Group. However, the views expressed here are entirely his own and do not represent the views of the Commission, the Working Group, clients or the firm.

For full contact information:
Michael C. Powell
443-570-8953 • mpowell@gfrlaw.com