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Greener ways to raise revenue

13 December 2013
Northwest states lead the US in evaluating the feasibility of a carbon tax.

"If it gets too cold, I'll tax the heat," sang George Harrison in the Beatles' song "Taxman." He was complaining about the high levels of income tax imposed by Britain's Labor government of the mid 1960s. But if Earth gets too hot, the thing to tax could be carbon emissions.

The state legislatures of Washington and Oregon have authorized the preparation of reports that will assess strategies by which to achieve state greenhouse gas emissions targets. Whereas Washington will evaluate a variety of options, Oregon will focus specifically on the feasibility of implementing a carbon tax.

Science behind the policy

Since the Industrial Revolution's beginnings in the mid-18th century, humans have contributed to climate change by adding carbon dioxide and other heat-trapping gases to the atmosphere, primarily through fossil fuel combustion. In 1880 the global atmospheric CO2 level was 285 ppm, according to estimates by NASA's Goddard Institute of Space Science (GISS). By 1960, the concentration measured at NOAA's Mauna Loa Observatory was 315 ppm. By May 2013, an all time high of 400 ppm was reached.

Elevated atmospheric CO2 concentrations have corresponded in Earth's past to elevated global temperatures, and recent GISS modeling work suggests that 2012 continued the trend of rising temperatures observed since 1880. The average 2012 temperature was 0.6°C warmer than the mid-20th century baseline, indicating that Earth continues to experience temperatures warmer than were observed several years ago. Each decade has been warmer than the previous decade.

The United Nations Framework Convention on Climate Change reached an agreement that future global warming should be limited to less than 2.0°C relative to pre-industrial times. Meeting that target would require global greenhouse gas emissions to be significantly reduced after 2020. Emissions in 2050 should be reduced by 30–50% relative to 1990 levels. However, according to the US Environmental Protection Agency, CO2 emissions increased by 10% between 1990 and 2011. Adding to the concern is the newly released Fifth Assessment Report from the Intergovernmental Panel on Climate Change (IPCC), which recognized that key models ignore permafrost thawing, now thought to be an important carbon-cycle feedback mechanism. Models could therefore have underestimated future warming.

The majority of knowledgeable scientists agree that global temperatures are increasing due to increased concentrations of man-made CO2 and other long-wave absorbing gases. Economists agree that when something is taxed, people tend to produce less of it. Following that consensus, some US states are proposing to emulate British Columbia in Canada and implement a state-wide carbon tax.

How it works

In 2008 British Columbia instituted a carbon tax of $10/ton of CO2 emissions, which has risen to its maximum cap of $30/ton of CO2. For gasoline, the tax currently works out to be around 7 Canadian cents per liter (24 US cents per US gallon). For coal, it's C$63 per metric ton (US$53 per imperial ton). Preliminary reports suggest this has reduced emissions by 5–10%, which is more than has been achieved elsewhere in Canada.

What's more, the new tax is revenue-neutral in that its proceeds are passed on as rebates to individuals and corporations as reduced income taxes. The tax shift serves the dual purpose of discouraging the unwanted behavior of releasing carbon while encouraging, through lower taxes, economic activity that is less harmful to the climate.

"Carbon taxes have been around for 20 years, particularly in Europe. But the most recent and most comprehensive is BC," says L. Tuck Wilson, lawyer at Portland, Oregon's TriMet provider of public transit. "That's the model that Oregon and Washington are studying."

In March Portland State University published a study that modeled the preliminary results of a hypothetical Oregon carbon tax with rebates, and estimated how the tax would affect Oregon's economy. Economists from PSU's Northwest Economics Research Center assumed a base rate of $10/ton in 2013, and an increase of $10/ton per year, reaching a cap of $60/ton CO2. Oregon's goal is to cut greenhouse gas emissions to 10% below 1990 levels by 2020 and by 75% by 2050. "The PSU study assumed that all of [Oregon's] existing sustainability or energy efficiency efforts would be continued," notes Wilson. Even so, it suggested that a price of $100/ton CO2e would be needed to reduce emissions to 1990 levels by 2030.

British Columbia's carbon tax is more than offset by reductions in income and other taxes.

British Columbia's carbon tax is more than offset by reductions in income and other taxes.

The simulations showed that revenues of $1.17 billion annually would be generated in 2015 and would increase to $2.16 billion annually by 2025. Care would be needed in redistributing this revenue not only for the sake of fairness but also to prevent adverse economic effects. The preferred scheme was to direct the majority of revenue to reductions in corporate income tax and to include low-income household relief as a matter of social equity. Different schemes vary in the amount of revenue set aside for reinvestment in energy efficiency projects.

"The carbon tax complements [energy efficiency efforts] because it's an effort to marshal market forces and accelerate the transformation within the economy toward efficiency and renewables," concludes Wilson.

Steps in the Northwest

"Washington and Oregon are in between British Columbia, which has a terrific carbon tax policy, and California, which so far has been pretty successful in rolling out a cap-and-trade policy. So we're in a good position to follow one or the other and set up a west coast bloc," says Yoram Bauman, an environmental economist and leader of the CarbonWA carbon tax campaign in Washington State.

In July the Oregon legislature authorized a study to "examine the feasibility of imposing a clean air fee or tax statewide." Senate Bill 306 appropriated $200 000 for the Legislative Revenue Office to carry out this study. Washington State's similar legislation (Senate Bill 5802) authorized a study to develop strategies to achieve the state's greenhouse gas emissions targets of 1990 levels by 2020.

Oregon's state capitol in Salem was completed in 1938.

Oregon's state capitol in Salem was completed in 1938.

Oregon's report will evaluate the effects of a clean air tax, including the economic and environmental effects of different tax rates proposed for specific types of fuels. It will also consider the impact on existing emission controls and regulations. Washington's report will review the effects of a carbon tax as it fits with a variety of emissions reduction strategies.

In a speech earlier this year, Washington governor Jay Inslee said that the US West Coast is a laboratory of innovation. It has the power to set a deadline for reducing its own CO2 emissions. The western states are actively pursuing emission reduction goals and strategies, and already have lower emissions rates than many other states.

East Coast states are also studying the possible benefits of a carbon tax. The Carbon Tax Center identifies New York as a state discussing using revenues from a carbon tax to reduce its sales tax. And Regional Economic Models, Inc. has recently reported that a fuel-specific carbon tax could improve Massachusetts' economy.

More money, less CO2

The carbon tax conversation centers in large part on how to re-invest carbon tax revenues, and three ideas have received most attention. The first idea considers reducing broad-based taxes to help offset the impact of fossil fuel price increases. Such an approach would reduce income taxes in Oregon and sales taxes in Washington. "Using carbon tax funds to reduce existing taxes is likely to lead to more economic growth," adds Bauman.

The second idea uses carbon tax revenue to reduce corporate income taxes. That approach could be an especially powerful driver to encourage sustainable growth. In income tax–free Washington, reductions in business and occupation taxes could be targeted at carbon-intensive industries so as not to put them at a competitive disadvantage internationally. "Current CO2-intensive businesses either won't make as much money, or they'll curtail their CO2 emissions," explains Clark Williams-Derry, program director at Sightline Institute in Seattle. Reducing corporate taxes for manufacturers would offset the costs of a carbon tax while providing an incentive to reduce emissions.

The third idea proposes to offset the impacts of carbon taxes on low-income households through income tax and sales tax rebates. "The biggest worry . . . is that carbon taxes wind up being regressive," says Williams-Derry. The tax hits lower-income people harder because of their proportionally higher expenditures on energy and energy-intensive services. Studies therefore need to look at the entire system—that is, what happens when one tax is altered in response to another.

It is possible that policy recommendations could include funds for clean energy R&D, but because most economists favor tax reductions as the preferred use of carbon tax revenues, this is unlikely to be a significant sum. However, a carbon tax could help "focus the mind on what we need to do, which is reduce carbon emissions," adds Bauman.

"In Oregon, we'd like to see money used for direct emissions reductions projects," says Jana Gastellum, climate protection program director at the Oregon Environmental Council (OEC). If eventually implemented nationally, OEC advocates reinvesting tax dollars into research and development.

"Because transportation makes up the largest share of Oregon's emissions profile, we want to see more research toward [emission] intensity of [various] fuels," adds Gastellum. This could include new infrastructure to support vehicle technologies that use electricity or advanced biofuels rather than petroleum.

A specific emissions-reduction tax

A specific tax replacement scheme that would directly encourage emission reductions is the vehicle miles traveled (VMT) tax. As the name implies, the tax would charge for miles driven in place of an excise tax for gasoline. Oregon established a pilot program in July in which 5000 drivers pay $0.015 per mile traveled instead of Oregon's $0.30/gallon gasoline tax.

"This is a backdoor way into taxing the efficiency of energy consumption and the production of carbon," says Angus Duncan, chair of Oregon's Global Warming Commission. In a sense, the gas tax is a way of doing this, but it has become so entrenched that it has minimal impact on consumer behavior.

The opportunity afforded by a VMT tax is that its effect on behavior can be much more explicit if it can be formulated to take into account vehicle fuel efficiency. The Global Warming Commission's current project is to scale from previous technical demonstrations to a bigger sample group in order to compare flat to variable VMT tax rates.

The basic VMT model comprises an access fee paid by everybody who uses the transportation system, a variable fee depending on number of miles driven and the efficiency with which they are driven, and a peaking fee to help manage congestion. Among the possible technical variations is a system for logging miles while protecting a driver's privacy with respect to location.

A regional demonstration in the Portland metropolitan area is scheduled for the near future. "This kind of demo would enliven conversation and put additional design options on the table," adds Duncan.

One system or fifty?

Whether a VMT tax in one city or a carbon tax imposed across an entire state, carbon emissions inevitably cross jurisdictions, and so, eventually, will regulatory policies.

"Washington and Oregon are a small part of the global problem, but they are part of the problem," says Williams-Derry. Developing a carbon tax would signal climate-sensitive leadership, and would create momentum for other states. But ultimately businesses, particularly fossil-fuel intensive ones that cross state lines, would not want a patchwork of regulatory systems. Pressure would grow for a uniform, nation-wide standard.

"The research that's most needed now is get-your-hands-dirty analyses of individual states and individual markets," says Bauman. For example, the carbon tax impacts on households will vary depending on the household's source of hot water—typically, oil or natural gas—and depending on whether the household gets electricity from a mostly hydropower utility or from a mostly fossil-fuel utility.

British Columbia's provincial government helped to facilitate action on a carbon tax before the economic downturn of 2008. The province has shown that smart policies can significantly reduce greenhouse gas emissions, and perhaps even benefit the economy.

The Oregon and Washington studies promise further discussion among economists, scientists, and policy-makers. Perhaps the future will hold a carbon tax ballot initiative.

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