>First, a side note. Whew! Ive been on a bit of a hiatus from posting as I got absorbed into the world’s largest rummage sale to help run their green team to keep stuff out of landfill these last few weeks. More on that later. Glad to be back to writing!<
So there are few things less popular in this world than taxes. However, when it comes to climate change, taxes already are playing a very important role, and have the potential to do a lot more in shaping our collective behavior and thereby our greenhouse gas emissions. I have been spending some time of late learning how this might work. Recently, I was fortunate to be able to attend a panel discussion on carbon taxes hosted by the Washington Clean Tech Alliance and the Seattle Chamber of Commerce. This event was the third in a four-part series on climate change that is being co-hosted by these groups through the months of May and June. This is the second talk Ive been able to attend in the series, and I am extremely impressed and pleased that our local chamber of commerce is stepping up to the plate and giving climate change some serious consideration, particularly since its parent organization is not always known for wanting to address this issue fairly and transparently.
Our panelists were an impressive group of economists and policy folks, including Yoraum Bauman, the Stand-Up Economist (yes, he really is a funny economist, they exist) from UW, James Tansey from the University of British Columbia, and Todd Myers of the Washington Policy Center. The discussion was moderated by Jon Talton, Seattle Times economics columnist, a very funny and (I think surprisingly for the Times) liberal commentator. You can tell just by looking at this line-up of folks that this was likely to be a very market-driven discussion about what types of responses we should be making to climate change, and indeed it was. But keeping that in mind, the folks that were brought to the table on this topic certainly have a wealth of experience and expertise about what tools can and should be considered in driving change on climate change in an economic framework.
When we talk about economic approaches for decreasing greenhouse gas emissions, there are two approaches that get a lot of attention at the table: Cap and Trade, and Carbon Taxation. The former, cap and trade, has the basic structure of assigning a total limit, or cap, on the amount of greenhouse gas that is allowed to be emitted by the members of the cap. Members who stay within their allowance can build up excess credits, which they can then sell to members who need to purchase credits to stay within their limit. Cap and Trade has become a reality over the past decade in a variety of regions and nations including the European Union, 9 New England and Mid-Atlantic States under the Regional Greenhouse Gas Initiative, the State of California, and most recently China, which has stated they will set a total limit on their carbon emissions for the first time, likely starting in 2016.
One of the great benefits of a cap and trade program is that, theoretically at least, you can set and have a decent chance of actually attaining a known reduction goal, because you are dictating the cap and therefore the total emissions of at least the sector of industry that has been captured in the cap. However, some major concerns have been raised with respect to carbon capping. One of the big ones is initial allowance giveaways – rather than selling permits, a program may, as the EU has done, choose or be pressured into giving a certain amount of allowances away to ease the transition to regulation. These giveaways can ease the burden on participants who may find themselves competing with companies not subject to the cap, but they also slow the advancement towards the carbon cap goals and can, without proper safeguards, turn into a boondoggle of corruption and lobbying pressure.
It is also hard to avoid the bureaucracy that is required in order to manage, oversee and enforce the program. The resulting policies tend to be relatively convoluted and opaque, and run the risk that the revenue that is taken in through Cap and Trade may or may not actually end up being reinvested in intelligent ways such as clean energy or offsetting costs for smaller businesses, vs ending up in a budgetary slush fund or earmarks at the whim of the political body that is doing the implementation. One more intractable problem with respect to cap and trade is that a flat cap is very difficult to apply to a situation such as in Washington where we have a very mixed electricity generation portfolio. Our electricity generation has substantial variability in emissions in, for example, dry years when less hydropower is generated relative to wet years, and that is very difficult to work with under a flat cap. There is much more information available on cap and trade, including in the final installation of this climate lecture series that you can see here, that is focused on Cap and Trade.
The alternative economic model for influencing GHG emissions that the panelists at this discussion mostly favored is pricing carbon, or implementing a carbon tax. The concept is pretty simple: add a tax – around $25 per ton of CO2 has been suggested by some folks interested in setting a carbon price for our state- to the production of carbon, with the idea that this added tax helps to internalize what are otherwise externalized costs of carbon production that corporations don’t currently see or pay for but that have a real cost to us societally in the form of climate change and pollution. The benefits of such a tax are multiple- first and foremost, it causes real behavioral changes that directly reduce energy consumption and thereby emissions. We can see this type of tax already at work and effective in British Columbia, where fuel consumption has declined by around 15% since implementation of that province’s carbon tax in 2008. In addition, the tax can generate substantial funds for reinvestment into clean energy – however, in this it is important to note that this is susceptible to the same type of diversion to earmarks or slush funds that I talked about as being a risk of a cap and trade policy, if appropriate safeguards for the use of incoming funds are not in place.
Many folks who are interested in creating a carbon tax for our state are keen on the idea that a tax like this can be revenue neutral, an appealing idea and an important component to generating bipartisan support for the effort. The folks at Carbon Washington have proposed achieving this by offsetting the carbon tax with a combination of a sales tax reduction, elimination of the B&O tax for manufacturers and upping the B&O tax credit for small businesses, and funding a rebate to help low-income families that will feel the effects of the tax on their energy purchases. You can read more about these ideas about achieving revenue neutrality within the carbon tax here. Other major advantages of a carbon tax include the fact that its relatively simple- no bureaucracy is required to set and maintain a goal, or cap, and no permitting processes are needed. Companies receive straightforward information about pricing, and can make decisions based on a single price; while government does not have to be in the business of telling us how to develop energy resources as a state, but rather let the market lead with better pricing that actually captures some of the real cost of that carbon.
The downsides? Well a big one is that you don’t have the certainty of achieving a concrete goal- the actual reductions are going to depend on collective market behavior, and there are lots of variables out there over which policy has little or no control. In addition, carbon taxation has the double-edged sword of simplicity- carbon taxes can be fairly easily given, so they can fairly easily be taken away. Unlike a cap and trade system where a complex process has the benefit of institutionalizing a policy and making it more difficult to undo, its pretty easy -and popular- to get rid of taxes, particularly in weak economies. But so far, we can look to the 6-year success of British Columbia, which is still enjoying a solid majority of folks supporting the tax.
After attending this panel discussion, and reading up on Carbon Washington’s proposals, I have to say that carbon pricing is looking like a pretty strong contender for a large-scale, relatively simple way to directly influence greenhouse gas emissions. Putting a price on carbon is an important way to state that we recognize and are willing to address the fact that carbon has real costs. I have pledged to help the CarbonWA folks to get their proposal on the 2016 state ballot, and you can too, right here!
PS- Breaking news! On July 1 South Korea implemented a carbon tax on imported coal- this is HUGE, as they are one of our biggest markets for coal export from the US. Adding a substantive coal tax is very likely to have a chilling effect on coal consumption and drive a shift towards less carbon-intensive energy sources in that country, as well as reduce the demand that is driving huge expansions in our coal-by-rail-and-ship infrastructure in the Pacific Northwest. Read more about South Korea’s carbon tax here.