Tuesday, November 8, 2016

Does Regulating for Cleaner Air Push Industry towards Favoring a Carbon Tax?

By Joni Sliger, Energy Fellow
Carbon tax supporters collected signatures to get Measure 732 on the ballot.
Credit: Washington Secretary of State Blog

Tonight, Washington could become the first state in the nation to enact a carbon tax. Ballot Measure 732 proposes an escalating tax on carbon emissions, with complementary tax reductions for what is meant to be a revenue-neutral measure (though there is some debate on that front). While there are still too many undecided voters to call it, Ballotpedia reports that four polls on the measure show support for the tax slightly edging out the opposition but still within the margin of error (averaging 41.75% to 37.45% with a +/- 4.45% margin of error). Notably, that support does not include many of the state’s environmental groups, whom the Seattle Times reports are working on an alternative proposal. So how is a carbon tax on the verge of passing despite industry opposition and a divided environmental community?

A carbon tax or “carbon pollution tax” imposes a tax on fuels in proportion to the amount of greenhouse gas emissions they emit. Suppliers of gasoline or coal thus would pay the state for the expected emissions of the product they sell. Consumers may expect suppliers to raise prices accordingly. In Washington, Measure 732 proposes to cut other taxes, such as the state sales tax and the business and occupation tax, and to protect low-income families by raising the Working Families Tax Credit. On the balance, these changes aim to be revenue-neutral, meaning the state would neither lose nor gain money with the Measure versus the current tax structure. The overwhelming majority of economists have repeatedly supported a carbon tax as the most economically efficient way to take action against climate change.

Proponents of the measure—led by the Washington State Chapter of the National Audubon Society—have outraised and outspent industry opponents: proponents raised almost $2.8 million and spent about $2.5 million while opponents raised less than $1.5 million and spent less than $800,000. Why are industry opponents—including such deep-pocketed players as the American Fuel & Petrochemical Manufacturers and the Koch Brothers—not fighting harder against Washington’s carbon tax measure?

Perhaps industries facing sector-specific climate change regulations would prefer a carbon tax.

Washington just finalized its Clean Air Rule (Rule), as my fellow Energy Fellow, Ed Jewell, blogged last month. This new regulation is more stringent than the federal Clean Power Plan (CPP). The Rule went into effect in mid-October, requiring the state’s 24 largest emitters to reduce greenhouse gas emissions by 25% below 1990 levels by 2035 or pay compliance credits for reductions. Over time, the qualifying cap defining who is regulated by the Rule will decrease, effectively covering more and more emitters. The Washington Department of Ecology has compiled a list of the 68 entities potentially subject to the Rule. The state’s economic analysis estimates that entities may pay as little as $410 million or as much as $6.9 billion over 20 years to comply, depending on how they decide to comply. Again, these costs will fall primarily on only 68 entities (and then indirectly to their consumers).

Economists generally favor a carbon tax because it can spread the costs of taking action against climate change across the entire economy. An industry player, such as power producers, may prefer that the costs of regulation be spread across all economic players rather than only themselves. This is one reason why the EPA, in the CPP, provided the use of a carbon tax as one option for states to use in compliance. In Washington, the Rule already is more stringent than the CPP, but unfortunately both the Rule and the CPP are locked in legal battles. If the Rule fails but the CPP survives, a carbon tax like that proposed by Measure 732 might be the best way for Washington to comply. 

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