Carbon taxes are witnessing a huge uptick in attention. The advent of the Trump era is causing clean energy and climate defenders to pursue alternative policy priorities to those of the Obama era. Emphasis of state primacy is at the core of the collective rethink currently underway. It is far from the only element.

Policies less reliant on regulation and more dependent on market principles are emerging from the shadows to center stage. The unsettling prospects of a Trump-wellian world is having an interestingly galvanizing effect.

Climate defenders on the right and the left are finding common ground and common purpose. One of the principal organizing threads may be seen in the #PUTAPRICEONIT campaign. It is a remarkably diverse grouping of partner organizations, e.g. Our Climate, Environmental Defense Fund, republicEn, Climate Change and  Citizens Climate Lobby, serving as a call to rally ‘round tax policy.

Earlier this year the concept of a national carbon tax made headlines when the  Climate Leadership Council released The Conservative Case for Carbon Dividends. Council leaders are not the names one might ordinarily associate with climate defense. They include two former secretaries of state, James A. Baker III and George P. Shultz; two former chairmen of the Council of Economic Advisers, Martin S. Feldstein and N. Gregory Mankiw; and former treasury secretary Henry M. Paulson Jr.

The Council’s carbon tax proposals have been getting a lot of press time and the endorsement of many of the organizations associated with #PUTAPRICEONIT.

The proposed national carbon tax is unlikely to be enacted any time soon. Council members met with and briefed Trump advisors. Shortly after the meeting, the administration indicated it really wasn’t interested in pursuing such a solution.

A carbon tax, however, is currently being considered by seven states: Washington; Oregon; Massachusetts; New York; Rhode Island; Connecticut; and, Vermont.

In addition to the seven states, a formal proposal will soon be introduced here in Capital City. The plan is the product of a number of organizations active in the D.C. area including: the Chesapeake Climate Action Network; Citizen’s Climate Lobby; Moms Clean Air ForceD.C. Divest; and One DC.

Collectively the group is known as PUT A PRICE ON IT D.C.

The outlook for these various state-based proposals remains murky, despite all the organizing around the concept. Several–Washington State, Massachusetts and the District of Columbia–have a fair chance of enactment in the next year or two.

Oregon and New York have both been active within the last several years but are now in a state of high neutral, making any near-term chances more problematic. Proposals in both Rhode Island and Connecticut are contingent on passage of a Massachusetts carbon tax.

The I will if you will contingency provisions reflect economic reality. Absent the larger Massachusetts market the economics for the smaller states just doesn’t work. Going it alone would place them at a competitive disadvantage compared to companies outside the state.

The regional theme is not a new one in the Northeast. The Regional Greenhouse Gas Initiative (RGGI) has provided very strong evidence of the benefits of regionalization of the power markets and environmental regulation. It has also shown the benefits of raising carbon revenues and re-investing it in efficiency and other sustainable energy measures.

State compliance planning, when faced with the Clean Power Plan, was leading a number of jurisdiction towards regionalization. Similarly, states already think in regional terms when it comes to transmission. It is likely as more states consider enacting carbon taxes, they too will think regionally.

 A conspicuous problem created by the absence of supportive federal policies is pollution’s continued refusal to respect state boundaries. Mr. Trump might want to include monies for walls around each state in his FY 2018 budget proposals. I’m confident he could get the states ultimately to pay for them.

State/city carbon taxes are more likely to come about before the national plan advocated by the Council and others. The importance of individual state actions is not simply the economic and environmental benefits accruing to the jurisdictions themselves but as an impetus for enactment of a nationwide tax.

By way of reference, it should be noted the Council’s national tax rate starts at $40 per ton and rises over time. All the proceeds from this carbon tax would be returned to the American people on an equal and monthly basis via dividend checks, direct deposits or contributions to their individual retirement accounts. In the example above, a family of four would receive [through the Social Security Administration] approximately $2,000 in carbon dividend payments in the first year.

The quid pro quo for U.S. businesses would be the significant rollback of environmental regulations.

To keep U.S. companies competitive border adjustments for the carbon content of both imports and exports would be levied. The adjustment tax would also serve to encourage other nations to adopt carbon pricing of their own.

State-based carbon tax regimes would not be the mini-me’s of the proposed national program. The brief descriptions of the state/city proposals below offer insights into how they would differ.

Washington State:

Governor Inslee’s 2017 proposed carbon tax is nearly identical to the 2016 ballot initiative defeated in the November election.  Inslee is proposing a $25 tax per ton of CO2 emissions, beginning in May 2018. The tax would then increase at a rate 3.5 percent faster than inflation in subsequent years.

The Governor’s proposal differs in two important aspects from the defeated ballot measure. First, Inslee’s plan has been rated as revenue-positive. The defeated measure was considered revenue-neutral.

The Governor has proposed using half the generated revenues to meet the state’s constitutional obligation of fully funding basic education. It is estimated that the tax would raise $2 billion in annual revenues.

After the education set aside, the remaining funds would be roughly distributed as follows:

  • $250 million to: fund emissions reduction through clean energy and transportation program, e.g. expand opportunities for residential and utility scale renewable energy; incent clean/electric vehicle purchases and the needed infrastructure; invest in research, technology and commercialization; or, otherwise cut greenhouse gas emissions, e.g. renewable fuels.
  • $250 million for Washington waters and forests to improve Washington’s flood management and storm water infrastructure, commercial agricultural/ irrigation systems and culvert replacement projects. Funds may also be used to improve forest health practices to reduce the risk of catastrophic fires.
  • $200 million to: accelerate job growth; increase manufacturing competitiveness; and, invest in industrial energy efficiency, electrification, co-generation, waste-to-energy or alternative fuel fleets and other projects to reduce emissions.
  • Funds may also be expended to: increase the business and occupation tax threshold from $24,000 to $100,000; and, increase the small business tax credit to $125 per month for all taxpayers.
  • $100 million to support affected low-income communities via programs that increase residential energy efficiency, improve indoor air quality and shrink energy costs for sensitive populations.

The 2016 initiative encountered opposition from some environmental justice and low-income community advocates because of how the revenues were to be distributed. The previous version of the tax proposal would have given all the money back, and then some, to the state’s residents and businesses through sales tax cuts, rebates for working families and a tax breaks for manufacturers.

The earlier version was rated as revenue neutral for its giving revenues and then some to reduce the state sales tax. For low-income citizens, a reduced sales tax was much less beneficial and unlikely to offset higher prices brought about by sellers passing the tax hike onto consumers.

How funds are to be returned to low-income consumers and communities is an important element of the carbon tax story.  It should not be under estimated.

Oregon:

Oregon remains in stasis on the matter of a carbon tax. Its legislature commissioned a $200K study–Carbon Tax and Shift: How to Make it Work for Oregon’s Economy—prepared by economists at Portland State University’s Northwest Economic Research Center and released in 2013.

The tax has been pre-empted by the passage of an Renewable Portfolio Standard requiring utilities to supplement the state’s energy mix with solar and wind. The Standard was enacted to balance/diversify the state’s considerable hydro sources.

New York:

Two versions of a carbon tax have been introduced. S2846/A107 establishes a beginning tax rate of $35 per ton, with annual $15 increases to a top rate of $185 per ton.

The legislation recognizes the regressive nature of the tax and directs an office of climate change to return 60 percent of the revenues to very-low and moderate-income residents in the form of tax credits. The actual amount of the credit will be based on the estimated expense incurred by the average very-low to moderate-income consumer.

The rate of the return of funds to consumers is intended to be progressive; the lower the income, the higher the credit value.

The remaining 40 percent of tax revenues is to support the transition of the state to a 100 percent clean energy economy. Investments in mass transit, climate adaptation, renewable energy, energy efficiency and conservation are all eligible targets of opportunity under the plan.

Both the Assembly and Senate bills are currently in committee. The calendars showed little movement since being introduced in January.

A3967 establishes a tax rate of $5 per ton of carbon and establishes an acceleration rate, equal to the annual inflation rate plus one percent. The term of the tax is ten years. The monies derived are held by the state comptroller for appropriation by the legislature.

This is not the first-time carbon legislation has been introduced in New York. The Carbon Tax Center lists the Empire State as one of the 25 most promising venues based on past and present proposals. The Center has indicated in the Table below that there are no legal ideological constraints to contend with.

New York has been very active in its efforts to reduce carbon emissions and to dispense environmental justice. In an ironic twist, New York’s past proactivity may dampen future action.  Governor Cuomo’s Reforming the Energy Vision initiative and the state’s participation in the RGGI both achieve somewhat similar outcomes.

As the state sorts out its participation in these multiple advocacy programs going forward, the prospects for a future of a carbon tax will become clearer.                                                                             

Picture

 Most Promising Carbon Tax States, April 2017


(Massachusetts:

Two carbon tax bills are currently in the legislative hopper. Although similar, the proposals differ on two points: the initial rate of taxation; and, how the revenues would be distributed.H 1726—An Act to Promote Green Infrastructure, Reduce Greenhouse Gas Emissions, and Create Jobs—starts the fee at $20 per ton of CO2, increasing in $5 increments until it reached $40 per ton.Distribution of proceeds would be: 80 percent returned to households and employers through rebates; and 20 percent to fund green infrastructure projects involving transportation, clean energy and climate change resiliency and/or remediation.The proposal ensures that low and moderate-income households would not be any worse off than under current conditions. The bill currently has 58 co-sponsors.S 1821—An Act Combating Climate Change—starts the bidding off at $10 per ton of CO2 increasing annually by $5 increments, until it too reaches a maximum of $40 per ton.

Revenues collected by this proposed tax scheme would all be returned to households, businesses and institutions. All households would receive an equal share of the collected revenues, while businesses and institutions would be returned funds in proportion to their share of total employment in the Commonwealth.

Additional funds could also be provided to rural households and energy-intensive businesses. The proposed Act enjoys the support of 65 co-sponsors.

This is not the virgin voyage of either proposal. Essentially similar versions had been previously introduced. Co-sponsorship support for both bills are higher this time around than the last.

It’s still anyone’s guess how the story will end. Substantial efforts by various clean energy, environment and progressive organizations appear to give the bills a better chance of making the transition from larva to butterfly than in the past.

New is not what it is cracked up to be when it comes to legislative proposals. Familiarity tends to breed comfort more than contempt. There is an inherent resistance to being first with an untried policy proposal in politics.

A note of caution for Connecticut and Rhode Island is in order. S 1821’s starting tax rate of $10 is below the $15 threshold of both  the other states’ bills. There are ways to resolve the problem, e.g. lowering the threshold trigger or waiting a year for the rate hike to kick in.

Under any scenario ending with legislation, the details will likely be worked out through negotiation. A three state region would be in everyone’s interest.

Rhode Island:

The legislation currently before the Rhode Island General Assembly is:  S. 0365THE ENERGIZE RHODE ISLAND: CLEAN ENERGY INVESTMENT AND CARBON PRICING ACT OF 2017. The tax would be levied on all fossil fuels within the state beginning January 1, 2018.

The initial rate of $15.00/ton of CO2 would be held for the first two years. The rate would then rise by $5 (in 2016 dollars) each year and adjusted for inflation. The Act makes no mention of a cap on annual rate hikes.

Collected funds would be allocated as follows:

  • Thirty percent (30%) to provide direct dividends to employers in the state;
  • Forty percent (40%) to provide direct dividends to residents in the state;
  • Twenty-five percent (25%) to climate resilience, energy efficiency, energy conservation, and renewable energy programs benefiting low-income residential and small business properties;
  • Five (5) percent of the funds may be used for administrative costs.

Funds dedicated to resilience, efficiency and renewables are to be held and distributed by the Rhode Island Infrastructure Bank. The Bank is a quasi-public institution that administers a host of funds including for brownfield remediation, low-income building efficiency and renewable energy.

Rhode Island’s share of the VW settlement for purposes of environmental mediation is slated at $13.5M. Although the settlement funds will be administered by the Department of Environmental Management, collaboration with the Bank holds the possibility of leveraging the resources of both institutions.

Rhode Island, like Connecticut, has hitched its carbon tax wagon to Massachusetts. The proposed legislation stipulates that the tax won’t take effect unless it is certified that another state in New England which borders Rhode Island and has an aggregate population of at least five million (5,000,000) persons does likewise at an equal or greater rate. The language is a long-winded euphemism for Massachusetts, as it is the only neighbor capable of meeting the requirement.

Connecticut:

The Connecticut carbon tax proposal is Raised Bill no. 7247. It is nearly identical to Rhode Island’s. For purposes of this article, to know the one bill is to know the other.

Connecticut’s political environment, however, appears less hospitable than either Rhode Island or Massachusetts. The state’s business community finds little comfort in the proposal.

According to an article in Hartford Business.com:

The Connecticut Business and Industry Association (CBIA) strongly opposes the tax, going so far as to request that the Environment Committee suspend its rules and remove it from a public hearing agenda (which didn’t happen) for fear that news of the proposal could damage the state’s reputation and worry business stakeholders inside and outside of Connecticut.

Vermont:

Prospects for a carbon tax went down significantly with the election of Republican Phil Scott as governor of the Green Mountain State. Although the home of Senator Sanders and a very large contingent of environmental and clean energy groups and socially responsible businesses, the carbon tax has been described as the very same issue …Republicans successfully used in recent months to hound some Democrats and Progressives out of office.

Despite the somewhat gloomy outlook, two carbon-tax-related items were introduced in February 2017. J.R.H.6 is a joint resolution requesting Governor Scott to advocate for a regional carbon tax through the Regional Greenhouse Gas Initiative (RGGI) which is comprised of eight states including: Massachusetts; New York; Vermont; Rhode Island; Connecticut; Maine; Delaware; and Maryland.

H. 394 is legislation relating to the conduct of a carbon tax and cap and trade study by Vermont’s Joint Fiscal Office. The bill has been read once in committee and is now resting, pending further action. The Office provides non-partisan financial analyses for the key legislative agencies.

Washington, D.C.

The proposed fee-and-rebate policy in the District would start at $20 per metric ton rising to $150 per ton in 2032. According to the information published by the coalition PUT A PRICE ON IT D.C.:

 Starting on day one, the majority of the money raised would be returned—through a quarterly “rebate”—to every D.C resident. While a universal, equal rebate on its own is an economically progressive policy, our bill design also provides additional support to low-income District residents. The carbon fee and rebate puts more money into the pockets of D.C. families, ensuring that low-income and middle class residents are better off in the transition to clean energy. (emphasis mine)

Strategic investments would also be made to accelerate D.C.’s transition to a clean energy economy in a way that is just and equitable.…the rebate would more than offset any rise in consumer prices for the vast majority of residents….an initial analysis of a D.C. carbon fee set at $20 per ton would yield over $500 per year for the average family, with low-income families receiving over $900 in the first year. This amount would steadily increase over time as the carbon price strengthens, to more than $1,600 and $2,750 by 2032 for average families and low-income families respectively.​

The policy would apply to natural gas and oil consumed in the District, as well as carbon-intensive electricity and emissions from non-public transportation. Roughly 75 percent of the revenues derived from the tax would accrue directly to D.C. residents. Twenty (20) percent of the remainder would be invested in renewable energy projects with the rest used to reduce the property tax burden of businesses.

Carbon emissions are projected to be reduced by 23 percent. The Center for Climate Strategies and Regional Economic Models, Inc. provided the analysis for the coalition. A rate quite consistent with the proposed plans in other jurisdictions.

If enacted, the tax scheme would be the most progressive of any proposed to date. The legislation must first be passed by the D.C. Council and signed by the mayor—after which it  will be referred to the Congress for review and approval. Capital City remains under the congressional thumb.

Supporting coalition members are confident of Council approval—given the favorable conclusions of the economic models and the significant sums to be re-invested in the community. Congressional approval is well within reach with so broad a coalition of supporters, including the Climate Leadership Council, local business and community organizations.

This year’s carbon tax activities are more positive than they have been in the past for the reason mentioned at the beginning of this article. Notwithstanding broad-based coalitions, the need to negotiate through the currently choppy to very wavy political waters, a carbon tax is not without its problems.

The current batch of bills, including Governor Inslee’s own, have heeded the 2016 lesson learned in Washington State. Revenue neutrality and revenues being lumped in with other general state funds is not acceptable—either to low-income communities or to environmentalists wanting the funds cycled into additional efforts to combat climate change.

Taxes are taxes. The business community in Connecticut is worried that the additional tax burden will place them at a competitive disadvantage in head-to-head competition with businesses outside of the state.

Low-income community members are also worried. Returning monies to low-income and moderate-income consumers through tax credits only works if they file and have enough income against which to take the credit.

For those at the bottom of the economic pyramid a dollar more or less—today– can have a profound impact on quality of life today and tomorrow. Rebate programs are asking at-risk populations to place their trust in the government.

Today’s political environment does not encourage confidence either in at-risk communities or the ranks of environmental defenders. All are beginning to understand what they have to lose.

The proposed bills referenced above –for the most part–deal well with the twin problems of economic and environmental justice by supporting a variety of efficiency measures and projects for the good of society including at-risk populations.

Efficiency improvements for low-income housing, reductions in harmful emissions through electric buses, investment in clean energy projects are all compensatory in nature.

The revenues derived from the tax can be further leveraged with the $2.7 billion states will be receiving from the VW settlement for enivironmental remediation. I encourage advocates of the carbon tax to consider how both sources of climate capital can be best leveraged.

Do the benefits of a well-conceived carbon tax outweigh the problems? Most likely they do.

If the models used to assess the beneficial impact of the propsed fee-and-rebate program in D.C. are correct, they most definitely do. Throw in the health benefits of reduced emissions, job creation, new investment outlets and improved resiliency and the credit column far exceeds the debit side of the ledger.

At some point, however, it will be necessary for the federal government to step back in to fill an integrating role that states—either individually or in regional groupings—simply cannot perform. Pollution does not respect state boundaries.

The better state-based carbon tax programs perform, the greater the chance for continued federal-state-local partnerships. We are—after all—in this together.

Source for the Table: The Carbon Tax Center
Photo: Web Page : PUT A PRICE ON IT D.C.