2) On the policy front, I’m doing some research on regressivity and the state tax system and came across this recommendation to eliminate the $400m sales tax on construction labor from the 2002 Gates Commission report. The Gates report is a decade old so I don’t know the current status of this issue—if you know anything please let me know—but if it’s still an active issue then it might be a good element to include in our effort. Comments welcome!

3) Thanks to everyone on Lopez Island for coming out to my talk last week and for joining the list-serv! As with everyone else on this list, let me know if you’re ready to pledge 40 person-hours to collect 1000 signatures for the CarbonWA effort between February and June 2014, and ditto if you can contribute in other ways :)

4) In news from elsewhere, the Oregon legislature is still considering various bills (including a carbon pricing study bill) and yesterday about 100 people turned out for a lobby day led by Oregon CAN, which is pushing a BC-style revenue-neutral carbon tax for Oregon. (Claire is an Oregon native and so she was there and is touch with the folks at Oregon CAN.) More generally, the year ahead is looking like it will have so much carbon pricing action on different fronts in different states that I’ve started to think of it as the “let a hundred flowers bloom” period. All this ferment has led to the creation of a state-level action page at carbontax.org that currently focuses on OR, NY, and WA. And Tom Steyer’s keynote speech at the Climate Solutions breakfast on May 13 included an explicit call for the west coast states to “participate together in direct democracy” (i.e., ballot measures!) as a way of building towards federal action. All very exciting, so let’s keep pushing forward!

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Comments are welcome via email or inserted into the PDF or (best of all) on the wiki. I’ll post responses too!

Print warning: If you’re going to print these pages, note that some of them have a lot of black coloring, so you might use up a lot of toner. (Sorry!) Also note that some of the comments are in light-colored text that might be hard to read on a print-out. (Ditto!). Overall I’d recommend trying to look at this online so that you can zoom in and out as needed.

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• Last week I was invited to talk carbon taxes with the Conservation Committee of the Cascade Chapter of the Sierra Club. The idea of a revenue-neutral carbon tax received a vote of support (unanimous, if I recall correctly) and a task force was created to come up with recommendations for getting a carbon tax passed. Great news, stay tuned for more!
• I submitted ballot language for a revenue-neutral proposal to see what kind of ballot title would come out of it, and here’s the result: “This measure would impose a greenhouse gas emissions tax on certain fossil fuels, reduce the state sales tax one percentage-point, eliminate the business and occupation tax on manufacturers, and increase certain tax credits.” More details on the bill itself (PDF, Word) and on the ballot title and summary.
• Governor Inslee signed into law a study bill that will evaluate ideas like BC’s carbon tax and report back in October 2013.
• A good op-ed in the Wall Street Journal from Nobel-winning economist Gary Becker and George Shultz: “Why We Support a Revenue-Neutral Carbon Tax”. (Last I checked this article was not gated, although the WSJ often is.)
• We’re shifting focus towards a revenue-neutral option and away from a transportation option, but as a last-ditch effort of sorts on the transportation front Clark Williams-Derry of Sightline and I wrote a post on “How To Fix the Washington Transportation Package”.
• PS. Some earth day talks coming up at Edmonds Unitarian Universalist Church (Sunday April 21), Plymouth Forum at Plymouth UCC in Seattle (Sunday April 21), Seattle University (T April 23), Bellevue College (Th April 25), and Yakima (May 2). Holler if you want details or want to help out!

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If revenue-neutral carbon taxes are such a great idea, why has only British Columbia adopted this policy?

I gave what I thought was a decent answer in class, but wanted to put some more thoughts down in writing:

1) People prefer the devil they know to the devil they don’t.

More specifically, people seem to prefer whatever tax system they have now, however lousy it may be, to possible alternatives. A good example here concerns Washington and Oregon, which both instituted income taxes in the 1930s. Washington’s income tax was found to be in violation of the state constitution, so the state adopted a sales tax instead. To this day Washington has a sales tax but no income tax, and voters would almost certainly reject an effort to replace the sales tax with an income tax. Across the state line, Oregon has an income tax but no sales tax, and voters there would almost certainly reject an effort to replace the income tax with a sales tax. Go figure.

I think that one part of the explanation here is that tax reform proposals seem to automatically engage people’s cynicism and mistrust of government, so they’re inclined to think the worst. In the case of revenue-neutral carbon taxes (i.e., raising taxes on fossil fuels but lowering existing taxes on income, sales, etc) the worst-case thinking is “You’re going to raise tax fossil fuel taxes but you’re NOT going to lower existing taxes.” This is a very difficult argument to counter, although B.C. has tried, e.g., by stipulating that the finance minister loses her salary if the tax is not revenue-neutral.

2) People don’t (yet) accept that climate change is a serious problem.

Tax reform is a big deal, and you’ve got to have a good reason to get behind it. Many people don’t feel that urgency right now.

When my older brother and I were kids, one of our household chores was hanging up the laundry. So we would go to the laundry room in our apartment building and proceed to snap towels at each other and otherwise goof around. And then eventually my brother would announce that it was “No f***ing around time”, at which point we would get down to business. The analogy, of course, is that Americans are still goofing around when it comes to climate change. At some point they may recognize that it is “No f***ing around time”, at which point they’ll be more willing to consider significant changes like environmental tax reform.

Put points #1 and #2 together and you see that people are inclined to stick with the status quo in part because they think we can just keep doing what we’ve been doing. But we can’t. The real choice is between changing our tax system and changing our climate. The status quo is not an option.

3) Economists think about the world differently than “normal people”.

When economists think about taxes, they mostly focus on efficiency and things like deadweight loss, or what was once described as plucking the goose to get the greatest amount of feathers with the least amount of hissing. When “normal people” think about taxes, they mostly focus on equity and fairness. And, as above, cynicism and mistrust of government play a major role.

Similarly, when economists think about environmental issues, they naturally think about using market-based instruments like carbon taxes or cap-and-trade systems. When “normal people” think about environmental issues, they mostly think about regulatory policies (like fuel-economy standards) or government-funded R&D into clean energy.

Finally, when economists think about policy, they often focus on pragmatic consequences and use a cost/benefit framework. In contrast, “normal people” often focus on left-versus-right ideology. (This contrast is the basis for one of my jokes, namely that economists are the kind of people who are against the death penalty because it’s too expensive.) Unfortunately, environmental tax reform exists in a kind of ideological no-man’s-land: when I make the case for using capitalism to tackle climate change, the stereotypical responses from the left and right, respectively, are “Capitalism? We don’t believe in capitalism!” and “Climate change? We don’t believe in climate change!”

4) There will be winners and losers.

Environmental tax reform will generate gains that are bigger than the losses, but there will be losses and they will disproportionately affect certain people and certain economic sectors. This was addressed in the equity part of #3 above, but it’s worth emphasizing that some people will lose their jobs and some industries will shrink. Those changes are inevitable if we want to tackle climate change, and in the big picture they will be offset by new jobs and growing industries in other economic sectors. There are ways to try to minimize these losses, e.g., by providing offsets for low-income households (as in B.C.) or by targeting certain tax reductions for energy-intensive industries (as in our proposal for Washington State). But in the end the theoretical ideal—a policy that makes everyone better off and makes nobody worse off—is unattainable; in the real world there will be winners and losers.

Of course, it’s worth remembering that climate change will produce winners and losers, too, and the odds are that the losses will outweigh the gains. This takes us back to #2 above, that people don’t (yet) acknowledge that climate change is a serious problem. If and when they do, perhaps they will be willing to take the difficult steps that will be necessary to deal with it.

PS. A fisheries analogy

A similar Tragedy of the Commons situation often exists with overfishing (e.g., with cod in New England), and the political challenges are often even more stark. The obvious solution to overfishing is to limit fishing and allow stocks to recover, and economists would recommend use economic instruments like a tax on fishing or a cap-and-trade system (which is known in the fisheries world as an ITQ system of Individual Tradable Quotas). But these policy recommendations almost always encounter resistance from the fishing community itself, the complaint being that you’re taking a struggling industry and kicking it while it’s down. The four issues identified above can be clearly seen: People are skeptical of changing the system they currently have (it’s worked for generations!), they don’t always believe that the problem is serious (maybe the fish are just having a bad year and will be back next year!), they think differently than economists (you’re kicking us when we’re down, and that’s not fair!), and there are winners and losers (what about the older skippers who just want to fish for another year or two and then retire?).

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Congratulations and many thanks to Judith Guitteny and her colleagues at Cité des Sciences, and to TSE economist Christophe Bontemps, who translated the French edition of Cartoon Micro.

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In other words, it’s a recipe for cooking the books on carbon taxes:

1. Pre-heat the oven with debt-crisis rhetoric. The interest rate for Federal borrowing is incredibly low, but don’t let that stop you from arguing that “[debt reduction] is appealing because this could reduce the interest rate for Federal borrowing”.
2. Mix carbon taxes with debt reduction and tax cuts. Make sure to front-load the debt reduction: “Until 2023, all of the net carbon tax revenues would be used to lower the Federal debt.” Worried that this goes against what just about any economist would recommend at a time when “families [are] struggling to get by as the national unemployment rate hovers just under 8 percent” (emphasis in original)? Simply add a caveat: “We [at NERA] make no suggestion that this particular combination is desirable, politically likely, or that it will produce the best overall policy outcomes.”
3. Cook until burned. “A carbon tax would have a net negative effect on consumption, investment and jobs”.
4. Top with bittersweet glaze. “Factoring in lost revenue from reduced economic activity, the net revenue from a carbon tax available for deficit/debt reduction and lower tax rates is relatively small.” As an added bonus—call-back!—a weakened economy will presumably raise the interest rate for Federal borrowing, so what comes out of the oven will be perfectly circular.

Yum, yum… Boy, that’s rich!

PS. For the record, the NAM report make a big deal about how “the price of natural gas would increase by more than 40%”, but almost half of this increase comes only in the very short run and relies on modeling assumptions about the short-term supply curves for natural gas being inelastic. (Translation: Fuel-switching from coal to natural gas drives up the price of the latter because producers have a hard time producing more.) Judge for yourself whether this makes sense by looking at how natural gas consumption has skyrocketed over the past few years at the same time that natural gas prices have been taking a nosedive. See the EIA graphs copied below.

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Amazing news continues to pour in from Oregon, where the Northwest Economic Research Center at PSU released a report on Carbon Tax and Shift: How to Make it Work for Oregon’s Economy. “A carbon tax is an efficient way to reduce harmful greenhouse gas emissions — you tax what you want less of,” said Tom Potiowsky, NERC’s director and professor and chair of PSU’s Department of Economics. “With a policy that uses the revenue from a carbon tax to reduce other taxes, Oregon could accelerate the process of reducing those emissions while still supporting a vibrant economy.” Everybody should read this report, and not just because I helped out on it a bit. (The real heroes are the folks at PSU and at the Oregon Environmental Council.) Last week BC Environment Minister Terry Lake joined Potiowsky to testify before the Oregon Legislature, which is considering 3 carbon tax bills and a carbon tax study bill.

Good news in Washington State, too: the State Senate approved a study bill to identify cost-effective ways to reduce carbon emissions. The bill specifically includes “a review of reduction strategies being implemented… on the west coast [and] in neighboring provinces in Canada” (e.g., BC’s carbon tax) and was passed by a 37-12 vote that included support from 12 Republicans. (Ten Republicans and two Democrats voted No.) The bill is very likely to pass the State House and receive the governor’s signature, in which case the study itself is slate to be finished by October 15, 2013.

There’s even an interesting bit of news nationally: Oregon Representative Earl Blumenauer and three colleagues from the House and Senate released draft carbon-pricing legislation and are soliciting feedback on it. The deadline for providing feedback is Friday April 12.

On the transportation front here in Washington: Transportation Issues Daily has the latest on the transportation package, including Inslee’s support for taking action. In past updates I wrote that the odds of a transportation bill passing this session are low, but it’s still alive and kicking, and Jim Lazar notes that “The supreme court decision (50% + 1) for taxes makes the odds MUCH higher.” Unfortunately we have not had much luck after our January op-ed at getting a carbon tax injected into the transportation conversation, but we will keep trying! (If a transportation bill does pass that is road-heavy and doesn’t include a carbon tax, I will personally oppose it, and I think many others on this list will also, but an informal poll of CarbonWA supporters indicated that as a group we should focus on promoting our positive agenda and not get distracted by opposing a roads-heavy transportation bill.)

On the education front here in Washington: a group of mostly Republican State Senators is trying to get $300m more for higher education, which is a top priority of the business community. “Senate leaders declined to explain how they would pay for the proposal. Lawmakers already face more than a $1 billion shortfall in the next two-year budget cycle and are separately under court order to expand funding for K-12 education.” Hmm… how about a carbon tax? :)

Finally, on the revenue-neutral front: I’m writing up a revenue-neutral option, stay tuned for more on that!

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