Time to explore new directions for U.S. climate policy

The 2nd half of 2010 may open a window of opportunity for carbon taxes, and the West Coast is in perfect position to play a leading role.

Start with the possible window of opportunity, which depends on the outcomes of three events:

  1. The fate of federal climate legislation. The House has already passed a climate bill, but the Senate is stuck, and the conventional wisdom is that we’ll get an energy bill but not a climate bill. Different folks in the climate world have different opinions about federal action (my opinion is here), but everyone should be thinking about a Plan B in case federal action doesn’t happen. And in that context it’s especially important to consider…
  2. The fate of the Congressional elections in November. Everyone seems to think the Republicans will pick up seats, with a decent probability of taking over the House and a smaller (but nonzero) probability of taking over the Senate too. Given the Republican tendency to oppose climate action in general and “cap-and-tax” in particular, the federal dynamics are likely to change significantly in 2011, with a strong likelihood of no action and an increasing interest in alternatives to cap-and-trade. Those alternatives may become even more important in light of…
  3. The fate of the AB32 roll-back measure in California. In 2006 California passed the Global Warming Solutions Act (AB32), a measure that (among other things) requires the state to launch a carbon cap-and-trade system by 2012. This November, voters in California will be faced with a ballot measure—the California Jobs Initiative—seeking to suspend that effort indefinitely. I have not seen any strong polling about the odds of success for this measure, but if it does succeed in suspending AB32 then it will likely be the final nail in the coffin of the Western Climate Initiative, a regional cap-and-trade system that is already reckoned to be on life support.

In my view the odds are (1) that federal climate legislation will not pass this year, (2) that the Republicans will make significant gains in November, and —I’m going to waffle on this last one—(3) that the California ballot measure has a good chance of rolling back AB32. If I am right on all three, or even just on the first two, then it will be time for new directions in U.S. climate policy. Not a new direction, but new directions, because significant action on climate policy for at least two years is likely to happen not at the federal level but at the state level, in the much-touted “laboratories of democracy”.

In the event that U.S. climate policy moves in new directions, I am excited about the prospects for state-level carbon taxes. These can be implemented in any state, but I am especially keen about the chances for this policy on the West Coast.

One big reason is that we already have a neighborhood example: the province of British Columbia implemented a carbon tax in 2008, and in 2012 it will reach approximately $30 per ton of CO2. (That’s about $0.30 per gallon of gasoline or $0.03 per kWh of coal-fired power.) That’s living proof that carbon taxes can establish economic incentives to reduce emissions without destroying the local economy. It’s also living proof that politicians can push carbon taxes and still get (re)elected.

A second reason is that the West Coast has green-minded voters—there’s a reason Dave Reichert (R-WA) and Mary Bono Mack (R-CA) were 2 of only 8 Republicans in the House of Representatives to vote for the cap-and-trade bill that passed the House last summer—and innovative leaders in the business and non-profit communities who support well-designed carbon tax policies. These include the usual suspects in the environmental world (including Sightline Institute, with whom I worked on this memo on carbon pricing in Washington State), but also folks like Todd Myers, the environmental director of the free-market Washington Policy Center and the co-author of this 2009 op-ed calling for a revenue-neutral carbon tax of $30 or perhaps even $50 per ton CO2; and companies like Puget Sound Energy, whose 2008 WCI comments included a statement to “reaffirm [their] support for a carbon tax program,” a position recently repeated by CEO Steve Reynolds. (I have also been told privately by other major business leaders that they think a carbon tax is a good idea, and PS my examples above mostly come from Washington State but I’m confident that similar examples can be found in Oregon and California.)

A third reason is that we have ballot measures on the West Coast. In parallel with #1 above, state legislatures appear unwilling to tackle climate pricing—California is the exception here, but other states have repeatedly failed to lend legislative support to the Western Climate Initiative—and in parallel with #2 above, state legislatures are likely to see the same right-leaning dynamics that are projected at the federal level. An initiative campaign could go directly to the voters with a proposal to implement a BC-style carbon tax and use most if not all of the proceeds to reduce existing taxes.

And that brings us to the fourth and final reason for favoring the West Coast as a focal point for carbon tax action: State tax systems in the area are ripe for reform. A revenue-neutral carbon tax would appeal not only to green-minded voters but also to those who are fed up with the current tax system and want significant reductions in property taxes, income taxes, and business taxes. (Admittedly, this fourth reason applies to just about all states, and as noted before carbon taxes can be implemented in any state.)

My dream scenario would be a group of coordinated ballot measures in West Coast states in 2011 or 2012, leading to a regional carbon tax comparable to the RGGI cap-and-trade system on the East Coast. (These policies could then engage in a mostly friendly face-off if and when federal climate leadership returns.) As a first step towards this dream, how about making some progress in exploring new directions so we’ll be ready in case the window of opportunity opens?

7 responses to “Time to explore new directions for U.S. climate policy”

  1. “As California goes, so goes the nation?”… which provides good reason to watch California governor and “California Jobs Initiative” votes closely since deep Big Oil pockets could dominate both of these outcomes.

  2. This is a decent overview of some current trends in climate policy, but I’m left wondering…

    First of all, conservative Canadians are not conservative Americans, and right now, no Republican will support any taxes at all. I understand that we got two in ’08, but consider the political climate in ’08.

    Second, the ballot measure bullet ain’t all it’s cracked up to be. Case in point: AB 32.

    Third, I’m having some serious problems with reconciling your revenue-neutral claims here for a few reasons:
    A) Are we doing this to cap carbon emissions or raise revenues?
    B) Do we really want our tax base to come from an industry we simultaneously hope to dramatically curb through that very tax measure, and do so on the backs of the poor (regressively)?

    Basing your tax revenues on regressively taxing a “product” we hope to eliminate doesn’t make too much long-term sense – and mitigating 15% of the tax doesn’t really do much.

    It’s got to be a cap first, and we need in place mechanisms that incentivize us to eliminate as many GHG emissions as we can, not make us dependent upon them for revenue. We also need to incentivize individuals to make the transition to lower- or zero-carbon emissions as quickly as possible – by disincentivizing high carbon activities (mostly committed by the wealthy) while empowering lower income folks to make the up-front cost leap to things like solar power and electric cars.

    Really what I’m saying is, we need to rebate nearly all that money to individuals, with some going toward mitigating impacts to non-economic entities like habitat (which also have human impacts, like catastrophic wildfires).

    I’m really happy, however, that you are doing work on this and encouraging this direction. It seems like you have your heart in the right place, and we just disagree on the specifics. I can live with that.

    Thanks for your great work!

    YB: Glad that we (mostly) agree. The answer to your (A) question is Yes. The answer to your (B) question is that 15% of the revenue will offset impacts on low-income households. It it simply not correct that the problem is “the rich”. The problem is all of us. As for a per-capita dividend: I’m not opposed to it, but there are some economic reasons to prefer tax reductions. Finally, regarding “It’s got to be a cap first”: No it doesn’t. Taxes and caps have similar effects and I see no reason for your statement.

  3. If the answer to A is “yes”, then we aren’t working on a climate bill anymore, we are working on a two-headed beast, one head will eat the other,and you can be pretty sure which one it will be. 15% is a very tiny starting point, to be hacked away at by folks who see a good thing for their donors, i.e., serious tax relief for the wealthy.

    The tax reduction arguments are serious short-term thinking with scary long-term repercussions – and I don’t mean short-term/long-term in econ. terms, but in political terms. Let’s pretend that what we hope for in C&T comes true: we actually get a low- or zero-carbon outcome (80% reduction w/in 50 years is considered the bare minimum right now). What happens to the value of carbon emissions? It either falls through the floor, becoming as valuable as whale oil for fuel, or we will come to rely heavily on the one or two industries left who have to have carbon emissions, and they will be responsible for backfilling the tax revenue that once came from, say, property taxes.

    Try re-instating property taxes on a society that hasn’t had them for 25 years. Or one year. Look at what happened when California tried to reinstate an annual tax of about a hundred and fifty bucks, three years after taking it away – freakin’ revolution, man. : )

    The short-term productivity gains we would see by moving our revenue stream to an item we hope to disincentivize (maul that language, econ!) won’t, we hope, come back in carbon-rich activities to fill our governments’ coffers… right? We do hope it will actually cut carbon…?

    I almost completely agree with your claim that the problem is “all of us.” However, carbon emissions are generated very differently between the rich and the poor. Poorer folks’ carbon comes from older equipment, the inability to pay large up-front costs for low carbon choices (from no money, or from renting, etc.), subsidizing high-carbon industries that market to the poor (fast food, packaged food, NASCAR, etc.), and the lack of adequate low-carbon service options in their communities, at all (such as transit). For the wealthy, carbon emissions are often associated with conspicuous consumption (shark fin soup, air travel instead of train or bus, NASCAR, etc.), and with travel to/from work (living in suburbs, gated communities, and having to commute – and may God strike them down if they share a freakin’ Escalade). I would love to see a break-down of GHG’s by economic quintile, so we can effectively target solutions.

    Since they differ in their emissions, we can see that, though both groups’ markets require level playing fields (internalizing carbon costs to some extent) to allow for better choices between high- and low-carbon options, each group requires a different solution. Basically, poor folks need the power to make the choice, while rich folks just need the level playing field. When you think of the MU of money, instead of a dollar being a dollar, this difference is even more striking – where savings from the wealthy will go into low-carbon investments, savings from poor folks would go to low-carbon options for feeding their kids.

    YB: (1) Politics makes for strange bedfellows, perhaps even two-headed beasts. (2) Carbon tax revenue will not go away anytime soon, and $30/ton will almost certainly not be sufficient to achieve the goals you’re talking about; if you want to get technical about it then the revenue question boils down to the price elasticity of demand for carbon emissions. (If demand is elastic, raising a carbon tax—or lowering the cap on cap-and-trade—will reduce revenue from a carbon tax or an auctioned cap-and-trade system; if demand is inelastic, which it definitely is right now, then raising a carbon tax or lowering the cap on cap-and-trade will increase revenue from a carbon tax.) (3) My proposal is to use carbon tax revenue to rebate property taxes, so if carbon tax revenue goes down then the rebate goes down; you can of course argue that voters will not tolerate that outcome, but I think it’s worth it because (after all) doing nothing about climate change also has “scary long-term repercussions.” (4) I don’t know about your rich-versus-poor assessment, but in any case what about the middle class?

  4. Great points, man. I disagree, still, but I think your heart and head are in the right place, and if your’s got enacted, I’d be much happier than with the status quo.

    Of course, however:
    If $30/ton is not sufficient to curbing carbon emissions to any great degree, then there is no real climate-related reason to enact it. Already, the revenue beast ate the climate beast, and it ain’t even enacted yet. And the P/E argument will only last a couple of years, we hope. I understand P/E, and I understand how long predictions about P/E bear out in the face of dramatically changed markets.

    If one believes that a carbon tax will curb carbon emissions, then one cannot simultaneously believe that the tax revenues will provide a stable tax base for government. If, however, one is looking for that golden P in the P/E of carbon, where revenues will be consistently generated for a long time, then one is looking for a new revenue stream, and not looking to change habits to curb emissions.

    Your claim that you are just refunding prop. taxes instead of replacing them leads me to believe you have little experience with the California’s Vehicle License Fee debacle I alluded to. Gawd, if only I were so lucky! To sum it up: California offered a 66% reduction in the VLF during good times, with the original price to automatically kick in when the State hit a rough patch. It hit that rough patch, and with politicians screaming, “It’s not our fault! It was automatic!” they were summarily swept aside… well, one was, and a man with 39% of the votes became our governor. So, unless you actually, physically visit each house each year and say, “Dude, I’m giving you a check from the carbon fund, but please notice that you still paid your property tax”, be prepared to see folks believe that they no longer have a property tax, really, and when the economy (or the carbon market) takes a dump, change your name. I saw how people reacted over an extra couple hundred bucks per year during a downturn; I’d hate to see them looking at a couple grand in taxes when they’d grown used to zero.

    YB: Right-o. (1) Cap-and-trade also works by pricing carbon, and current estimates from the EPA are that the price from Waxman-Markey will be about $24/ton CO2 in 2020 and $39/ton in 2030; so if you think $30/ton in 2012 is too weak then get used to disappointment. My view is that $30/ton in 2012 would be a fabulous step in the right direction. (2) Perhaps the problem in CA was that the state hit and rough patch and Wham! the VLF went back up immediately. For better or worse carbon changes slowly slowly slowly, so any whammy that comes will develop slowly over time. (3) Is it so hard for you to image a world in 2050 where CO2 is down 80% but (and in part because) there’s a carbon tax of $150/ton? That would maintain revenue stability, and my guess is that it’s much more likely that a carbon tax of $150/ton would still be on the inelastic portion of the demand curve, meaning that it would raise lots more money than a $30/ton tax and fund much more in terms of tax rebates. I guess you can worry about running out of revenue, and I’ll dream about using carbon taxes to replace ever more of our existing tax system :)

  5. Okay, don’t misrepresent me to try to make a point – that’s not fair. I didn’t say that $30 is too weak. I said, “If $30/ton is not sufficient to curbing carbon emissions to any great degree, then there is no real climate-related reason to enact it.” (I already am disappointed in both bills for the reason that they are hiding a regressive tax in climate bills, and hoping that a regressive tax will solve our perceived fiscal problems, but much more disappointed because they look to incentivize even greater energy production through offsets, credits, and trying to mitigate the impacts on poor people through energy-use rebates, instead of straight cash coupled with high energy prices.) Don’t get mad because that is a true statement.

    The flip-side is that if $30/ton is sufficient to curb carbon emissions to a great degree, then the transitions it will have wrought will have pushed carbon closer to obsolescence, and it won’t be a good revenue generator for long. I’m hoping for the latter, as well as a revolution where politicians learn about the MU of money and think, “wow, using a regressive tax for revenue generation is stupid as well as wrong.” Yes, I am used to disappointment, as I’ve taught/worked in national and state-level environmental policy for ten years. Considering how excited you are at a tax proposals chances, I’m willing to be you aren’t, yet, too used to disappointment yourself. I’ll reiterate that I hope you win over the status quo, but with some tweaking in your proposal.

    You are right: I do have a hard time believing that any price that pushes us to an 80% reduction will also be inelastic to the point of revenue refunding. The amount of change (substitutes) required to reach an 80% reduction will have made carbon much more elastic. Like I said, it’ll either be that, or we will be dependent upon one or two industries for our revenue… not a good economic choice if you consider what happened when we did that with the financial industry.

    Okay, re: VLF’s problems. You describe how the VLF worked… how, exactly, does your description differ with what will happen to carbon prices/property taxes during a downturn/recession? Your system will say, “Okay, folks, pay up! You have to pay two grand in property taxes that you haven’t been paying during this recession, because we aren’t making the money in carbon taxes, because you can’t buy as many carbon-heavy things as you had been buying.” Do you really think they will care if you insist that they’ve been paying it all this time, they’ve just gotten a refund? California told us that we’d just been getting a discount, and this was the real price, but it didn’t matter. Plus, is that even good policy, raising non-income adjusted taxes during a recession?

    If you give me an example where a product’s price curbed its consumption 80%, but didn’t spur substitutions that dramatically changed its P/E within ten years (see Simon/Ehrlich Wager), and then I’ll slow down in my revenue argument. In fact, give me any economic forecast that accurately predicted markets forty years later.

    YB: We fundamentally disagree about this statement of yours: “If $30/ton is not sufficient to curbing carbon emissions to any great degree, then there is no real climate-related reason to enact it.” You think this statement is true, and I think it ignores the fact that $30/ton is a good first step in what is likely to be a decades-long struggle. Beyond that, let me just note that I’ve been kicking this idea around for a dozen years, since I co-authored Tax Shift in 1998. So I’m not exactly new to disappointment either :)

    PS. Thanks for your kind words (in the comment below) about the Snickers bar; I’m fond of that one too.

  6. I want to add something before I forget. Your Snickers bar opportunity cost example is FREAKING GENIUS. I’m glad I didn’t have that one when I taught high school econ. – it would have given some teenagers sleepless nights. The nerdy ones, yes.

  7. You forgot the claims I’ve made throughout: That basically if yours were to pass, I’d be much happier than the status quo. So no, I don’t disagree that it’s a decades-long struggle. I also don’t think that, if it doesn’t curb carbon, it has any real climate-related impact.

    Really we disagree in the ability for a GHG price to both have a climate impact and a reliable revenue generation capable of replacing property taxes. I do hope you are right, though.

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