CO2.0: Washington Groups Gear Up For Second Push for Carbon Taxation

November 16, 2016

The failure of Washington’s Initiative 732 wasn’t a surprise, as the carbon tax proposal created rifts in the usual alliances for such a proposal due to its revenue neutrality (with a possible revenue loss in the short term). Many proponents of carbon taxation favor such a tax as a source of new revenue, either for expanding general state programs or for funding environmental and energy efficiency efforts. Now, the Alliance for Jobs and Clean Energy—which publicly parted ways with advocates of I-732—has taken the first steps toward following up on its promise to develop an alternative carbon tax proposal, releasing a five-page outline of their emerging proposal.

Like I-732, the new Alliance for Jobs and Clean Energy (hereafter Alliance, for simplicity’s sake) proposal starts out with a tax of $15 per metric ton of carbon emissions, which, by way of example, works out to about 13.4 cents per gallon of gasoline. And like I-732, the rate is set to rise over time. After that, however, the similarities disappear. While the Alliance’s preliminary position paper is insufficiently detailed to support a complete analysis, here are a few of the more notable components:

  • The tax rate contains what the Alliance terms a “performance-based escalator,” meaning that, in addition to inflation-indexing, the rate would rise if Washington failed to meet (to-be-established) emissions and energy efficiency goals. The unadjusted rate could rise to $68 per metric ton by 2050, or about $150 (in 2050 dollars) after inflation adjustment. Although the I-732 rate adjustment mechanism did not take specific emissions goals into account, it contemplated similar rates, with a likely rate of about $156 per metric ton (in 2050 dollars) by that time. Specific emissions targets have not been spelled out to date.
     
  • The revenue would be dedicated to environmental initiatives and, to a lesser extent, offsets for low-income earners and businesses transitioning to less carbon-intensive models, in contrast to I-732’s intendedly revenue neutral approach, and to the goals of some who see a carbon tax as a source of general revenue or, specifically, as a way to achieve the state’s court-mandated education funding increases.
     
  • Under the proposal, 70 percent of revenue would go to support clean energy, split between a Carbon Reduction Investment Fund and a Sustainable Investment Fund. A further 20 percent would be invested in water infrastructure and related conservation efforts, while 10 percent would be earmarked for forest conservation. Projects would be selected and prioritized by newly created committees composed of “experts and representatives from Environmental Justice Communities.” The selection of these committee members, and the degree to which they would be accountable to the legislature, is not specified.
     
  • Energy-intensive and trade-exposed businesses would be granted compliance flexibility for an unspecified length of time, with rebates to offset compliance costs in the short run. These will gradually decline over time, but are intended to be maintained longer for businesses which are “highly efficient compared to their national peers.” Businesses could also submit their carbon reduction projects for consideration for grants under the Carbon Reduction Investment Fund and the Sustainable Investment Fund. Uncertainty surrounding the duration of these offsets, flexibility for extending them for some firms, and committee determinations of which corporate capital investments to subsidize offer at least the potential for favoritism or arbitrariness, with more popular energy-intensive businesses receiving substantial offsets while less politically appealing ones are exposed to greater costs.
     
  • At least 25 percent of all investments must be to the benefit of disproportionately burdened communities (defined as communities of color, low-income communities, and workers in the fossil fuel industry), and a further 10 percent of investment must flow to projects located within those communities.
     
  • An oversight board would be established to monitor investments and implementation, the board consisting of representatives of various interest groups and coalitions (consumers, business, labor, environment, public health, tribes, communities of color, and government). At least 35 percent of seats would be reserved on a right-of-first-refusal basis for members of a new Economic and Environmental Justice Committee, to be established by law.
     
  • Lower-income households would receive rebates pegged to the estimated average increase in household costs under the carbon tax regime. A transition fund would provide income, benefits, peer counseling, and job retraining for those whose jobs were displaced by the carbon tax due to facility closures and layoffs.
     
  • As with I-732, the Working Families Tax Credit would be funded to assist low income families, though, unlike with the Initiative, there would be no further tax offsets to the sales tax or the manufacturing B&O, which were part of the I-732 effort to secure revenue neutrality and offset the regressivity of carbon taxation.

In a postmortem on I-732, the Tax Policy Center observed, “Analysis shows that a national carbon tax would disproportionately burden low-income consumers, for whom energy costs comprise a larger share of their household budget. Even if companies directly pay the tax, they pass at least a portion on to consumers in the form of higher prices. Returning some of these revenues to low-income consumers through a sales tax break or expansion of low-income tax credit programs can discourage carbon consumption while mitigating regressivity.”

While the Alliance proposal offers (in some cases temporary) assistance to displaced workers and low-income individuals facing higher consumer prices, it will almost certainly be more distributionally regressive than I-732. It also highlights a growing divide on the left in terms of how to quantify regressivity.

A carbon tax is regressive. There is no real dispute on this question. But if the tax revenue is used predominantly to help low income families, is the proposal still regressive? In other words, can the expenditure side offset or reverse the regressivity of a tax, or are these two elements fundamentally distinct?

The question becomes more fraught when revenues are dedicated to conservation. The Alliance and other proponents of further investment in clean energy argue that climate change disproportionately impacts low-income communities, and thus investments in environmental protection accrue to the benefit of these communities, but such an impact is necessarily more speculative (particularly at the state level), less quantifiable, and less immediate than other governmental efforts to assist low income households.

As proponents of the Alliance proposal move forward in their efforts to secure legislative support in the 2017 session, expect debate on this question to intensify. Initiative 732 divided traditional allies; it remains to be seen whether this new proposal can reunite them.

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