Saturday, March 31, 2018

Moving Forward with a Carbon Tax in Washington State: Only A Revenue-Neutral Approach is Viable (Part I)

There has been a lot of talk about reducing the carbon emissions in Washington State and Seattle.

Lots of talk. 

But with all the good intentions and chatter, progress has been very slow.   For example, the carbon emissions in Washington State was higher in 2013 than in 1990.  There are similar statistics for King County and Seattle.  Total emissions is not down at all... they are up.

The essential fact is that the amount of carbon per person in the Northwest has declined slightly, but increasing population has more than neutralized the added efficiencies from better gas mileage cars and the like.  And the situation is much worse worldwide, as global population increases and countries such as China and India use vast amounts of coal and fossil fuels to improve the living standards of their populations.  And, of course, there is the fracking revolution, resulting in increasing oil and gas production in the U.S.    As a result, the amount of carbon in the atmosphere is rising fact accelerating upwards (see below).

The earth is starting to warm as a result of increasing greenhouse gases and in order to make any real progress in reducing the warming, we would have to CUT the emissions by 80% or more during the next decade.  Let's face it...this is not going to happen on our current course.

Catastrophic warnings and exaggeration of current climate variations by environmentalists (and local media outlets like, the  Seattle Stranger and occasionally the Seattle Times) are doing little.  Laying guilt trips on folks is clearly ineffective.   It is obvious that few folks will really sacrifice voluntarily to reduce global warming, and the most rabid environmental types still take their airplane trips.

The solution to this issue is elsewhere and inevitably technological.  One approach is to plan for the warming and create a resilient society.   Clearly a good move.  The other is to develop effective technologies to use less energy and to develop clean energy sources.  We must do this as well.

But there is a problem.  Fossil fuels are really quite cheap--mainly because of the huge increase in fracking during the last ten years.   Gas prices are up slightly over the last two years but still quite modest (see graph....about $2.60 a gallon on average)

And at the same time, natural gas is getting less expensive (see below).

With cheap fuel costs, folks are increasingly buying bigger cars (SUV are all the rage), air travel remains affordable and increasing rapidly, and folks are still doing a lot of driving.   The use of renewables is growing, but still represent only a few percent of the energy mix. (I always find it amusing that local environmentally oriented politicians never talk about the huge regional industry producing intensive fossil-fuel burning devices---Boeing).

As long as energy is cheap and the costs of burning fossil fuels (air pollution, global warming) are not made part of the price, progress towards reducing its usage will be undermined.

Carbon taxes and caps

During the past few years there has been intense interest in using economic tools to restrain the growth of carbon emissions in Washington State and elsewhere, tools such as carbon taxes and caps on emissions, to name a few.

In 2016, an initiative to initiate a revenue neutral carbon tax (I-732) was defeated.  In 2017, Governor Inslee's cap on carbon emissions was found to be illegal, and last month, a carbon tax bill in the WA State Legislature (I-4849) was defeated.

In this and my next blog, I will review these prior attempts to carbon reduction and discuss what I believe is the only viable route:  a revenue-neutral carbon tax that put the funds back into the pockets of WA State residents.

Suggested Rules

Any economic approach to reducing carbon emissions here in Washington Sate should have four key attributes:

1.   It is effective in significantly reducing carbon emissions.  The penalty for using carbon should be large enough to provide a sufficient price signal to push folks to reduce their emissions and to encourage alternative technologies.
2.   It is not regressive, with poorer people not paying more than their reasonable share.
3.   It is simple, objective, and not in control of one political party or group.
4.  It can serve as a model for the rest of the nation.    A carbon tax that helps the situation ONLY in Washington State will not have much impact.   We need a measure that could be used in other states and will encourage the development of technologies that can be used around the world.  It must be a bipartisan, since our nation is split between two parties.

There are two main types of carbon taxes:  (1) revenue-neutral taxes that return all the carbon taxes to citizens and (2) carbon taxes that use funds for a variety of purposes, such as making investments in alternative energy technologies or for more general "social justice" goals.

Another approach is to dictate carbon reductions through "caps" on carbon emission.  Some caps simply limit carbon emissions with no money changing hands (like Governor Inslee's executive action that was found unconstitutional) or ones where organizations can trade and sell rights to emit carbon, with money changing hands (cap and trade).   But the cap approach has run into problems in both Europe and California, and has inherent weaknesses that allow such an approached to be "gamed."

In my next blog, I will examine past and current attempts at a carbon tax in Washington State and make the case for a revenue-neutral approach.


Eric Blair said...

I have two issues with this proposal, and one is that additional taxation on energy usage is regressive economically, not progressive. It punishes the poorest among us, since it is usually the lower middle class and blue collar workers who wind up commuting the longest distances from their homes to work. This finding was borne out in CA after their multiple increases in gas taxes over the past two decades, and it definitely did not lend to the increased usage of public transportation. Secondly, renewals still have a long way to go in terms of replacing carbon - based energy sources, but safer and more efficient nuclear energy production is appearing to be a much more viable (and short - term) option.

Jim Lazar said...

The point about gasoline and natural gas being quite cheap is even more evident if you look at it in inflation-adjusted terms, or, better yet, look at it in "miles of gasoline per hour of income" which takes account of changing prices, changing fuel economy, and changing income.

I'll start with natural gas. In 1980, when I began my career in energy economics, the Sumas border price for natural gas imported from BC was $5.04 per million btu. That was in 1980 dollars. Today it is less than $3 per million btu in 2018 dollars. In real terms, this is an 80% cost reduction.

Next, gasoline. I'll approach this a little differently. In high school, gas was about $.40/gallon; I got paid $1.50 per hour. With that, I could buy 4 gallons. In my dad's Chrysler, or my mom's station wagon (or my first car, an ex-military Willy's Jeep), that would take me about 40 miles. Today, minimum wage is just over $10/hour, and that will still buy about 4 gallons. So, the price of gas has gone up more or less in line with the minimum wage. But, today, a comparable car would get 25 - 35 mpg, meaning that 4 gallons will take me 100 to 140 miles, about three times as far. The cost of gasoline per mile driven has dropped sharply. Oh: I now make a little more than minimum wage (and drive only about 6,000 miles per year), so the cost of gasoline is, for me, a rounding error in my personal budget.

Bottom line: gas (both natural gas and gasoline) is cheap.

I'll challenge Cliff on Part 2 of his blog: whether a revenue-neutral carbon tax would affect driving very much. Suppose it was $100/ton, above the upper limit of any of the proposals being considered today, including Initiative 1631. That would add about 33% to the cost of gasoline. BUT, gasoline is only about 30% of the cost of driving: car payments (the capital cost), maintenance, and insurance are 70% of the cost. So the cost of DRIVING, per mile, would go up about 10%. Economists measure the elasticity of demand, the change in quantity with respect to a change in price. For driving, it's on the order of -0.3, meaning 10% increase in the cost of driving per mile will result in about a 3% decrease in the number of miles driving. While the higher price would also cause many people to choose a Prius (or and electric car) over the Tahoe or Explorer they drive now, I'm very skeptical that even a $100/ton carbon tax would have more than a small impact on the demand for gasoline.

The good news is that wind and solar costs have come down dramatically. Recent wind and solar projects in the UAE, India, Mexico, Oklahoma, and Colorado have been achieved at costs lower than the operating costs of existing coal and natural gas power plants. Cheap. Really cheap. Like $.02/kWh for wind, and $.03/kWh for solar, versus $.04/kWh just for the operating costs of the nuclear plant at Hanford. There is some real hope for clean electricity. I didn't think this day would come. It has.

I hope that emerging electric vehicle technologies, coupled with smart charging that controls them to charge when low-cost wind and solar are available. That would be a huge difference. But is that change more likely to happen with a revenue-neutral carbon tax, or with a tax-and-invest strategy, that puts money into the smart charging network and the wind and solar development? That's the reason to consider the Cap-and-Invest strategy.

Sue Willard said...

I agree that revenue-neutral is essential. Applying it in a way that benefits all income levels equally is probably the only route that could acquire enough popular support to succeed. Public/private partnerships in wind & solar development are happening right now too.

The question right now is what every person (including you, dear reader) can do right now to be part of the solution, not part of the problem.

A few years ago we made a move toward being part of the solution. We took out a small loan to put in a solar array in partnership with our P U D, our local power company. It produces slightly more electricity over the course of a year than we use. We sell the extra back to the company. Enough people have done this that it eliminated the need to build another generating plant ~ hydro, coal, oil, . . . With another loan, we also bought a slightly used hybrid car that is plugged in right now.

We do live on acreage and use diesel and gas-powered equipment, so we're still contributing to smog. And accessible public transportation is not an available option for us right now. When electric equivalents start to happen, we'll look at changing. We already have a battery-powered pruning saw.

You say "when low cost wind & solar are available". It is NOW.

Smart charging is happening right now in our national grid, and public charging stations are starting to be a reality. in our area.

I would hope you are participating in the solutions available right now. Please don't wait for the best solution. It will always be just over the horizon.

Placeholder said...

I guess I ought to be used to it by now, but I'm not. The nearly universal tendency of Seattle "progressives" to speak beyond their rather startlingly limited competence still amuses, amazes, and irritates me.

The projects that Jim Lazar mentioned don't actually give any detailed cost breakdowns. Until they do, everyone should consider the numbers to be phony. Not that "progressives" routinely lie about the numbers. Oh no, never happens.

All of this adds up to the usual high-income trendoids wanting to really stick it to the proles.

RLL said...

I have wondered about subsidizing medical care, for all citizens, with the carbon tax. That would make it revenue neutral and benefit everyone.

giantgambianrat said...

I'm very excited to hear you talk about a revenue neutral carbon fee and dividend. The best way to reduce carbon emissions is with a simple fee that taxes all carbon sources and whose revenues are returned to the people of Washington. Citizen's Climate Lobby has done great work on this.

Eric, I agree that low income households spend a large amount of their income on energy as a percentage of their income, but per capita, it's actually quite low. This means that if there's a dividend return (like Alaska's Permanent Fund), low income people will actually have more money in their pockets, rather than less.

Jim, I agree that getting people out of personal cars will be one of the harder points of decarbonization, but getting delivery fans, buses and freight to change is already happening. A predictable carbon fee will be an even greater incentive to get businesses to plan for an all-electric future.

Steve Lalley said...

Jim Lazar: Nice write up. I have a question, you mention the costs of wind and solar coming way down. Is any of that due to government subsides or is it what I would call "real" cost reductions?

I also wonder how much wind, solar and tidal can really help until we've come up with a solution to storing energy. Has anyone studied that?

Eric Blair said...

Sue - while I appreciate your efforts, I'd like to know if tax monies were available in order for the local utility to gain access to your solar installation. Additionally, were tax dollars used in order for you to take out that low cost loan - the devil is in the details. Renewable sources are still light years away from competing with carbon energy sources without massive taxpayer subsdies, your all - encompassing claim that wind and solar is a replacement right now for carbon sources is risible.

Jim Lazar said...

In response to Steve Lalley.

The cost of wind and solar coming down is definitely DUE TO government subsidies, in the sense that the "infant industry" incentives (some call them subsidies) in the form of the production tax credit (wind) and investment tax credit (solar) stimulated the industry. That stimulated industry has grown in size, and with the growth has come economies of scale. These economies of scale are enduring, real cost reductions that will persist after the tax incentives phase down over the next few years.

The recent Xcel Energy (Colorado) bids at 1.9 cents/kWh (wind) and 2.8 cents/kWh (solar) do include some tax incentives.

BUT, we are beginning to see some solar/wind bids that have no tax incentives attached, and those tell us where the future will be in the US when the incentives phase down.

Mexico: CFE signed contracts for wind at 2.2 cents/kWh, and solar at 1.8 cents/kWh, with no incentives.

India: Several wind projects contracted at $.02/kWh with no incentives.

UAE: Solar contracted at 1.7 cents/kWh with no incentives.

Eric Blair said...

Jim - what happens when the sun doesn't shine and nighttime comes, and what happens when the wind doesn't blow?

Steve Lalley said...

Thanks Jim!

Yes for now there will have to be power generated in the traditional methods until we can store the renewable generated power. That's why I think solar and wind will be a niche player until we come up with a technological solution to energy storage. Which makes me wonder what the maximum possible percent penetration for renewable can really be until that storage problem is resolved.

Hopefully Lockheed and maybe others are actually on a path to fusion power but so far that's always been 20 years away.

Organic Farmer said...

I think we should consider, how human caused increased atmospheric CO2 may very well have an extremely POSITIVE economic impact on northern tier states such as Washington!!

Places like Southern California, and Florida suffer from a great number of issues caused by over population, migration away from the swamps of Florida and the deserts of California sounds like a good thing for the environment, climate change or not!

I would like folks to consider what might be economically good for Washington, prior too creating self imposed restrictions on a state level, when climate change is a global issue.

As a vegetable farmer having economic suffering, because of the cool dark damp spring, the idea of a warmer brighter growing conditions sounds economically positive, for this blue collar farmer.

I believe Cliff said it himself, that climate change will have less of a negitive impact on Washington, than other places.

Why tax ourselves on a state level? Why? Who stands to profit?

The stat of Washingtons contribution to global carbon emmissions is miniscule!

Again, why a state tax?

Eric Blair said...

Careful, Organic Farmer - you speak heresy when you make statements like that one.

Bruce Kay said...

actually, on a per capita basis Washington State and every other state along with other fat cat nations such as Canada, the contribution to carbon emissions is massive.

As you point out, climate change is a global issue but not all global citizens hold either the same wealth or energy footprint. In that context, great wealth equals two things that the less fortunate do not have:

1) superior opportunity for technological and economic innovation.

2) Less vulnerability to the risks of innovation.

A carbon tax is considered to be the highest efficiency CO2 mitigation. Thats is, for the amount of effort expended, the greatest return on investment. It costs little and does exactly what is intended - steer energy use away from fossil fuels. This isn't just theory, it is proven around the world by numerous actual case studies in action over many years. There are of course many factors that can complicate or upset this expectation, such as a failure to make the tax progressive or some unexpected economic disaster but in general, carbon tax is the most efficient CO2 mitigation policy any country could implement.

A carbon tax in the context of point 1 (superior capability for innovation) and point 2 (lower vulnerability to the risks of innovation) combined with the proven track record of carbon taxation around the world means that it is essentially a no brainer for any first world country, especially those with such a massive moral obligation ( high per capita wealth and carbon foot print)

That is why not just Washington state but any high wealth / high carbon footprint society needs to take the smallest risk for the biggest bang at the smallest cost. Lord knows, that is the least that they should do, considering the far greater risk in not doing enough at all.

Organic Farmer said...

Heresy indeed! Hehehe

Exploring how northern tier states such as Washington, could economically benifit from a carbon rich atmosphere should be thought through.
Seriously, one must consider how a self imposed carbon tax on our state may very well be a double negative for our economy.

So, back to carbon tax concept..

Yes, the data is solid. A high per capita wealth has equated to a larger carbon footprint. So break it down to the individual. Wealth = larger carbon footprint.

Why not a straight up wealth tax then? Tax the top 10% or even top 50% of income/net worth folks.

Take the money to subsidse clean technology for bottom 50% of the income/net worth folks.!

Fair and just is to tax the wealthy, after all that's where the moral obligation lies yes?

Sorry, just don't see it. A whole new income tax code in Washington!?

Which brings us back to a consumption tax which hurts the bottom 50% disproportionately higher than the wealthy whom, likely don't consider weather or not they can afford to fill their gas tank or not when at the pump.

I cannot see how a consumption tax can be progressive. I 732 surely was not progressive.

Bruce Kay said...

Pragmatically speaking, you won't get much argument from me. It should be weighted more on the wealthy but as you know, the connotations of language are extremely powerful in generating perceptions of meaning. You call it a wealth tax and suddenly all the wealthy people are portrayed as being punitively singled out for the terrible crime of generating wealth.

However I mentioned risk vulnerability for a reason - because really that is what progressive taxation is all about. It is not punitive because those who pay the most are the least at risk. If you really insist on framing it as punishment, the reality is that the punishment amounts to being flogged with a wet noodle. They have no real vulnerability, the tax merely steering them to recoup costs with changed energy behaviour or to stimulate innovation, all options unavailable to the vulnerable.

On the other hand the less wealthy, those who are inordinately vulnerable to real risk associated with rises in fuel costs, must be relieved of that burden due to their lack of opportunity. It can't just be tax time rebates either because day to day margins are too tight for the most vulnerable. They need shelter from taxation on the upfront, not later on when they probably don't pay much income tax anyway.

Maybe call it a vulnerability relief tax or something. God knows, FOX news has already transformed the meaning of "progressive" into some sort of satanic communist dogma, despite the fact that "progress" remains one of the foundational elements of liberal democracy.

Spencer said...

Great to see a blog on practical steps to curbing climate change.

I'm curious, doesn't the defeat of I-732 indicate that even revenue-neutral carbon tax isn't yet politically viable? Or are we hoping that an additional 10% of Washington have come to their senses since 2016?

I wonder if a revenue-producing carbon tax would actually do better, in the way that Sanders might have done better than Clinton. The corporate tax breaks in I-732 left a bitter taste in my mouth.

Eric Blair said...

When you center your entire life and outlook on political issues, you're bound to be disappointed.

Jim Lazar said...

Eric Blair asks what happens when the wind does not blow and the sun does not shine.

Fortunately, the Pacific Northwest has one of the world's largest batteries, in the form of hydroelectric storage along our river systems. Our hydro system met all of our needs until the mid-1970's. It is very flexible. But it's limited to the amount of energy that falls from the sky as snow and rain.

If we add wind and solar when they are available, we can save the limited hydro to fill in the gaps. That needs to fall within the constraints for irrigation, navigation, flood control, fish migration and recreation, but there is a lot of flexibility.

There are many other tools available. My paper, Teaching The Duck to Fly, available for free download at the Regulatory Assistance Project website, discusses ten strategies to adapt the power system to a high level of variable renewable energy.

These strategies include grid-integated water heating, ice-storage air conditioning, improved rate design, controlled pumping of municipal and irrigation water, and several other proven technologies.

It won't be easy to make the changes. But it will be harder to live on a hotter planet.