Gov. Inslee’s Carbon Pricing Model, Part 2

Last week’s newsletter on Gov. Inslee’s Carbon Action Pricing Model got a lot of comments – about three times the normal amount. Thanks for reading it! The bill has arrived in the Appropriations committee and we will spend some time looking at it before taking action, so I have time to work through all the details.

Readers of my newsletter and blog brought up a few concerns that I felt I should respond to. Here are my responses to the most common ones.

Why should we act – China, India, etc. are far larger than us and aren’t acting…

There are two ways to respond to this concern. First, I can quote Mahatma Gandhi “You must be the change you wish to see in the world.”  This may be unsatisfying to some readers. 🙂

Second, I can point to how much of the world’s economy (and carbon emitters) will soon be covered by some kind of carbon pricing scheme, including China. The following graphic from Sightline shows the expansion of carbon pricing strategies, including planned rollouts over the next few years. We would not be acting alone. For more detail read the Sightline article.

Sightline: All the World’s Carbon Pricing Systems in One Animated Map

Cap and Trade or Carbon Tax? Why one over the other?

Lots of people had very firm opinions about the greater simplicity of a carbon tax instead of a cap and trade system. Many others wondered why I even brought it up.

A cap and trade system decides annually how much carbon is allowed to be produced in the economy and auctions out allowances. It adjusts for “edge effects” like the coal power plant partially owned by PSE in Montana that produces a lot of the electricity in the state by adding charges to the power that’s imported, aiming to get PSE to shift to a lower-carbon source. The price floats as carbon producers try to find the best way to make their product and produce less carbon as a by-product.

There are concerns that the auction system can be rigged, or that there will be undue influence by large players in the system. These are legitimate concerns and can be best addressed by having lots of transparency over the market.

With a carbon tax on the other hand, the state sets the price of carbon, and then the amount of carbon produced by companies in the system adjusts to match the price. It’s simpler – there are no auctions, and the permits can’t be traded. I’ll point you back to my friends at Sightline for a more in-depth explanation of the difference between these two.

In reality, both systems would be implemented with some constraints that would make them act more like each other. If you had perfect information about what the market would do, the two systems would end up identical – you could set the tax rate at exactly the level that would make the amount of carbon you want produced happen or vice-versa. A cap and trade system always has a floor price and a ceiling, making them look somewhat like the tax model.

There has been a lot of research in the Governor’s office on the cap and trade model, and he believes this is the best solution for our state. We’re looking at carbon tax alternatives so we can make an informed decision, but I think either system can work.

The University of Washington is a big producer of carbon. Isn’t this a problem?

The UW has a steam plant that produces a fair amount of carbon, meaning they would have to buy permits. Just like other power producers they should look carefully at alternatives to how they run the plant today – the alternatives may turn out to be less expensive than the current system once all the external costs are taking into consideration.

The UW gets direct general fund subsidies. We can fix any problem the UW has with a direct appropriation. They would then be in the same financial position, but have some upside if they could find a way to reduce their carbon output, and they would be more motivated to do so.

Everyone knows that companies pass costs like this down to the consumer.

Everyone “knows” lots of things that just aren’t true. Some of the costs will most certainly be passed through to consumers, but not all. The reference I give is to a study of gas taxes, which are much more direct than the proposal here.

Since we need to raise revenue to fund the education increases called for by McCleary (or, if you prefer the Republican frame, the non-education expenses pushed out of the budget by the McCleary-driven education increases) it seems to me that we have two options: a tax that applies mostly to Washington taxpayers, or one that to some extent taxes large out-of-state companies. I’d prefer the latter.

In summary

As I mentioned, the bill has now arrived in my committee. Because it raises revenue it is exempt from cutoffs that apply to bills that are not “necessary to implement the budget” as we say down here. This gives us a couple of weeks to organize a strong hearing, get feedback from economists, etc. I have some questions to still address, and want to read through the text of the proposal another time before I’m comfortable with it. Thank you for all of your thoughtful feedback on this and other issues I’ve been writing about.

About the Author

I am the Director of the Department of Early Learning for Washington State. I formerly represented the 48th Legislative District in the State House of Representatives, chairing the Appropriations committee and spent many a year at Microsoft.

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