Gov. Inslee’s Carbon Pricing Proposal

I’ve gotten a lot of email this year about Governor Inslee’s climate proposal, both pro and con. Mostly pro, but a number of questions have come up and I’d like to take the opportunity to address them.

  1. I have no personal doubt that the globe is warming up, and that human activity contributes to this.  If you are confused about this there are lots of excellent pieces that work through the science in great detail, such as the information on NASA’s website:  http://climate.nasa.gov/evidence/
  2. I support the general direction Gov. Inslee proposes: using a market-based solution as the organizing mechanism to drive changes in our behavior to address this over time. People on the left and the right tend to agree that getting the markets to include all the costs of decisions is much more efficient than writing extensive regulations.
  3. I am open to using either Gov. Inslee’s proposed “cap and trade” mechanism or the simpler but less focused “carbon tax” strategy. Both are economically similar, but have different implementation concerns.

The basic idea is that we impose a tax or fee on activities that produce atmospheric carbon, as close to the source as we can. This fee will result in less of the activity (bringing fossil fuels in to produce power of some kind.) The Sightline Institute has a great summary: http://daily.sightline.org/2014/12/18/why-the-carbon-pollution-accountability-act-is-a-big-awesome-deal/

If you want a primer on how a cap and trade or carbon taxes work I urge you to look at the one Sightline publishes. http://www.sightline.org/wp-content/uploads/downloads/2012/02/Cap-Trade_online.pdf

The questions that have come up are:

Won’t this hurt the economy? In a word (well two) – not likely. I’ve got two arguments for this.

  1. Reasonable economic studies say it won’t. The Office of Financial Management studied the likely economic impacts of the Governor’s proposal. They found that, “employment, output, income and inflation-adjusted income are essentially unchanged under the carbon charge policy.”
  2. RGGI Economy is FineOther states, provinces, and regions that have implemented similar policies are not only still functioning, in most cases their economies have outperformed everyone else. The Northeastern states have had a cap and trade regime for a long time (RGGI) and they outperform the rest of the country. California is another example. It too is doing fine. The final example is British Columbia, our neighbor to the north. Just like us they were hit by the economic downturn, but they are recovering faster than the rest of the country.

There will be lots of arguments about this point. Endless “studies” will come out of think tanks financed by the oil companies that purport to show that the world will come to an end. This just isn’t supported by the evidence.

Will the big companies will just pass the cost on to consumers? The Governor’s office estimates that there are about 130 taxpaying companies who will directly pay carbon pollution fees. Some of the costs will undoubtedly be passed on to consumers, but from the vociferous way the oil companies are objecting to the program you know they will pay a significant fraction. If they absorbed no cost it wouldn’t be worth their while to spend millions lobbying, and tens of millions running campaigns against the proposal in California and British Columbia. Here’s a quote from Sightline on this:

Industry will try to scare us with hyper-inflated cost estimates. Oil and coal have a long history of over-blown cost estimates aimed at scaring decision-makers away from making oil and coal take responsibility for their pollution. Experience—with the Clean Air Acts of 1970 and 1977, the 1990 amendments, and now with California’s carbon cap—show that industry cost estimates are often way off-base. http://daily.sightline.org/2015/01/21/how-oil-industry-will-try-to-kill-carbon-pricing/

Will there be a lot of exemptions available to those with political pull? A cap and trade mechanism auctions off the “right to pollute” in discrete chunks equivalent to a certain tonnage of CO2. Some plans make a percentage of the “allowances” available in non-auction ways. Gov. Inslee’s proposal auctions 100% of allowances, avoiding the most obvious entryway to this problem. I tend to agree with the concerns that too much of the program is up to the Dept. of Ecology and not set in law. This is a tactical concern, and one we can fix during the legislative process.

Won’t we end up with no revenue if this works? Over time we will reduce the number of allowances available, reducing the revenue we get from them. Of course, the price to pollute will go up at the same time, increasing revenue. If it turns out that there is no revenue from the program because we eliminate carbon pollution I’m ok with that and will find another solution to our budget issues. Think about this like cigarette taxes. High prices are the single thing we can do to discourage youth smoking, but it hasn’t eliminated revenue, unfortunately. It is significantly reducing the number of people who smoke – a reasonable analogy.

There are some economic benefits to this plan that I feel really good about:

It actually works. In the RGGI chart above you can see the carbon pollution from the RGGI states declining much more rapidly than other states. This is true in British Columbia as well, though I don’t have as nice a chart.

It’s not just another tax on the middle class. Carbon allowances generate revenue in a less regressive way than most other options available to us. This presupposes that you believe we need to raise revenue to comply with McCleary and maintain other core state services. If we didn’t we could implement a cap and trade mechanism in a revenue-neutral way. However we do need to raise revenue now. Our current tax structure was created in the 1930’s and it’s time for new tax options that work for the 21st century. Since much of the cost will accrue to out of state mega-corporations it won’t hit low-income folks as directly as some of the options we have like the sales tax.

It creates economic opportunity. I’m not a big fan of economic proposals that spread money here and there in little tax breaks or corporate giveaways to “generate growth.” I am in favor of changing the fundamental economics of the world to create opportunities. We want to be in the forefront of this and have a lot of the intellectual and manufacturing work around green power generation done here, not in other states. According to this report, renewable energy is much more labor-intensive than getting energy from fossil fuels, hence providing more well-paid jobs. One of the great things about systems that use market forces, such as the Governor’s proposal, is that they trigger shifts in investments by making low-carbon alternatives more worthwhile investments than oil. Growth in a sector that’s already so critical to our state’s economy gives us a competitive edge over others, and if it creates more jobs per megawatt hour than those nasty alternatives, the opposition’s suggestion that we’re choosing between jobs and the environment is false.

Sightline fossil vs education spendingIt keeps more money in-state. Because Washington doesn’t have any of its own fossil fuels, anything we spend on oil, gas, and coal power is money leaving the state. Sightline has this blog post showing that we spend twice as much on oil as we do on education. Imagine if the money we spent on fossil fuels stayed here instead? I’d rather pay for Washington wind turbine technicians than coal miners in West Virginia.

It’s working in California. This Bloomberg article shows that California’s bill is stimulating more growth in the renewable energy sector than any other state currently sees overall. Admittedly, California’s system sets aside some of the revenue generated through the sale of allowances for R&D in this sector, and our bill doesn’t do that. However, because our economy is already less dependent on fossil fuels than theirs was, one could argue that Washington State’s renewables sector could see similar growth patterns once the catalyst (i.e. the cap) is in place.

What’s good for the planet is cheaper for people. Generally, the consumption of carbon-intensive goods and services is expensive. Think about the cost of a year’s worth of ORCA cards (less than $1100) vs. owning a car (AAA estimates it costs over $9000 per year on average). What would you do with the $8K difference? I’d wager that most of us would put it back into the economy.

In summary, I think it’s a reasonable proposal and that’s why I was the #2 signatory on the bill. I believe (as I do with the first draft of most major legislation) that there are changes we’ll need to make in the Legislature. I expect the bill to pass out of the environment committee next week and move to Appropriations where we can do some of the work that needs to happen. I’m not sure what the votes look like overall, but I think it’s a rational proposal that we should look at seriously.

Ellicott Dandy from OneAmerica (www.weareoneamerica.org) provided some of the data and references in this post, as did my friends at The Sightline Institute (www.sightline.org).

About the Author

Ross
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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