I used to live in Washington state. I’m no longer registered to vote there, but if I were, I would vote “Yes” on Nov. 8 for the Washington Carbon Emission Tax and Sales Tax Reduction, also known as Initiative 732, or I-732.
I-732 would make Washington the first U.S. state to have a carbon tax. The tax would be levied on refineries and utilities, who would then pass the tax on to consumers in the form of higher gasoline, electricity and natural gas prices. The tax would start at US$15 per ton of carbon dioxide in July 2017, increase to $25 after one year, then rise with inflation plus 3.5 percent in each subsequent year.
Stacks at the Nucor Steel plant – one of the types of manufacturing sites that would be affected by a carbon tax – in front of the Space Needle in Seattle. AP Photo/Elaine Thompson
Similar to British Columbia’s carbon tax, I-732 is designed to be revenue-neutral. That is, all of the tax revenue would be returned to households by lowering other taxes. Specifically, I-732 would decrease Washington’s sales tax by one percentage point, fund a tax credit of up to $1,500 annually for low-income households, and effectively eliminate a business tax on manufacturers.
I-732 addresses one of the major concerns of a carbon tax – that it would hurt low-income households. But it also exposes the difficult and complex politics of environmental policymaking: a number of environmental groups have failed to get behind the measure, potentially derailing an opportunity for Washington to lead on climate.
Like most economists, I’m in favor of a carbon tax. In a survey of top economists, 90 percent said they would prefer a carbon tax over alternative policies for reducing carbon dioxide emissions. “Totally basic economics!” according to Stanford economist Robert Hall. A carbon tax would discourage carbon-intensive activities like producing electricity with fossil fuels and burning gasoline in vehicles, and encourage low-carbon alternatives like renewables and energy efficiency.
I also like the plan to make I-732 revenue-neutral. This idea of “revenue recycling” has long been recognized by environmental economists as one of the key benefits from taxing externalities, or side effects of economic activities. Decreasing the sales tax would make Washington state consumers better off and make the Washington state economy more efficient.
Moreover, the low-income tax credits would help prevent I-732 from hurting Washington state’s neediest households. Critics of carbon taxes often argue that they are regressive, pointing to the fact that lower-income Americans spend a high fraction of their income on energy. With these tax credits, however, I-732 would be sharply progressive, making low-income households significantly better off.
This is an important point, not just for I-732, but for carbon policy more generally. In a recent paper, Maryland economist Rob Williams and coauthors examined a national carbon tax for which revenue would be returned in equal, lump-sum payments to all households. They showed that these lump-sum payments would exceed average expenditure on the tax for households earning less than $70,000 per year, so these households would be net winners. I-732 is potentially even more progressive because the tax credits would be targeted to low-income households.
Environmental groups enthusiastically support I-732, right? Er… no. In fact, neither the Sierra Club, nor the Washington Environmental Council, nor Washington Conservation Voters support the measure. It is baffling to me that an environmental group could stand in the way of a carbon tax. Putting a price on carbon dioxide is the single most efficient way to fight climate change, and it strikes me as irresponsible for these groups to have failed to get behind I-732.
The primary concern seems to be that I-732 doesn’t raise revenue for pro-environmental causes. Washington state has no state income tax and struggles to raise government revenue, so some groups see this as the last good opportunity to raise funds for renewables subsidies, public transportation and the like. For instance, in its official position, the Sierra Club said members “expressed deep concerns that the initiative does not include all that is needed for an equitable climate policy and just transition to a clean energy economy.”
This is conflating two issues, however. I understand why a group would want to see more pro-environmental spending, but there is no economic reason why all this needs to happen in the same piece of legislation.
Critics of I-732 should also be careful what they wish for. Opponents from environmental advocacy groups are intensely concerned about potential impacts on low-income and other vulnerable populations. But in research here at the University of California Berkeley we’ve shown that pro-environmental spending tends to be regressive, benefiting high-income households disproportionately. If your goal is to help low-income households, it is hard to envision a better policy than a $1,500 tax credit.
It is notable that so much of the discussion about I-732 has been about the revenue rather than about the tax itself. This fascinating article details the myriad different points of view in Washington state on how to spend the money. We are seeing this dynamic in California as well, as environmental justice groups argue that more of the revenues from California’s carbon trading system should be used for addressing equity. These fights about revenue are likely to be a central part of carbon politics moving forward.
I-732 is an opportunity for my former home state, Washington, to lead on climate. By demonstrating that this can be done at scale, Washington state can lead other states, or even the U.S. federal government, to adopt similar policies. It would be fitting that a state so rich in natural beauty would take a stand for preserving the planet for future generations.
It won’t be easy. This is a local solution to a global problem. The costs would be borne locally, while most of the benefits – mitigating climate change – would be experienced globally. But if Washington state can spur others to action, they will have played a key step in moving climate policy forward.
“For me, supporting I-732 is the way I can look my children in the eye,” said Audubon Washington’s Gail Gatton, in a recent Seattle Times op-ed, “and tell them I have done everything possible to ensure a stable climate for their future.” Your move, Washington state.
This blog is available on The Conversation.
Lucas Davis is the Jeffrey A. Jacobs Distinguished Professor in Business and Technology at the Haas School of Business at the University of California, Berkeley. He is Faculty Director of the Energy Institute at Haas, a coeditor at the American Economic Journal: Economic Policy, and a Faculty Research Fellow at the National Bureau of Economic Research. He received a BA from Amherst College and a PhD in Economics from the University of Wisconsin. Prior to joining Haas in 2009, he was an assistant professor of Economics at the University of Michigan. His research focuses on energy and environmental markets, and in particular, on electricity and natural gas regulation, pricing in competitive and non-competitive markets, and the economic and business impacts of environmental policy.