Do carbon taxes work?

Do carbon taxes work?
Washington voters contemplating Initiative 1631 might be wondering whether carbon taxes actually work. The state’s unique energy sources make it difficult to draw fair comparisons to similar measures already passed. Created by Daviles - Freepik.com

A question some voters might have before voting on Initiative 1631 creating a $15-per-ton tax on carbon is whether it will actually work in reducing emissions. Advocates say its passage will lead to reduction of 50 million metric tons by 2050, while critics argue that the initiative doesn’t provide appropriate incentives for the oversight board charged with handling the revenue.

However, it is difficult for either side to point to countries that have already enacted carbon taxes to make their case.  Some of that is due to the nuances between policies, but much of it can be attributed to Washington’s unique reliance on hydropower, which provides approximately 75 percent of the state’s electricity.

“You can’t find anywhere that is similar to Washington state,” Washington Policy Center Environmental Director Todd Myers said. “It’s hard to find comparable carbon taxes in terms of our impact, because there’s just not many people who are similar to us.”

One country to have imposed a carbon tax and significantly reduced emissions is the United Kingdom, which includes England, Scotland, Wales and Northern Ireland. The carbon tax was passed in 2013; the country’s emissions are now 38 percent below 1990 levels and equal to that of 1890 emission levels.

However, the rapid drop in emissions is primarily thanks to the country’s immense reductions in coal output beginning in 2012. Since then, coal-generated power has been reduced by 80 percent, driven also in part by new EU pollution standards.

Washington’s coal-fired power plants are already scheduled for closure in 2024. In the meantime, coal plants would be exempt from paying the carbon fee under I-1631.

Myers estimates that half of the tax burden under I-1631 would fall on transportation fuel alone. “It is a gas tax increase, first and foremost.”

An oft-touted example of an effective carbon tax is British Columbia’s, which was enacted in 2008 and the first of its kind in North America. The tax rate was initially $10 per ton and since 2012 has been $35. Designed to be revenue-neutral, it applies to roughly 70 percent of all emissions in the province. While I-1631 would raise the price of fuel by 14 cents a gallon, the BC carbon tax raised the price by approximately 21 cents.

Although BC initially reported a reduction in carbon levels, critics have attributed that to a temporary drop in economic activity as a result of the Great Recession. They point to recent data showing that while carbon levels as of 2015 are below 2008 levels, they have gone up since 2011.

As a result, the Canadian province – like Washington state – is not on track to meet its 2020 carbon-reduction goals.

BC claims its continued economic growth, equal to that of Canada overall, as proof that the carbon tax did not affect the economy. Yet, a 2015 study by the Cato Institute argues that the province’s growth had previously been outperforming the country prior to the tax, and the carbon tax “has arguably reduced the BC economy’s performance relative to the rest of Canada.”

However, Myers says “part of the challenge” for either side “is it’s a counterfactual (argument). What would have happened without the carbon tax? If the economy is growing, you would still see an increase in overall CO2 emissions, but (one could argue) it would have been worse without the carbon tax.”

In 2012, Australia introduced its own carbon tax of $23 per metric ton, after repealing cap and trade legislation, that applied to roughly 370 businesses. Within a year, the carbon tax had become so unpopular that it led to a new coalition assuming control of the government that had campaigned on repealing the tax, which it did in 2014.

A 2013 study conducted by Brisbane-based Griffith University Economics Professor Alex Robson prior to the tax’s repeal found not only had electricity prices and unemployment increased after the tax was introduced, but so had carbon emission levels (pages 6, 7 and 8).

Like with other countries, the comparison is difficult because unlike Washington, Australia is a major exporter of coal. Last year it set a new record for coal exports – its carbon levels were also the highest on record.

One of possible causes for the spike in unemployment in Australia were the many changes made to the carbon tax once it was implemented that included removing the floor price and increasing the tax rate to $24.15 per ton. The study concluded this reduced “certainty for businesses and directly negat[ed] one of the original justifications for the tax.”

The study also noted the effect of the tax on energy-intensive industries “is similar to a tax on exports or a tax on import-competing industries.”

I-1631 seeks to prevent a similar outcome in Washington state by exempting Energy Intensive Trade Exposed” industries (EITE) as defined by state law, yet, concern over the initiative has divided the labor community. Earlier this year, 60 percent of delegates at the Washington State Labor Council’s annual endorsement meeting backed the initiative, but the vote fell short of the two-thirds majority needed.

And among the WSLC-affiliates opposed to I-1631 is the Washington State Building and Construction Trades Council (WSBCTC). However, WSBCTC is represented on the steering committee for the Alliance for Jobs and Clean Energy, the group sponsoring I-1631.

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