Extras on Excise: Washington Carbon Tax and Oregon Cap-and-Trade Proposals Encapsulate Larger Environmental Debate

Sustainable energy is everywhere these days, from Elon Musk’s solar roofs to Boulder, Colo.’s marijuana energy charge. States are implementing ways to reduce their carbon footprint, including renewable energy incentives and renewable portfolio standards. Washington’s and Oregon’s lawmaking activities this session are a microcosm in this quest to establish optimal energy policies.

The Proposals in Washington and Oregon

Carbon taxes have appeared in numerous federal and state bills and proposals, but none have been successful. Voters quashed Washington’s recent carbon tax proposal, Initiative 732, in November, 59 percent to 41 percent. The proposal would have imposed a $15 tax per ton of carbon dioxide in fossil fuels used or sold within the state and used for electricity in-state with a possible $100 maximum tax.

But the idea of a carbon tax lives on in the Evergreen State. Washington Gov. Jay Inslee (D) recently included carbon tax plans in his 2017-2019 budget proposal that mimic Initiative 732. His proposal calls for a $25 per ton tax on carbon dioxide emissions effective May 1, 2018, the same rate and effective date as Initiative 732. Both the gubernatorial proposal and Initiative 732 would increase the tax 3.5 percent per year, adjusted for inflation.

The legislative version of this proposal, S.B. 5127, was introduced on Jan. 13, as originally reported by Bloomberg BNA’s Paul Shukovsky (subscription required). Other Washington carbon tax bills include H.B. 1646 (S.B. 5127’s companion bill), S.B. 5509 ($15 per ton proposed), H.B. 1555 ($25 per ton) and S.B. 5385 ($15 per ton).

Unlike carbon taxes, cap-and-trade in the United States exists at the state level in California. The Oregon legislature is considering following suit. S.B. 557 proposes assigning target limits for the amount of permissible greenhouse gas emissions, effective Jan. 1, 2018; the limits would decrease gradually. The bill would also require the state Environmental Quality Commission to determine the method for distributing allowances to companies and rules for offset credits, effective Jan. 1, 2021.

Oregon already has statutory emission reduction target limits. These goals aim to reduce emission levels to 10 percent below 1990 levels by 2020 and 75 percent below 1990 levels by 2050. S.B. 557 would replace those limits with the goal of reducing emissions to minimums of 20 percent below 1990 levels by 2025, 45 percent below 1990 levels by 2035 and 75 percent below 1990 levels by 2050.

How Carbon Taxes and Cap-and-Trade Work

A 2014 Brookings Institution study identified carbon taxes and cap-and-trade as “opposite sides of the same coin.” Both are tools for reducing carbon dioxide emissions, and both are supposed to achieve general equilibrium between the reduction costs with the environmental benefits. While carbon taxes “set[] the price of carbon dioxide emissions and allow[] the market to determine the quantity of emission reductions,” cap-and-trade programs “set[] the quantity of emissions and let[] the market determine the price.”

Essentially, carbon taxes and fees are generally imposed on carbon dioxide at two points: either on the amount present in fossil fuels “before combustion” or the amount in gases that are emitted into the environment.

Under cap-and-trade programs, the government sets a limit for how much carbon dioxide companies can release into the air. Companies get permits for releasing the pollutants into the air, and they can trade their permits amongst each other. The European Union’s cap-and-trade program works akin to redeeming tickets—a company uses its “allowances” for each ton of pollution it emits. The fewer allowances used, the more the company has to trade or save for future use.

There are pros and cons for each program (and for each jurisdiction’s variation). For example, carbon taxes cause “a bigger initial hit to the balance sheet” because under some cap-and-trade systems, permits are free at first, according to the Grantham Research Institute on Climate Change and the Environment (London School of Economics’ climate change research organization). The Tax Foundation’s carbon tax analyses note that like other excise taxes, high tax rates can reduce the base and revenue and impose greater tax burdens on specific industries. The Brookings study, which analyzed the benefits and costs of both systems, found that administering a cap-and-trade program is more difficult than imposing a carbon tax because of the permit/allowance component.

There are some concerns about failed Initiative 732 that are applicable to the current carbon tax proposals in Washington. A state carbon tax could drive manufacturing companies to other jurisdictions and could increase energy costs for consumers, according to the Tax Foundation’s analysis. Similarly, there may be pushback against Oregon’s S.B. 557 from affected industries. However, if either of these proposals becomes law, they may very well influence other states’ energy policy decisions.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Which has a better chance of reducing carbon emissions—carbon taxes or cap-and-trade?

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