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Taxing Carbon gets New Scrutiny

Taxing Carbon gets New Scrutiny

Created on Thursday, 16 May 2013 04:00 | Written by Steve Law 
 
Greenhouse gases would fall as state finances stabilize

Any top 10 list of Oregon’s most daunting challenges is likely to include global warming, wobbly school funding and unstable state finances.

Now a new study shows the state could make major strides on all three fronts with one bold stroke: a carbon tax.

A Portland State University study orchestrated by former state economist Tom Potiowsky suggests a new fossil fuels tax could lower greenhouse gas emissions, boost employment and provide a new revenue source to help schools and state services weather future recessions.

Call it a public policy trifecta.

“I think it would be a real plus for Oregon’s economy,” says state Rep. Jules Bailey, D-Portland, who says the idea is gaining momentum this session of the Oregon Legislature.

“That kind of conversation is definitely coming,” says Gov. John Kitzhaber. “I think we’re eventually going to put a price on carbon in this country.”

Environmentalists and economists concur that the single-most effective way to curb greenhouse gas emissions is levying a surcharge on carbon dioxide and related emissions that reflects the environmental damages they cause to the Earth. The two basic ways to do it are a cap-and-trade system and a carbon tax.

Under a cap-and-trade system, which the United States used to conquer the acid rain problem, the government could set a cap on carbon emissions and establish a market-based trading system for the rights to emit carbon. As the cap drops, companies would have incentives to reduce their emissions and sell their emissions credits.

A carbon tax is simpler, involving a surcharge on gasoline, coal, natural gas, home heating oil and other fossil fuels based on the greenhouse gases they emit.

Angus Duncan, chairman of the Oregon Global Warming Commission, and Andrea Durbin, executive director of the Oregon Environmental Council, both favor a cap-and-trade system. But both see a carbon tax as a viable alternative, and it may have its own advantages in Oregon right now.

Traditional fossil fuels have a relatively low economic footprint in Oregon because they derive mostly from elsewhere. “We’re bleeding dollars out of the state when we pay for fossil fuels,” Bailey says. In contrast, Oregon is a national leader in producing solar and wind power, which have zero carbon emissions, and stand to be expanded if a carbon tax is deployed.

Wooing supporters

Bailey is pitching the carbon tax to industry, and conservative Republicans, as a way to reduce state regulations, such as the Renewable Portfolio Standard, which obligates utilities to supply a set percentage of their power from renewable energy.

The study by PSU’s Northwest Economic Research Center, led by Potiowsky, also suggests tradeoffs that might ease opposition to a carbon tax. The study proposes a “revenue neutral” carbon tax, so it wouldn’t be tagged as a tax increase. Instead, the study calculates, revenues raised could be used to sharply reduce corporate taxes in Oregon.

The study also calls for subsidies to offset the impact higher energy prices would have on lower-income residents, who devote a higher share of their income to gasoline and home heating.

A carbon tax also could be used as a way to bolster state revenues for schools and state services.

“It could generate more money than a sales tax,” Durbin says. “There’s a lot of interest in having real revenue reform next year,” she says, and if Salem power players are serious about a comprehensive tax reform package, a carbon tax could be an easier sell than a sales tax.

Economists refer to a carbon tax as having a “double dividend.” Even a revenue-neutral tax would help diversify a state system that relies more on a single source of funds to pay for basic services — personal income taxes — than any other state. Oregon state government is awash in money when the economy booms and more people are working, then must slash state and school spending when people lose jobs during recessions.

Gaining traction

Bailey concedes his bill calling for a carbon tax won’t pass this session. But the idea is gaining currency, and he hopes a bill calling for a carbon tax study, pushed by state Sen. Jackie Dingfelder, D-Portland, will pass.

The PSU study brought more attention to the issue in Salem, and so has the experience of British Columbia, which enacted North America’s first carbon tax in 2008.

In the first three years, consumption of refined petroleum products decreased by 15.1 percent in British Columbia, while increasing 1.3 percent in the rest of Canada. Another study found the carbon tax hasn’t negatively affected employment in British Columbia.

Reuben Plantico, director of environmental policy for Portland General Electric, notes that British Columbia is different because it relies largely on hydro power.

PGE and Pacific Power, the two largest electric utilities in the Portland area, still generate a sizable portion of their electricity from coal, which has the highest carbon emissions of any major energy source.

PGE would prefer a national solution in lieu of an Oregon carbon tax, Plantico says, though he concedes “the outlook for that kind of an approach seems pretty dim right now.”

PGE also has many questions about how it would work.

Dollars and sense

The devil, as usual, is in the details.

The PSU study calculates that a carbon tax starting at $10 per ton of carbon emissions, growing by $10 a year up to $60 per ton, would reduce Oregon’s greenhouse gas emissions 12.5 percent by 2025. That’s impressive but it comes at a cost. PSU estimates that would raise gas prices at the pump the equivalent of 55 cents per gallon, with similar increases in heating fuel and other fossil fuels.

That's likely to be a hard sell with the public. Oregon voters, when given a chance to vote on gas taxes, have sometimes rejected them even when they were set at a few pennies per gallon.

Durbin notes that gas prices fluctuated 40 cents during the first three weeks in April. Still, she figures a $60/ton carbon tax isn't viable without rebates for low-income families.

Even at $60/ton, the carbon tax wouldn’t be enough to meet the state’s initial greenhouse gas reduction goal of 10 percent below 1990 levels by 2020. “It’s not a silver bullet answer on how do we reach the state’s greenhouse gas goals,” Durbin says.

To hit that goal, the PSU study calculates it would require a $100/ton carbon tax, and even then the state would be a decade behind schedule. A carbon tax that high would raise gasoline prices an estimated 94 cents a gallon.

Durbin says a tax that high is politically unrealistic, and PSU economists conclude it would cause too much economic disruption.

The PSU study helped advance the discussion, Duncan says, but it has some holes. For one, it didn’t adequately account for energy produced elsewhere that is consumed in Oregon, he says.

Duncan also expects opposition from “anybody for whom tax is a four-letter word.”

Winners and losers

Industries that rely heavily on energy, such as paper and steel manufacturers, will get hit harder than others, and could be pressured to shut down in Oregon. Truckers and other transportation businesses also would suffer. Supporters say revenue from the carbon tax would help industry by lowering corporate taxes and help trucking companies electrify their fleets.

The carbon tax also could hurt Oregon’s competitiveness vis-a-vis Washington, which enjoys greater access to Columbia River hydro power sold by the Bonneville Power Administration. Clark County and other communities with Public Utility Districts rely on hydro power, while PGE and Pacific Power rely more on coal and natural gas.

“The equity issues are really significant here,” Duncan says, and are among the many issues that need to be addressed. “I think that something like this will take awhile to work on.”

Bailey says the economic losses from the carbon tax will be offset by new jobs in energy efficiency and renewable energy, sectors where Oregon already is a leader.

“Oregon isn’t going to solve the global climate crisis all by itself,” Bailey says. But if we can show that a statewide carbon tax works and “the sky doesn’t fall,” Oregon can pave the way for the rest of the nation, and the world, to follow suit, he says.