Carbon Tax Andrew Jope PA 395 – Green Tax September 14, 2004

What is a Carbon Tax? Excise tax levied on fossil fuels in proportion to the CO2 emissions which they produce, roughly equivalent to carbon content. Assessed as $ per ton of carbon or $ per ton of CO2 emissions. Currently no carbon tax at the federal or state level in the US.

States Considering Carbon Taxes Maine – convened tax-shifting advisory committee Michigan – industry tax credits for energy conservation, fleets of alternative fuel cars, purchase/installation of recycling equipment Minnesota – 1996 Economic Efficiency and Pollution Reduction Act – Pollution tax offset by $1.5 billion/year reduction in payroll and property tax. Defeated in committee. Public support for tax shift, opposed by Teamsters, airline and mining industries.

States Considering Carbon Taxes (Cont.) Oregon – 1998 Governor convenes Environmental Taxation Subcommittee. Vermont – 1996 – Act 60 adds $.04/gallon in state gas tax to fund education.  Policy window in late 1990’s closed with little success.

Federal Excise Tax Rates on Fuel FUELCENTS/GALLON Gasoline18.4 Ethanol/Gas Blend13.2 – 15.4 Diesel Fuel24.4 Ethanol13.15 Methanol12.35 Liquefied Petroleum Gas13.6 Compressed Natural Gas4.854 Liquefied Natural Gas11.9 Aviation Gasoline19.4 Aviation Jet Fuel21.9

Vermont Fuel Taxes CATEGORYFUELRATE Sales and UseGas (Propane/Natural).05% Electricity.05% Coal.05% Heating Oil/Kerosene.05% Motor VehiclesPurchase6% Short Term Rental5% Diesel FuelVehicles<10,000 lbs.$.17 Vehicles>10,000 lbs.$.26 Gasoline$.20

Cap + Trade vs. Carbon Tax- Case for Cap + Trade Fixes amount of CO2 emitted, allows price to float. Enable reductions where least costly. More appealing to private industry. Can be designed to deal with all GHG’s defined in Kyoto. Permit prices adjust automatically to inflation/price shocks.

Cap + Trade vs. Carbon Tax- Case for Carbon Tax Taxes externalities directly/sends clear price signals. Influences broader scope of behaviors- consumers, transportation + service sectors. Fewer transaction costs in implementation. Permanent incentive to reduce emissions and innovate. Earns revenue / able to be recycled.

Northeastern States Approach 9 States committed to regional strategy to reduce CO2 (NY,CT,VT,NH,DE,ME,NJ,PA,MA,RI) Will establish emissions trading for power producers. April, 2005 – agreement to be finalized.

Issues – Competitive Disadvantage Globally – Industrial relocation to developing countries follows labor costs, NOT ENERGY COSTS. State to State – More problematic. Easier and less costly to relocate to another state

Issues – Regressivity Carbon tax applied in isolation IS REGRESSIVE (transportation/residential costs). Can be addressed through revenue recycling (progressive income tax restructuring, direct benefit payments, etc.)

Issues – Winners and Losers WINNERS  Nuclear Industry (Vermont Yankee)  Hydropower (Hydro Quebec) LOSERS  Traditional Industry  Agriculture  Forgive portion of tax liability? (Scandinavian model)?

Issues – Timing and Adjustment Short term costs to workers and communities. Phase in over time – allow industry to adjust at rate closer to traditional market conditions. Recycle revenue to buffer adjustment costs- worker retraining, partial compensation, efficiency subsidies. Index to inflation – tax base shrinks by design.

Is it Right for Vermont? Rural state with little industry and power production. CO2 Emissions  47% Transportation  20% Residential  33% Commercial, industrial, utilities 70% of air pollution from gasoline combustion – dispersed sources, hard to regulate. A new policy window? (VT Yankee 2012 / Hydro Quebec 2016)