In spite of a broad consensus on the damaging impact of global warming to the planet, the United States and Canada have failed to take measures to address the issue. That apathy has forced regional governments to take the lead. In 2008, British Columbia passed a carbon tax that serves as a model approach to creating incentives for cutting carbon emissions. The following year, nine northeastern states established the United States’ first regional system for reducing carbon emissions. California last year implemented a “cap-and-trade” system in conjunction with the province of Quebec.
Now, if Governor Jay Inslee has his way, Washington state will soon follow suit. Warning that the effects of climate change will cost the state nearly $10 billion a year after 2020 unless serious action is taken, Inslee last April created a Carbon Emissions Reduction Task Force to make recommendations on designing and implementing a market-based program to limit carbon emissions. The task force — comprising 21 members from labor, business, health and public interest groups — will report to the governor on November 21, in time for Inslee’s office to prepare legislation for the 2015 session.
Rod Brown, an environmental attorney who is part of the task force, says his first impression from listening to experts is just how far behind the curve Washington state and the rest of the country have been. “The rest of the world considers it normal to pay for pollution,” says Brown, who points out that even China has seven regional carbon-trading pilot programs in operation. “We [in the United States] are the outlier.” While both business and labor agree the state needs to price carbon as a way to discourage greenhouse emissions, he says, the question is: “What does it look like?” The role of the task force is to examine other systems now in place and figure out “what would happen [in Washington] in terms of effect on emissions and costs,” says Keith Phillips, the governor’s special assistant on climate and energy.
In considering a system that achieves the right balance of incentives and regulations for Washington state, the task force will look particularly closely at California’s cap-and-trade system and British Columbia’s carbon tax.
The strength of the cap-and-trade system, which Governor Inslee seems to favor, is that it sets a cap on carbon emissions and then gives companies the flexibility of reaching targets either by increasing efficiency or purchasing carbon allowances.
Another advantage of adopting California’s approach is that a working system is already in place and Washington state would not have to create new systems and procedures from scratch. The state could simply adopt the rules, market structure and pricing that have been established in California. “California, to its credit, has a really robust and committed set of public agencies that are watching this stuff, monitoring the market and ensuring accountability,” says KC Golden, senior policy adviser at Climate Solutions.
The weakness of cap and trade is that the prices of the allowances companies buy to offset their carbon emissions can fluctuate greatly, sometimes making it difficult to plan for the long term.
The ability to purchase offsets is also a potential weakness. “You don’t want to offset all of your emissions in the energy sectors with tree planting or things that aren’t in the energy sector because that takes away the incentive to really invest in this energy transition,” says Golden.
The strength of a carbon tax, on the other hand, is its simplicity. The rules are clear and there tend to be fewer exceptions. Since consumers and companies will have a better idea of the price of energy from year to year, it’s easier for them to justify investments in boosting energy efficiency.
“If I got to be the czar, I would probably select a hybrid form — a cap with some types of tax features built in,” says Alan Durning, executive director of the Sightline Institute, a nonprofit research and advocacy group. He says he would advocate a flat tax to encourage emission reductions, especially on the part of consumers, and a cap-and-trade system to set a firm legal limit on pollution from industrial sources.
Whatever climate policy is chosen, there is likely to be skepticism from industry. “We do recognize that there is a need to address this problem, but we are not sure that we’ve seen an appropriate path outlined to address the problem,” says Brandon Houskeeper, director of government affairs on environmental issues for the Association of Washington Business. He points out that while there is a representative from the Washington State Dairy Federation and one from Alaska Airlines on the governor’s task force, the trucking industry and the small business sector are not represented.
Many businesses are concerned that they would face greater competition from out-of-state firms that don’t confront the same higher energy costs. “We’re an interstate industry and we have one of the largest truckload carriers in the United States based in Washington,” says Larry Pursley, executive vice president of the Washington Trucking Associations. “If you make them uncompetitive by something you are doing in this state, the carriers that are coming in from outside the state are going to eat their lunch. We’d like to see this addressed on a national basis so there is a level playing field for everyone.”
One key concern to many businesses is what will be done with the money raised by putting a price on carbon. If Washington state were to impose the same $30-per-ton tax on carbon that British Columbia implemented, it would generate $2 billion annually, says Yoram Bauman, an economist at the nonprofit Carbon Washington and author of a comic book called The Cartoon Introduction to Climate Change. That money could be used to improve highways and public transit or it could be used, as Bauman recommends, to cut sales taxes for individuals and B&O taxes for companies. Todd Myers, director of the Center for the Environment at the Washington Policy Center, agrees, warning that using carbon taxes to generate revenues raises the danger of the system getting “larded down with payoffs and cronyism.”
California’s cap-and-trade system
California’s cap-and-trade program was launched January 1, 2012. It sets a ceiling on carbon emissions and then assigns to polluters allowable amounts of emissions. Businesses can buy allowances at state auctions or from other companies. They can also get credit for emissions by providing “offsets,” measures that remove greenhouse gases from the atmosphere. Offsets might be achieved through programs that break down greenhouse gases or through the planting of trees.
Over time, the state will cut back the amount of emission allowances available, putting pressure on polluters to reduce their emissions or find ways to offset them. The goal is to reduce emissions to 1990 levels by the year 2020. The advantage of a cap-and-trade system — and where it differs from a carbon tax — is that it sets a legal cap on the amount of emissions. The major drawback of cap and trade is the complexity of implementing and managing the systems. Yoram Bauman, an economist who recently published a comic book explaining the rationale between the two approaches to pricing carbon, likens carbon taxing to haiku in its simplicity, while he says cap-and-trade systems are more like Tolstoy’s War and Peace.
California officials say so far things have gone well. “We’ve had six or seven auctions that are running smoothly,” says Cliff Rechtschaffen, senior adviser to Governor Jerry Brown on energy and environmental issues. At these auctions, power companies and others that emit large quantities of carbon dioxide trade allowances to emit carbon dioxide beyond limits established under the system. “There have been no problems with wrongdoing or manipulation,” says Rechtschaffen. “It’s doing what it’s supposed to.”
In addition to the emissions cap, California also introduced stricter rules on energy efficiency of automobiles and buildings as well as measures requiring regulated entities like electric and gas companies to introduce energy-efficiency measures. Rechtschaffen says those complementary measures will help producers and consumers get more out of the power they use, thereby reducing the cost of meeting lower carbon standards. “Whether you buy through the market or through an option, it creates an incentive to reduce the emissions in the first place,” he explains.
There still could be problems ahead. Next January, transportation fuel suppliers will be brought into the system. “That’s going to add another $2 billion to the cost of supplying fuel to the market,” says Tupper Hull, vice president for strategic communications at the Western States Petroleum Association. As higher costs are passed on to consumers through higher gas prices, Hull says, “That is going to create a great deal of unrest and unhappiness.”
This summer, 16 Democratic members of California’s Legislature signed a letter calling on the state to delay the expansion, complaining that it would result in higher gasoline and other fuel prices, pulling down a still weak economy. The Democrats also complained how money being raised by the new system was being used. Roughly a quarter of the revenues will be directed toward financing a controversial $68 billion high-speed-rail project.
Relying on a cap-and-trade system could also present special challenges to Washington, which makes heavy use of hydroelectric power. In years when there is plenty of precipitation and the state’s dams provide lots of power, the state would consume less carbon-based fuel, so carbon prices would drop. But in dry years, more coal and gas would be used to generate power, so carbon prices could soar. Some of those impacts would be mitigated if Washington became part of a larger trading group that included regions like California and Quebec.
British Columbia’s carbon tax
In 2008, just before the global financial crisis, the centrist Liberal Party in British Columbia won legislative approval for a revenue-neutral carbon tax. The government opted for a simple tax on emissions rather than a cap-and-trade system, says Mary Polak, the province’s environment minister, because it is much simpler to implement. “It’s pretty straightforward,” notes Polak, “and it’s easier to explain.”
British Columbia’s carbon tax is pegged at $30 Canadian for every metric ton of emissions resulting from the burning of fuels — gasoline, diesel, natural gas and coal. That means any enterprise that emits carbon dioxide must pay its share of the tax. For the consumer who buys gasoline at a service station, the cost comes to 6.67 cents per liter (about 25 cents per gallon) for the carbon tax.
Since British Columbia chose to impose the carbon tax in a revenue-neutral way, the money collected through carbon taxes is returned to taxpayers by cutting corporate, small-business and personal income taxes by about 1 percentage point. “Our finance minister is required every year to show in the budget how much carbon tax we collected and how much of it was put out to the public in tax cuts,” says Polak. “By law, penny for penny, that has to be returned to the public in tax reductions.”
By raising the cost of carbon, says Polak, the tax encourages companies and consumers to use less energy, thereby producing fewer emissions. Companies are more likely to invest in lean manufacturing and other measures that improve productivity while also cutting energy use. Consumers faced with higher energy costs will theoretically drive less and lower their thermostats. And, in fact, according to provincial reports, British Columbia’s greenhouse gas emissions dropped about 7 percent from 2008 through 2011, the most recent year for which data are available, even as emissions in the rest of Canada continued to rise.
“We had a 17 percent reduction in emissions in B.C., but it wasn’t from people driving their cars less. It was from industry and manufacturing,” says James Tansey, director of the ISIS Research Centre in the Sauder School of Business at the University of British Columbia. “That’s the lowest-hanging fruit.”
At first unpopular, the tax has done little to hurt the British Columbia economy and is now embraced by both sides of the political spectrum. “Our GDP went up, and it went up faster than in the rest of Canada, at the same time as our carbon emissions went down,” states Polak.
Polak adds that only two industries — greenhouse operations and cement producers — complained of competitive disadvantages under the tax. After review, the government provided a rebate to the greenhouse sector. The impact on cement companies is still under review.
“The proof of the pudding is in the eating,” notes Polak. “By the time we were in a position to implement the carbon tax, it was 2008. Could you have picked a worse time? And yet it did not have a negative effect on our economy. We survived the downturn better than almost any other jurisdiction.”
According to Polak, the provincial government hopes to supplement the carbon tax by joining a cap-and-trade system. “We always contemplated that our revenue-neutral carbon tax would be one piece and that we would also have cap and trade in place as well,” she says. Cap and trade is not, however, well suited to small jurisdictions like British Columbia that do so much business with other regions, she says. “So we will keep watching for opportunities to be part of a larger cap-and-trade system.”