What Price Gas?

Cheap natural gas will be a boon to our regional economy. But one downside of inexpensive energy is that it might discourage efforts at conservation. To combat this situation, Washington state could take advantage of the relatively low cost of energy to restructure its tax code in a way that discourages energy consumption with a simple carbon tax.

“A carbon tax is [a] much more straightforward” way of cutting greenhouse gases, says Steve Reynolds, CEO of Bellevue-based Puget Sound Energy. After all the problems the nation has faced with complex financial instruments, a similarly complex system of trading carbon credits, as proposed by the Obama administration, might create too many opportunities to game the system. The Washington Policy Center, a conservative think tank, also supports a carbon tax if it is revenue neutral, meaning that any additional revenue raised would be used to cut other taxes.

British Columbia put a carbon tax in place and it seems to be working.

Implemented in July 2008, the tax applies to fuels such as gasoline, diesel, natural gas, heating fuel, propane, coal, and even peat and tires when they are used to produce energy or heat. The tax is similar to a sales tax, but is levied on carbon dioxide equivalent (CO2e) usage by the metric ton. Most often collected just like a gas tax at the pump, consumers also pay the tax on their natural gas and propane bills. Jamie Edwardson, communications manager for the B.C. Ministry of Finance, says that the carbon tax puts a price tag on the goal of reducing emissions by one-third by 2020.

British Columbia’s carbon tax rates are designed to step up annually. The tax started at $10 (Canadian) per metric ton of CO2e in 2008 and jumped to $15 per ton in July 2009.  On July 1, 2010, the rate will become $20 per ton, then increase an additional $5 each July 1 until 2012. For gasoline, the 2008 rate was equal to 2.41 cents per liter; it will increase to 7.2 cents per liter by 2012.

The B.C. government is keeping the carbon tax revenue neutral by returning revenues in the form of tax cuts. In the 2008-2009 budget cycle, for example, the tax brought in $306 million. Over $100 million of that went back to low-income residents, $107 million cut the lowest two personal income tax brackets by 2 percent, and corporations and businesses each received tax cuts that totaled $100 million. With a projection of $557 million collected in the 2009-2010 forecast, $748 million in 2010-2011 and $955 million in 2011-2012, tax cuts will be even greater.

“The carbon tax is an essential tool for cutting usage and promoting efficiency,” Edwardson says. “The higher price for higher carbon choices also makes other greener choices more viable.”

One problem with a carbon tax is that it is regressive, hitting poor people more heavily than the wealthy. Yoram Bauman, lecturer on economics at the University of Washington’s Program on the Environment, says a tax similar to the B.C. tax, equivalent to about 30 cents per gallon of gasoline or 3 cents per kilowatt of a coal-fired plant, would generate about $2.5 billion a year. He believes a small percent of the revenue from the carbon tax, perhaps 10 percent, could be used to give a sales tax rebate to low income families. The remainder might help reduce property taxes and B&O taxes.

Whatever taxes are trimmed using revenues from the carbon tax, Bauman thinks a carbon tax could play an important role in encouraging conservation, reducing carbon emissions and encouraging the development of a clean energy sector by raising the cost of carbon fuels relative to other sources of energy.

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