What Price Gas?

April 27, 2010

By Tim Newcomb

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 Columbias 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.

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Back to Where Theres a Drill, Theres a Way

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 Washingtons 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.