The right thing in climate policy for all the big countries is a carbon tax, which is simpler and less vulnerable to fluctuations in emissions than cap-and-trade schemes.” – The Economist

A recent discussion spawned the idea of implementing a carbon tax within DC, and so I wrote up this brief.

– What and whom would a carbon tax affect?
A carbon tax, technically a tax upon the carbon content of energy and fuels, would primarily affect electric generation, gasoline & diesel, and heating fuels (natural gas, fuel oil). A narrower tax could affect only fuels, or electricity. The UK’s carbon tax, for instance, taxes various energy sources at differing rates.

– Who consumes energy in D.C., and how?
The EIA reports that DC’s total energy consumption is 70.5% imported electricity, 18.7% natural gas, 7.9% gasoline, and 2.7%fuel oil. 66.3% of energy is consumed by the commercial sector (i.e., offices), 19.9% by residences, 12.1% by transportation (i.e., cars & trucks), and 1.6% by industry.

Of carbon emissions within DC proper in 2010, natural gas was 54.6% and petroleum 45.2%. Because DC imports all of its electricity, it has the least carbon intense economy among the states, emitting 91.6% less CO2 per dollar of GDP than the US average. This does not, however, include fuel burned for electricity used by DC end users; 59.2% of DC electricity originated from fossil fuel generators.

– Have carbon taxes been implemented elsewhere?
Yes, several jurisdictions have. Finland and Sweden were first, in 1990 and 1991. In North America, the provinces of British Columbia and Quebec have carbon taxes, as does the city of Boulder (on electricity only). Dozens of multinational corporations, including most oil majors, use an “internal carbon price” to evaluate corporate decisions: ExxonMobil’s is $60/ton.

– How have these fared?
British Columbia’s carbon tax, unique in its broad reach even though the province works within the framework of a high-carbon-emitting country, “has been remarkably effective in reducing fuel use, with no apparent adverse impact on the province’s economy,” according to a University of Ottawa study. GDP growth paralleled Canada’s, income tax rates fell to the lowest nationwide, and fuel consumption fell by 17.4% per capita.

– Have carbon taxes been proposed in U.S. states?
A bill has been introduced in the Massachusetts legislature, and a ballot measure is currently collecting signatures. In Washington state, Governor Jay Inslee has specifically directed a legislative commission to study a carbon tax, and an NGO has proposed draft legislation.

– What level of tax would be appropriate?
An easy guideline for measuring the impact of a carbon tax is that a tax of $1 per ton of CO2 results in just less than 1¢ in tax per gallon of gasoline. DC’s current gas tax rate of 23.5¢ per gallon thus implies a tax rate of $27.98/ton of carbon dioxide. (Maryland’s gas tax is now 32.10¢ per gallon.) This rate is very similar to the C$30/ton that British Columbia charges, and near the midpoint of the $5-65/ton “social cost of carbon” price suggested by the White House.

– Where do proceeds of carbon taxes go?
In most cases, as in British Columbia, carbon taxes are a “tax swap,” whereby other taxes — notably on income, capital, etc. — are reduced. Some bills, like that proposed by Citizens Climate Lobby, feature a “dividend,” or direct rebate back to taxpayers. Sometimes, climate actions are funded with a portion of proceeds as well; the Massachusetts bill, for instance, directs $90 million in revenue towards transportation debts and 10% to clean energy. In DC, ambitious plans have been launched, but not yet funded, for transit expansion (by WMATA and DC) and for cutting emissions, and a carbon tax would be one way of funding implementation of those plans. (Boulder’s tax was implemented to fund its climate action plan.) In addition, DC currently pays its annual operating subsidies for both WMATA ($275 million in FY2014: $58M bus, $42M rail, $22M paratransit) and DDOT transit out of general funds, and a carbon tax could be a stable, dedicated source of transit operating funds.

– Who are winners and losers?
A carbon tax that includes electricity would have a much broader base and thus wider impact. It would primarily affect the office sector, and as such mostly commuters, but it might also attract Congressional attention. A carbon tax solely on fuels would mostly impact building heating/cooling; again, this would largely fall on offices, but also on DC residents’ heating bills.

Although a carbon tax typically is somewhat regressive, there are many ways to design a carbon tax to mitigate impacts on lower income consumers. In particular, a DC carbon tax could use targeted measures to offset higher home heating costs for low income residents: income tax credits, weatherization or LIHEAP assistance, and transit improvements.

– Further reading
Sightline Institute: Carbon Tax Fact Sheet
Resources for the Future: Carbon Tax FAQs
Citizens Climate Lobby: DC Chapter