The key to a successful carbon tax is how you spend the money

Twenty-five countries in the world have taxes on carbon emissions. However, neither the U.S. federal government nor any state has successfully enacted a carbon tax.

Washington state got somewhat close to having a carbon tax when a local environmental group, Carbon Washington, placed Proposition I-732 on the ballot during the 2016 elections.

However, as the liberal coalition splintered, I-732 was defeated, securing only 41 percent vote (for reference, Hillary Clinton carried the state with 52.5 percent vote and Gov. Jay Inslee was reelected with 54.4 percent vote). Not withstanding this electoral reverse, several states including Washington are seriously considering carbon tax proposals.

{mosads}What is the focus of carbon tax debates? One might expect to see a debate on how high the tax should be. Liberals fear that a low level of tax may not sufficiently encourage emitters to reduce CO₂ emissions. In contrast, conservatives argue a high tax will impose high energy prices on households and force businesses to close down their factories and relocate to non-tax states.

Yet, the real debates lie elsewhere: How and where to spend the tax money. To examine the politics of pork, we compare three carbon tax proposals, all from Washington state: the 2018 carbon tax proposed by Governor Jay Inslee, a counter proposal by Washington Land Commissioner Hilary Franz, and I-732.

Who gets the money?

Broadly, there are three ways to spend the tax money, each with a different political constituency. First, the tax money could be returned to businesses or households say via tax cuts; this is called the “revenue neutral” approach. Here the philosophy is that carbon tax should not increase the size of the government; it should merely place a penalty on CO₂ emissions. 

Second, the carbon tax could be used for climate-related policies such as mitigation and adaptation. The third option is to use carbon tax to fund non-climate policy priorities such as K-12 education. Every carbon tax proposal has a mix of the above; what varies is their salience.

Furthermore, even if the money is spent on say mitigation and adaptation, it is crucial in which part of the state will it be spent. Adaptation projects generate local benefits and hence local interests can be expected to jockey for these projects. But this jockeying also afflicts mitigation. Think of public transportation. While it will reduce the use of personalized transport and reduced CO₂ emissions, it will create local benefits of improved infrastructure, higher housing values, and so on. 

I-732, Inslee and Franz

Prominent Republicans support a revenue neutral carbon tax. Washington’s neighbor, British Columbia implemented a revenue-neutral carbon tax in 2008. It is, therefore, not surprising that I-732 carbon tax initiative sought to build a bipartisan coalition in favor of a carbon tax. 

It proposed a tax of $25 per ton of carbon dioxide (increasing thereafter at 3.5 percent a year faster than inflation) and at the same time, lowering the state sales tax rate, eliminating certain taxes on manufacturing, and providing tax relief up to $1,500 a year to low-income households. 

Yet, this approach was opposed by liberal groups and even the Democratic Party, who wanted the tax to fund new projects. They claimed that the process by which this proposal came about was not inclusive. Further they claimed that tax cuts would actually decrease state revenue, leading to cutbacks in programs such as public education. Others wanted taxes to generate positive revenues to fund new climate projects. 

If tax money is not returned in the form of tax reductions, where will it be spent? Some want the tax to fund non-climate policy priorities.

For example, Inslee has proposed carbon tax of $20 per ton starting 2019 (and rising by 3.5 percent annually plus inflation). In the first two years (the budgetary cycle in the state), he wants to devote two-thirds of the $1.5 billion tax revenue to funding K-12 education, a non-climate policy.

The logic is that the governor wants to backfill the $1 billion deficit in state budget with this new money. In subsequent budget cycles, he wants to direct 50 percent to energy related projects, 35 percent to climate adaptation projects, and 15 percent to vulnerable communities in the state reduce their financial burdens.

While the details are not clear, it seems most of these projects will be located in major population centers that are to the west of the Cascade Mountains.

But the crucial step is the use of carbon tax to backfill deficit in public education account. This appeals to a major political constituency: teacher unions. Further, the use of the tax on “public bads” to fund public goods is not unique to the Inslee approach. Seattle and Philadelphia, for example, are taxing sweetened beverages to fund education, better access to healthy foods, and parks.

Yet in Chicago, this approach did not garner public support. The Chicago soda tax was enacted in August 2016 but got repealed in December 2016. A key reason was that while the tax supporters portrayed it as public health measure, they wanted to use the tax revenue to plug the $1.8 billion budget gap. This is similar to what Inslee is trying with the carbon tax in the first two years, given the chronic under funding of public education in the state of Washington.

In contrast to Inslee proposal, in an open letter to Washington Legislature, Washington Commissioner of Public Lands Hilary Franz suggests using carbon tax money on climate adaptation, focused on farms and forests in Eastern Washington. This includes projects such as increasing water conservation and storage and improving forest health.

Thus, spending priorities of Inslee and Franz are very different; Franz does not propose to spend on non-climate issues. Even within climate policy, she wants to direct much of money to climate change adaptation, and not mitigation, and for projects located in conservative Eastern Washington, and not liberal Western Washington.

A No-win Situation 

A revenue-neutral tax could build bipartisan support but as I-732 experience shows, most liberal groups oppose it. But I-732 also reveals the limits of bipartisanship. Surprisingly, some industry groups turned against it and it was voted heavily down in conservative Eastern Washington.

The Inslee approach seems most politically viable because it could re-construct the liberal coalition that I-732 could not mobilize. But the use of tax revenue to fund non-climate projects might invite backlash as the repealed Chicago soda tax suggests.

Franz’ approach would certainly appeal in conservative Eastern Washington. But Franz’ proposal directs the pork to issues and geographies that liberals disfavor. Hence, it will be opposed by the liberal coalition that dominates the politics of Washington state. 

The carbon tax saga reveals a new inconvenient truth: Interest groups are mobilized if the tax can be used to fund their favored projects. To figure out the politics of carbon tax, follow the money. 

Nives Dolšak is professor and associate director of School of Marine and Environmental Affairs at the University of Washington, Seattle.

Aseem Prakash is the Walker Family professor and the director of the Center for Environmental Politics at the University of Washington, Seattle.