Werner's Blog — Opinion, Analysis, Commentary
In support of Washington State's Initiative 732

On Tuesday November 8, Americans will go to the polls. While most of the attention will be focused on the outcome of the presidential election, voters in Washington State have an opportunity to ponder the merits of Initiative 732 (or I-732 for short) that calls for the introduction of a carbon tax similar to the one British Columbians are familiar with since 2008. If the ballot measure passes, Washington State would become the first US state to adopt a carbon tax. Only a few states have any form of carbon pricing, most notably California, whose cap-and-trade system has been joined by Quebec. The outcome of the Washington state initiative may have far-reaching consequences for carbon pricing in the United States. The measure proposes to introduce a US$ 15/tonne tax in the first year that would raise to $25/tonne in the second year, followed by continuing increases of 3.5% (adjusted for inflation) until it reaches $100/tonne. The US$25/rate would be roughly at par with B.C.'s carbon tax. The increase to $100/tonne would take about 40 years. The revenue form the carbon tax would be returned to taxpayers through a 1%-point reduction in the sales tax, cancelling a business tax, and providing assistance to low-income earners.

‘Washington State's carbon tax would emulate B.C.'s successful model of carbon pricing and help reduce GHG emissions steadily.’

"Climate change is real and demands a strong response from government."—wrote the Seattle Times in its editorial, and turned 180° around and recommended rejection of the intiative by assertintg that that B.C.'s carbon tax is not working and in any case this was a bad time for making changes to Washington's strained tax system. The newspaper also pointed to an analysis that the proposed carbon tax wold not fully revenue-neutral. Both arguments are faulty. First, B.C.'s carbon tax is working the way it it is intended, but the price remains relatively low and population growth offsets some of the per-capita gains. Without the carbon tax, emissions would be clearly higher, as my co-author Sumeet Gulati and I have found in our research. Second, even if I-732 is not fully revenue-neutral, this can be fixed easily through appropriate modifications in the implementation legislation.

My research with UBC colleague Sumeet Gulati on the effect of B.C.'s carbon tax on vehicle use and vehicle purchases has been mentioned favourably in the Wall Street Journal and The Economist magazine. Yet, both articles also point to a strange source of opposition to the proposed measure: environmentalists. As Greg Ip asked fittingly in the WSJ: "Washington state's ballot initiative would reward conservation without hurting business, so why does the left oppose it?" Some environmentalists are unhappy that I-732 would return the revenue from the carbon tax through tax reductions, whereas they prefer the use the revenue for double dividend schemes that finance other environmental causes. In other words, the measure doesn't go far enough for them. By opposing I-732, or at best offering lukewarm support, these environmental activists are at risk of scuttling a policy that is far superior to virtually anything else that has been proposed in the United States. In his WSJ article, Greg Ip concluded that "[i]t is precisely because a revenue-neutral carbon tax isn't weighed down by so many ancillary social goals that it stands the best chance of appealing to people across the political spectrum." Likewise, the New York Times' Editorial board concluded that "the idea of putting a price on carbon is still one of the most straightforward, economy-friendly ways to deal with climate change." I concur with both.

Washington State shares many similarities with British Columbia. Both are coastal jurisdictions with an abundance of hydroelectricity. Washginton State has a larger economy and tilts away from natural resource indutries a bit more than B.C., as it is home to Boeing and Microsoft. Washington and B.C. both have a big urban-rural divide. The economic similarity of both jurisdictions makes it very likely that a carbon tax in Washington would have the same beneficial effects as in B.C. The revcenue-neutrality of the proposal, templated on B.C.'s tax, is the brainchild of Yoram Bauman, an economist who lives in Seattle (better known as the world's first-and-only stand-up economist). Economists overwhelmingly support putting a price on negative externalities: a Pigouvian tax. What to do with the revenue from such a tax is important as well. Returning it to households and businesses minimizes economic distortions and inequity. Putting it into a "green fund" where politicians can play with subsidizing pet schemes and projects is a much inferior choice. (This is not to say that we don't need more investment in worthwhile infrastructure such as improved transportation systems. We do, but there is a better way to finance these, linked directly to the source of transportation woes.)

When voters go the polls in Washington State on November 8, I hope that they will consider the well-being of their kids and grandkids and how climate change will affect their lives. As a neighbour from North of the border, I will watch the outcome of the vote on I-732 perhaps with great interest.

References and further readings:

Posted on Sunday, November 6, 2016 at 10:45 — #Politics | #US | #Environment