A Carbon Cap for Washington State?

My governor, Jay Inslee, has proposed a state-level carbon cap for the largest business emitters.  By auctioning the permits, he expects to take in about a billion dollars in new revenue, about a sixth of which would be rebated to low-income residents to defray the extra costs they will have to pay.

This is a less-than-ideal system, but in fairness to the gov, he was backed into a corner.  State revenues haven’t fully rebounded from the Great Recession, there is hardly any help from the feds, and the courts have imposed a deadline on compliance with the McCleary decision, which will require hundreds of millions of dollars in extra spending annually on K-12 education.  Republicans control the state senate and will veto any tax increase.  The budget is headed for a crisis.

By instituting the cap, Inslee would make good on his campaign pledge to take action on climate change while maneuvering himself out of a fiscal jam.  It’s hard to see how he could do this differently.

The best thing about his plan is that he would auction all the carbon permits—no giveaways, as in California.

Other aspects of the plan are less wonderful, but there is minimal political space.  Focusing on the largest businesses is administratively simple and avoids the political conflict that would arise from a broader-based cap—particularly one that included transportation directly.  Also, using auctions as a revenue-raiser is effectively an increase in the sales tax which the state already employs.  From the point of view of progressivity, it would be much better to rebate all the permit earnings and institute an income tax for the equivalent amount, but the inability to break the tax logjam is why this is on the table in the first place.

On balance, I applaud this move, but I worry that, with nearly all states and the federal government facing a Republican fiscal chokehold, there will be more temptation to use carbon policy as just another kind of tax.  This is poor tax policy and will further muddy the confused politics of climate protection.