Friday, November 9, 2018

A Washington State Carbon Tax Goes Down in Flames

Initiative 1631, which would have created a carbon tax in Washington State, lost by almost 12% of the vote this week.  Commentators on all sides have interpreted this as a decisive defeat for carbon pricing, making more indirect policies like subsidies to renewables the only politically feasible option.*

I don’t have time for a lengthy analysis, but in a few words I want to suggest that this conclusion is premature.  I live in Washington State and saw the battle unfold first hand in real time.  Voters were not asked by opponents of 1631 to reject carbon pricing; on the contrary.  And it was the failure to draft and promote a straight-ahead carbon pricing law that doomed it.

While supporters of 1631 point to money from fossil fuel interests as the “cause” of their defeat, the actual propaganda of the No side did not belittle the threat of climate change, nor did it even argue against the need for action to reduce emissions.  It hammered on these points:

1. 1631 was weak.  It excluded too much of the state’s emissions and wouldn’t have a meaningful impact on them.

2. Nevertheless it would raise energy bills for virtually all the state’s residents.

3. It proposed an undemocratic procedure for allocating carbon revenues.

The money behind this message may be “bad”, but the message itself was correct.  1631 was so poorly conceived that the arguments of the troglodytes were closer to the truth than those of the progressives.  Take them one by one:

1. 1631 was the second carbon tax initiative in two years.  Last year’s effort, I-732, had broader coverage and allowed for higher carbon prices over time.  It was opposed by progressives, who organized to defeat it and then drew up their own, weaker proposal.  There is a lot of detail to go into, but the short version is that 1631's carbon price was essentially symbolic, a few cents on the carbon dollar.  It was not a meaningful action to deal with the threat of a climate catastrophe.

2. This one was particularly galling for me as an economist.  Supporters of 1631 actually campaigned on the argument that the tax would be paid by a few large corporations, not by all of us.  On this point the No crowd was entirely right and the Yes entirely wrong.  I’m sure many pro-1631ers really believed that energy taxes aren’t passed through to consumers, but those at the top who drafted the proposal knew better.  Their public communication was dishonest, they got called on it, and they lost.

3. 1631 was the product of horse-trading between various interest groups.  Environmentalists wanted carbon revenues to go for green infrastructure.  Identity groups wanted funds funneled into minority, immigrant and low-income communities.  Unions wanted money for workers in the fossil fuel sector who might lose jobs.  Tribes wanted the state to defray the costs of climate change that impinge on them with particular force.  All of these are worthy goals in their own terms.  The problem is, how to translate a deal reached around a table between various representatives of these movements into a political process for disbursing public funds.  The solution they came up with was an appointed board of 15 “experts” who would control the allocation, carving off the carbon money from the general fund and its control by the state legislature.  Do I understand the distrust of the legislature?  Yes.  Was this blatantly undemocratic and contrary to the widely-held principles of how government ought to operate?  Also yes.  The No people blasted this idea again and again, and the public responded predictably.

The defeat of 1631 was an own goal by the progressive community.  We still haven’t had a vote on a sensible, defensible carbon pricing measure.  Until we do, I don’t want to write off the political feasibility of taking direct action against climate change.  A better bill would have universal coverage, as stiff a carbon price as possible, and—because carbon prices would eat significantly into household budgets—would return most or all of the revenues back to the public, ideally in equal lump-sum rebates.**

*Subsidies to renewables, energy efficiency programs and the like, while highly desirable, have only indirect effects on the use of carbon energy.  They shift the demand for fossil fuels to the left by some amount, but in a complex, evolving world with many other factors influencing global energy markets, the effect on emissions is unpredictable.  A direct approach uses the power of law to keep some portion of fossil fuels themselves in the ground, either by a cap on their use or price increases calibrated to corresponding use reductions.  The indirect approach to carbon is direct in its impact on renewables and other resources it targets, just as the direct approach to carbon is indirect in its effects on renewables and efficiency.  Ideally we should adopt both approaches, with programs directed against carbon fuels and for energy alternatives.

**732 was intended to rebate carbon revenues, but through tax cuts.  This was a mistake, since the amount of the rebate was variable (depending on how complex tax formulas would be affected by changing state economic conditions) and the rebates greater for those with higher incomes.  Worse, a portion of the cuts was allocated to business taxes in a misguided effort to buy off business and conservative interests.  The mobilization against it by progressives was vigorous and emotional; I attended an event in which supporters of 732 were called racist from the podium.  Mainstream environmental groups joined this opposition in order to demonstrate their social bona fides.


Anonymous said...

"732 was intended to rebate carbon revenues, but through tax cuts. This was a mistake, since the amount of the rebate was variable (depending on how complex tax formulas would be affected by changing state economic conditions) and the rebates greater for those with higher incomes."

Thanks for saying this. Of course Greg Mankiw said 732 was the correct approach as tax cuts for rich people is always high on his priority list.

Barkley Rosser said...

Thanks for the information on this, Peter. It explains a lot. Curious that the biggest killer issue on both proposals was what to do with the tax revenues.

john c. halasz said...

732 was far superior to 1631 though thanks to "progressives" it lost by 59% rather than 56% this time. Bauman had offered his laboriously acquired ballot line from a shoe-string budget to the "progressives" if they could agree on an alternative, which they failed to do. (One commenter described their process as just "jockeying for vigorish"). I believe there was some carve outs for the agriculture sector, but no other ones, unlike this version which had lots of carve outs especially absurdly for "energy intensive industries", (when isn't much of the energy generation in WA hydro anyway?) and there was supplementary subsidies for low income households, but otherwise was to be entirely rebated through sales tax reductions. The problem was that Washington state has a highly regressive tax structure, relying mostly ob high sales tax and while sales tax is regressively burdensome on low income people, reducing sales tax reduces, without eliminating that burden. But 1631 would rebate nothing, but rather amounts to a rise in the tax burden, which scarcely helps "social justice" concerns.

I disagree with you notion that rebates to business are somehow since businesses are large energy users and the positive and negative incentives of carbon pricing are more likely and fully to be responded to by them since they operate on explicit bookkeeping with cash flow and cost expenditures paramount, whereas households often have only vague ideas about the budget constraints. I also disagree with the lump sum rebate, (a fetish of many economists since supposedly all taxes are "distortionary") and that there is something wrong with high income households receiving de facto higher rebates, since the only point is to reduce carbon demand and higher incomes would have larger footprints: the tax incidence and the rebate incidence should be as much aligned as possible, except for very high incomes, which are going to be fairly price insensitive anyway. which should be proving the low income subsidies. The only point of a carbon tax is to shift the relative prices of carbon intensive energy vs. alternatives on existing markets, thereby damping down demand. The pseudo-progressive veneer of lump sum rebates is partly why the awful Schultz-Baker proposal adopted it. But as a general rule if you want to achieve a goal in a system you use a single control variable. If you want to achieve another goal in the same system you need to use a different control variable. Engineers understand that, economists maybe not so much. I'm all in favor of redistributing income and wealth, but doing so require different policies in the overall mix, and a carbon tax is not made to order for that. Conflating different aspects of policy together just repeats the "progressives" muddle. 350's slogan of "rise for jobs justice and the climate" is rather empty, failing to differentiate between 3 entirely separate issues rather than figuring out the cross-implications of differing goals in the policy mix.

Anonymous said...

John Cocrhane alert:

It seems that the Grumpy Economist agrees with Greg Mankiw - it against all reason to have any of the carbon tax revenues to fund new government spending. More tax cuts for the rich!!!