By November 8, 2016 Read More →

The politics of carbon taxes…it ain’t pretty

carbon tax

Graphic: Northwest Progressive Institute.

If Washington voters don’t approve carbon tax, is it likely other states or feds will introduce one in near future?

Washington state environmentalists are clashing over a carbon tax proposition that will show up on Tuesday’s ballot, demonstrating again that carbon pricing to reduce emissions can be a tough sell to voters.

carbon tax

Prof. Sumeet Galati.

In theory, carbon taxes are simple. They raise the price of carbon-intensive goods and services, which encourages consumers to use less of them.

Many economists like them because carbon taxes work with the market and presumably produce better, more efficient outcomes than, say, regulations. Well, those economists who accept the need for government to combat global warming like them, but that’s grist for another column.

Most environmentalists like them, but more on that in a moment.

But voters, consumers, and taxpayers – in most cases the same people – aren’t as crazy about carbon taxes.

Take Washington, which votes Democrat pretty consistently, is considered a blue state, and appears poised to cast its collective ballot for Hillary Clinton, according to public opinion polls. The state also has an active environmental movement that carries a lot of political clout.

carbon tax

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One would think Initiative 732 to establish a state-wide carbon tax would be a slam dunk. Instead, the proposition has pitted national and regional eco-activists against one another, with those opposed sometimes in an uneasy political alliance with fossil fuel supporters.

At issue is what to do with the carbon tax revenue.

Initiative 732 supporters want a revenue-neutral tax, in which other taxes – usually income and business taxes – are reduced to offset the amount raised by the carbon tax.

Opponents want the revenue to be used for programs such as affordable housing, improved public transportation or free solar for working families, according to the Washington Post. Or, in the case of corporate opponents, some of which have poured hundreds of thousands of dollars into the campaign to stop Initiative 732, they want no carbon tax.

The Canadian province of British Columbia, just up the road from Washington, has been dragged into the debate. BC introduced a revenue-neutral, economy-wide carbon tax on fuels in 2008, which is praised by those who favour Initiative 732 as the best example of a well-designed tax.

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Prof. Sumeet Galati is an economist with the University of British Columbia who has studied the province’s experience with the carbon tax. He says that opposition was high when the tax was first introduced, but consumers very quickly accepted it and now politicians would face resistance if they tried to do away with it.

“Even when BC announced revenue-neutrality, I don’t think the voters were completely convinced – and this is typical, we don’t trust our government, we don’t expect to get all the money back,” he said in an interview.

Revenue neutrality is the key, says Prof. Galati. When consumers see that other taxes are lowered, and their tax bill remains more or less the same, opposition eventually dissipates.

Neighboring Alberta recently introduced a carbon tax, set to take effect on Jan. 1, that has faced stiff opposition. Alberta is the home of the Canadian oil and gas industry, and the province has long prided itself on being business friendly, with low tax rates.

The socialist government led by NDP Premier Rachel Notley decided to not make the Alberta carbon tax completely revenue neutral, leading to accusations from political opponents that many consumers would be paying full freight at a time when the oil and gas industry is on the rope because of low prices.

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The carbon tax is seen by many Albertans as a jobs and business killer, something that might have been avoided if the NDP government had followed the BC example. Similar complaints have been heard in Saskatchewan, whose premier has publicly opposed the recently introduced national carbon tax.

“What’s made a big difference is the revenue neutrality in BC, and this maybe is different in Alberta, is because the income tax and corporate taxes both went down,” said Galati.

The principal takeaway for Washington from the BC and Alberta examples is that a carbon tax can be complicated and easily misunderstood by consumers.

Whatever economists may think about the elegance and simplicity of a carbon tax, consumers take a different view because in their experience, a tax is a tax is a tax and that means more money out of their pockets.

If Initiative 732 fails in Washington because of the internecine squabbling between environmental groups, what state government would want to court political controversy by introducing its own carbon tax?

And a national carbon tax will almost certainly be off the table, even if Hillary Clinton becomes president and the Democrats win the Senate.

The political cost is just too high.

So, keep an eye on the Washington election results and the fate of Initiative 732. Its success or failure may have more far-reaching consequences going forward.

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