Policy Brief: Carbon Tax

 January 7, 2015

Read  Carbon Tax Survey Comments.

A Carbon Tax for Vermont?

On November 13, 2014 a coalition called “Energy Independent Vermont” announced a campaign to persuade the 2015 General Assembly to adopt a new tax on “carbon pollution” The Coalition is led by the Vermont Public Interest Research Group (VPIRG), the Vermont Natural Resources Council, and the Conservation Law Foundation. (www.energyindepednetvt.org).

The Coalition argues that we must defeat “climate pollution – the biggest environmental challenge of our generation.” It believes that human-caused emissions of carbon dioxide are causing “super storms and extreme weather events.” The Coalition proposes that state government levy a new tax on carbon-based fuels. That would cause the price of natural gas, heating oil, propane, gasoline, and diesel fuel to rise. The higher costs of carbon fuels will make them more expensive, thus depressing their usage and reducing the carbon emissions that, the Coalition believes, produce “climate pollution”.

The higher price of carbon fuels will lead consumers to turn to electric vehicles to replace gasoline and diesel-fueled vehicles, replace home heating gas and oil with electric heat pumps, and invest more in energy conservation and efficiency.

Under the Coalition proposal the state would tax all of these fuels at some convenient point in their supply chains. The proposal exempts electricity because it is covered by the Regional Greenhouse Gas Initiative. It also does not include biomass fuels, like firewood.

Coalition leader VPIRG commissioned a study of the carbon tax economic effects by Regional Economic Models Inc. (REMI).The study assesses carbon tax rates of $50, $100, or $150 per ton, phased in over several years. At the lowest ($50) rate, VPIRG expects the new tax to produce $35 million in 2016 and $250 million in year 2030. At the $150 rate, the take would be $700 million a year by 2030. The REMI model promises significant increases in jobs, disposable incomes, and Gross State Product.

The advocates say the state would redistribute the carbon tax revenues through refundable tax cuts, per-employee rebates, and “corporate income tax reductions for businesses,” to compensate them collectively for the higher energy costs caused by the carbon tax. Additional rebates would go to “low income Vermonters”, plus “dedicated funding for weatherization assistance programs”.

The carbon tax would be a net tax increase. Ninety percent of the carbon tax revenues would be redistributed among the persons and businesses that collectively paid the tax, though of course not dollar for dollar. The remaining ten percent of the revenues would be diverted to pay for “investments in energy efficiency, renewable energy, and other clean alternatives to fossil fuels”.

The ten percent would add up to a significant amount of new subsidies for the favored enterprises. According to the REMI study, they would receive $3.5 million the first year (at the $50 rate) to as much as $70 million fifteen years out (at the $150 rate).

Among the leading beneficiaries of these carbon tax revenues would likely be the two leading figures of the renewable industrial complex who underwrote the VPIRG report: David Blittersdorf (All Earth Renewables) and Matthew Rubin (Renewable Energy Vermont).

With the carbon tax in place, Vermonters could look forward to paying a third more for gasoline, diesel fuel, natural gas, propane, and heating fuel. What they would receive from the state as a rebate would depend on what the legislature decides is an “equitable” redistribution among the persons, businesses, governments, and organizations subject to the new tax. It would also depend upon a legislative determination of the most pressing fiscal priorities, such as covering a projected $100 million General Fund deficit in Fiscal Year 2016.

Here are some cautionary considerations:

  • The Coalition’s rationale for levying a carbon tax is the need to curtail “climate pollution”. The force of this argument depends on the extent to which carbon dioxide emissions can be shown to produce long term and deleterious changes to the Earth’s climate, and whether one believes that taxing Vermonters’ carbon combustion would produce any discernable effect on “climate change”. These contentions are highly controversial.
  • The REMI study’s strongly positive projections for job, disposable income, and Gross State Product growth depend on certain assumptions made in the computer modeling process. It is not at all clear how reducing payments for fossil fuel energy from outside the state and increasing subsidies for locally produced renewable energy (wind, solar and biomass) would actually meet the state’s energy requirements, or keep Vermont’s energy-dependent enterprises competitive in a national and global market.
  • The Coalition disingenuously states that “Our plan will require these [oil] companies to pay a tax on the carbon pollution created by the fossil fuels they sell.” Those taxes will of course be passed on to consumers as higher fuel prices – as much as $1.35 tax increase per gallon of gasoline.
  • Levying an additional tax on sources of natural gas, propane, heating oil, gasoline and diesel fuel might be workable, but managing a large revenue redistribution to the designated beneficiaries would likely be more difficult and costly.
  • Even Gov. Shumlin, and ardent supporter of reducing carbon dioxide emissions, recently observed “that “if you have a high carbon tax in a gas station on this side of the [Connecticut River] bridge and you have no carbon tax on the other side of the bridge, it’s pretty clear where you’re going to fill up your tank.” Families and businesses with natural gas home service or heating oil deliveries would of course not be able to “cross over the bridge” to get lower energy prices.
  • Assigning ten percent of the carbon tax revenues for the benefit of what some call the “renewable industrial complex” would constitute a continuing and unwarranted stream of subsidies for a small number of Vermont’s highest cost energy producers (especially wind and solar PV).
  • The Coalition says “based on legislative priorities, carbon tax revenue could of course also be used for other purposes.” That thought would surely occur to legislators urgently trying to fund other parts of the budget, in the face of a $100 million FY2016 General Fund deficit.

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