Local Climate Tax Cuts (aka Revenue Neutral Carbon Taxes)

At the risk of stating the obvious: a carbon tax is a Pigovian Tax, i.e. a tax on bad things, meant to expose otherwise hidden costs to efficiently motivate rational consumers to consume fewer of the bad things -- without imposing any cumbersome regulations.

Raising taxes is difficult if not impossible in today's world. To get around this problem, British Columbia managed to create a carbon tax that did not raise taxes -- an un-tax if you like. They did this by lowering other taxes to compensate.

The tax very nearly didn't survive; a lot of luck and political skill were needed to make it succeed:

One thing that helped it succeed was simplicity. No long technical explanations. The closer the story is to fitting on one line, the better it resists spurious attacks.

Another thing that saved it was it is somewhat local. The smaller the jurisdiction, the lower the stakes, and the bigger the chance that a sensible idea can escape the forces of partisan politics.

Perhaps more counties and cities should consider enacting their own small revenue-neutral carbon taxes on top of the state and federal efforts (or lack thereof) -- riding out in front of the herd a little if they felt like it. Other counties without ambitious climate change plans could simply opt to not reduce their sales tax, and leave everything as is.

California's goal for 2030 is CO2 emissions 40% below 1990 levels by 2030. The City of Los Angeles is more ambitious; its goal is a 45% reduction by 2025. Could a local revenue-neutral carbon tax help?

According to LAEDC, in 2006 in Los Angeles, the sales tax rate was 8.25%, and about $11 billion in sales tax was collected, so each percentage point is worth $1.35 billion. If 100 million taxable tons of CO2 are emitted in Los Angeles County per year, then lowering the sales tax by 1% (from 8.25% to 7.25%) would mean adding a carbon tax of $1.35 billion / 100 million tons = $13.5 per ton.

So to lower the sales tax by half a cent, you'd have to raise all fossil fuel energy taxes as follows:

(That's just a quick and dirty estimate; corrections cheerfully accepted.)

California's cap and trade system currently prices co2 emissions at $12.60/ton. To match BC's current price of $30, LA would need to lower sales tax by about 0.7 percent, raising gas prices by 8 cents per gallon.

But what effect would raising the price of carbon have on LA's goals?

One example its its solar feed-in program. Currently LADWP offers about a ten cent per kwh subsidy above wholesale prices for solar energy fed back into the grid. This subsidy, assuming 4.5 hours of full sun average, costs $164,000/year/MW of installed solar for twenty years, or $3.2 million per MW over the lifetime of the subsidy. The mayor's local solar dashboard says the city wants to install 268 MW of solar between Dec 2014 and Dec 2017; the total subsidy would be $3.2 million * 268 = $858 million, or almost a billion dollars. The subsidy could be avoided entirely if electricity rates were ten cents per kwh higher. That could be achieved by reducing the sales tax by 1.5% (e.g. from 8.25% to 6.25%) and raising the price of carbon to $40/ton. With no subsidy required, the SIP program (and all other solar programs) could be expanded much further than currently planned, and with less financial risk to the city.

The FIT program currently benefits from the 30% federal solar tax credit, which is scheduled to expire at the end of next year. At the LADWP Solar Roundtable in March 2015, people building FIT solar systems said that very few of their current projects would be viable once the tax credit drops from 30% to 10%. Compensating for this may require raising the LADWP subsidy by 3 cents/kwh, or alternately reducing sales tax by another 0.5% on top of the 1.5% mentioned above.

Another example is motor vehicle fuel economy. Recent experience shows that above $4/gallon, high-MPG vehicles become popular.. According to gasbuddy.com, gas prices are about 40 cents per gallon below their hybrid-friendly peak in Los Angeles. A carbon tax of 40 cents/gal corresponds a carbon price of about $80/ton and about a 3% cut in sales tax rates, and would probably reawaken interest in high-miles-per-gallon vehicles in Los Angeles.

Coincidentally, Exxon is said to be assuming that the price of carbon emissions will be set at $80/ton.

Further reading

Local climate change efforts: City of Los Angeles data and targets:
Comments and corrections welcome. Contact the author at: dank at kegel.com
Copyright 2015, Dan Kegel