Champions of Climate Change?

December 8th, 2016 <-- by Paul Higgins -->

Last month a Washington State ballot initiative to help protect the climate system went down in defeat. The initiative was remarkable for being one of the most straightforward and promising approaches to climate change risk management ever tried in the United States at any level of government. That it failed is remarkable because some environmental groups contributed to the defeat.

The initiative (I-732) would have placed a price on emitting carbon. The proceeds from that carbon price would have gone toward reducing existing sales taxes.

The reasons for this approach are well understood. Greenhouse gas emissions result, in part, from a classic market failure. No one owns the atmosphere so it has, up to now, been largely available for any emitter to use for the free disposal of greenhouse gases. This is an economically harmful subsidy because those who emit do not pay for their use of the atmosphere and for the damage to the climate system that they cause.

Furthermore, a price on emissions creates an incentive to emit less. Indeed, without increasing the price, it will be very difficult to reduce emissions. That is a basic economic principle—the higher the price of something, the lower the demand.

However, a price on emissions alone would disproportionately hurt low-income families. This is because energy expenditures are a basic need and make up a larger fraction of household spending for low-income families than for those with greater wealth.

Whether you earn $10,000 a year or $100,000 a year, you need to heat and cool your home, to use hot water, to have lights on at night, to refrigerate perishable food, and to get from your home to your job. Wealthier families typically use more energy but the basic need for energy is largely independent of wealth and expenditures on energy constitute a much higher percentage of a low-income family’s household budget. As a result, increases in energy prices eat up a larger fraction of a low-income family’s remaining discretionary funds.

I-732 largely eliminated this problem by directing the revenue from the carbon price to reduce existing sales taxes, which also fall more heavily on the less affluent. The combination of a new carbon price and relief from existing sales taxes would have been an overall improvement for the budgets of the majority of low-income families. So the initiative would have been a significant step toward stabilizing climate that separately helped most low-income families.

Nevertheless, several prominent environmental groups actively did not support I-732 or opposed it outright. Why?

For some, the problem is that they want the revenue from a carbon price for new government programs. That revenue could, for example, have gone to job training, renewable energy deployment, or building climate resilience, among other potential uses. Returning the revenue by reducing sales taxes seemed to these environmentalists like a missed opportunity.

New government programs might be defensible but those programs aren’t directly relevant to a carbon price. The price on carbon simply corrects the market failure of letting emitters freely dump their pollution into the atmosphere while creating an incentive for everyone to reduce emissions. The new programs, if worth having, would be equally good no matter how they are funded. Choosing to fund new programs with the revenue from the carbon price would have come at the expense of low-income families because it would have redirected the revenue away from reducing sales taxes.

Using the revenue for new programs would likely also make a carbon price harder for voters to sustain over time and therefore less effective. The reason is that a price on carbon would likely increase energy and transportation prices. Indeed, adding a price to carbon is intended to increase carbon-based energy and transportation costs because that creates the incentive for consumers to make lower emitting choices.

Of course, many voters won’t like seeing energy and transportation prices go up and they might vote to repeal the initiative in the future. However, if people know that sales taxes are lower because of the carbon price and feel those savings in their pocketbooks, then they may like (or at least accept) the tradeoff. Indeed, for most people it is a very good tradeoff because we gain more with climate stability and reduced sales taxes than we lose through higher prices for carbon-based energy—financially it’s an even exchange and we get increased climate stability. Spending the revenue on new programs weakens the benefit of reducing the sales tax and that makes it more likely that people would be willing to accept, at most, a lower price increase on carbon-based energy.

Additional opposition to I-732 centered on social justice, which I-732 did not specifically emphasize. This criticism is a little surprising because I-732 sought to provide a stable climate system for all and to ensure beneficial impacts on the household budgets of most low-income families. Asking climate policy to accomplish more than that will either weaken climate change risk management or make it more challenging to enact than it already is. Extrapolating to other of societal problems, it would be hard to make progress on any one issue if we force our solutions to be vehicles for the other problems that we face. No matter how important those issues may be.

So it’s surprising that given a chance for meaningful climate protection, some in the environmental community chose to work against it.


One Response to “Champions of Climate Change?”

  1. Climate Policy Blog » Blog Archive » The Conservatives’ Fee and Dividend—The Advantage of a Focus on Emission Prices Says:

    […] has tried so far. Yet past policy debates (like the Washington State initiative I wrote about here) suggest there will be criticisms of the approach that have at most a thin basis in reality. These […]

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