What a carbon tax would mean for Washington’s economy

State economists say the impact of a carbon emissions tax on short-term economic growth appears negligible.

By John Stang, September 11, 2014, Crosscut

Preliminary calculations show that a Washington carbon emissions tax would slow the state economic growth in the long run. But the short-term economic impact appears negligible.

 

Economists from the Washington Office of Financial Management presented two scenarios to a climate change advisory task force in Seattle on Tuesday. The scenarios, based on computer simulations, were not actual plans and each came with some caveats. But they provided some insights into the effects of a carbon emissions tax on the state’s economy.

 

Simulating the impact of a lower carbon emissions tax showed Washington’s Gross Domestic Production — essentially the level of government spending, investments and consumer money churning around the state in a given year — growing from roughly $400 billion today to $616 billion in 2035. Modelling the effects of a higher carbon emissions tax saw the GDP increasing from $400 billion today to $550 billion in 2035. An economic scenario with no carbon emissions tax predicted a GDP growth increase from $400 billion today to about $900 billion in 2035.

 

Based on the same computer simulations, neither lower nor higher carbon emissions tax levels had any economic effects on the GDP until early next decade. Neither tax rate exerted a major impact on personal incomes for the next 21 years.

 

Gov. Jay Inslee is expected to introduce legislation on carbon emissions taxes and possibly a cap-and-trade system in the 2015 legislative session against stiff GOP opposition. The climate change task force is supposed to provide feedback for the governor as he designs his legislative package. That feedback will be nailed down in November and formally presented to the governor in December.

 

“I struggle with what the impacts will be,” admitted task force member Mark Reddeman, from Energy Northwest, a consortium of several Washington utilities.

 

At Tuesday’s task force briefing, state economists were at a loss to explain why computer simulations showed a carbon emissions tax dampening GDP growth in the later years. Economists promised to revisit and possibly tweak the computer models in order to explain that mystery.

 

The computer simulation predictions came with several caveats. They do not account for economic forces other than the carbon emissions tax. They do not account for any innovations in reducing carbon emissions. And, as the economists warned, every computer simulation comes with strengths and weaknesses.

 

The simulations did take account of the fact that almost all of the collected carbon tax revenue would be returned to taxpayers – as either working family tax credits or as rebates on business-and-operations taxes. When Inslee called for exploring taxes on carbon emissions, he wanted all proposals to be “revenue-neutral,” meaning ways would be found to trim a corresponding amount of taxes elsewhere.

 

Any proposed 2015 plan must include a way to enforce carbon emissions reduction targets set in a 2008 state law. In 2008, Washington’s Legislature set a goal of reducing the state’s greenhouse emissions to 1990 levels by 2020, with further trimming of emissions to 25 percent below that 1990 level by 2035 and to 50 percent below by 2050. So far, no progress has been made toward those goals. If no new remedial measures are put in place, and if the state’s population continues to grow, the state’s carbon discharges will blast away all the targeted reductions set back in 2008.

 

In 2010, Washington spewed 96 million metric tons of carbon into the air. If left unchecked, that volume is projected to increase to 135 million metric tons by 2050. Fifty percent of the 1990 carbon emissions level is 44 million metric tons. One metric ton is roughly the amount of carbon that 30 fuel-efficient cars driving average distances produce in a year. Vehicle emissions are one of the biggest, if not the biggest, producers of carbon pollution in Washington

 

Inslee has asked the task force to identify the best ways to use market forces to reduce carbon emissions. He wants the committee to consider the economic consequences of any plan and to ensure that no region suffers disproportionate impacts. He has asked that its advice include how to boost job creation while addressing climate change issues. And lastly, the governor wants Washington’s proposed system to be scalable; that is, to be capable of linking up to and coordinating with similar reduction systems in other states.

 

Tuesday’s session provided economic snapshots of two potential carbon tax plans, neither of which has been floated as a legitimate proposal yet.

 

The “lower” simulated tax scenario called for a tax of $12 per metric ton beginning in 2016, with a 60-cent-per-metric-ton increase annually through 2020. After 2020, the tax would increase annually by $2-per-metric-ton. The scenario calls for collecting $737 million in 2016 and $839 million in 2020. This scenario will meet the state’s 2020 carbon reduction goal, but not the 2035 carbon reduction goal. In it, gasoline production costs are projected to increase 16 percent by 2035, while natural gas production costs would increase by 10 percent in the same period.

 

The “higher” simulated tax scenario called for a $12 per metric ton tax in 2016, with an $8-per-metric-ton increase annually. It would raise $1.165 billion in 2016 and $2.794 billion in 2020.  The scenario would barely meet the state’s 2020 and 2035 carbon reduction goals. The predicted increase in gasoline production costs was 60 percent by 2035, with natural gas production costs growing by 35 percent in the same period.

 

Job growth and losses for various industries would be mostly small percentage-wise under both scenarios, with the total figures somewhat zeroing out. The natural gas industry would be hit the hardest,  losing 2 percent to 6 percent of its workers by 2035. On the other hand, the chemical manufacturing industry would grow 16 percent to 24 percent by 2035 under the two carbon emissions tax scenarios.

 

The biggest chunk of these taxes would be paid by transportation fuel suppliers, who produce about 30 million metric tons of carbon emissions annually. These 40 businesses are middlemen between the refineries and gas stations, who mix and blend petroleum product into specific types of gasoline and fuel. The power industry produces about seven million metric tons of carbon annually. Washington’s five refineries produce about six million metric tons a year. Other industries generate significantly less carbon annually, according to the state’s economists.

 

“As this goes to the Legislature, a lot of political discussions and intrigue will go around this,” said task force member K.C. Golden of environmental think tank Climate Solutions. “If you design this through the revenue lens first … you might not produce something conducive to [fighting] climate change. … One thing that has come out of today’s analysis is that you don’t want to do it on price alone. … We’re going to have to align some political will about moving forward.”

 

This panel is Inslee’s second attempt at using a committee to design a plan that tackles carbon emissions. In 2013, the governor presided over a climate change panel of two Republican legislators and two Democratic legislators, who deadlocked along party lines. The Democrats wanted to explore carbon emissions limits and cap-and-trade programs. Republicans — backed by major business lobby groups such as the Association of Washington Business — opposed those measures. Instead, Republican legislators wanted to explore adding more nuclear power and revoking the state’s 2008 carbon emissions reduction law.

 

Carbon emissions have been linked to increasing ocean acidity along Washington’s shores, including in Puget Sound. That change in pH levels has begun killing baby oysters and harming other Northwest shellfish. Washington’s shellfish industry is worth about $270 million annually.

 

Carbon emissions are also linked to global warming, which influences how snow packs form and melt. That in turn affects how much water is available for farming and residential consumption. As he moves toward announcing his preliminary plan, Inslee has been visiting forests, shellfish sites and water treatment plants in an effort to gather information. This all sets the stage for a tense  environmental-economic showdown when the governor’s climate change plan is unveiled in early 2015.

 

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