Group considers “carbon tax” strategies

A group working to reduce Colorado’s greenhouse gas emissions will explore three market-based alternatives for potential presentation to voters during either the 2008 or 2009 election cycle.

The Colorado Carbon Reduction Initiative is “a citizen’s advocacy group devoted to applying market-based approaches for reducing Colorado’s greenhouse gas emissions.” The group considering three scenarios that will address the GHG emissions problem at various levels, ranging from a rather modest effort to encourage alternative fuels to a “paradigm shift” model that would dramatically increase the cost of fossil fuels over time.Because all of the proposals deal with tax issues, the one that is eventually pursued would have to be presented to the voters for approval, as required by the Taxpayers Bill of rights (TABOR).

Scenario 1 is a “funded carbon reduction plan” which impose a small tax on carbon fuels the proceeds of which would be used to encourage the development of energy efficiency and  renewable energy projects.

The amount of the tax is not finalized, but the number bandied about at the group’s August 1 meeting was $2 per ton of emitted carbon. The tax would be imposed on all forms of energy that emit carbon, but as a practical matter, it would impact primarily gasoline and electricity use — as would the proposals described below.

A $2 per ton tax on carbon emissions translates into a two cent per gallon increase on gasoline, and a 0.19 cents per kilowatt hour on electricity. This is about a three percent increase in the cost per kwh.

This proposal is a essentially a statewide version of what the city of Boulder is doing. At the levels quoted above, it would raise an additional $180 million a year to promote local alternative energy. It’s chief advantage is that it takes advantage of easily achievable carbon emission reductions in the short-term. It is also politically palatable and relatively inexpensive.

It’s chief disadvantage is that in the long term — say by the year 2050 — it will do little to change consumer habits, and will have little impact on the long-term carbon emissions from the state. Unlike the other two proposals, it isn’t “revenue neutral” but will provide new money to state coffers.

Scenario 2, which is still “in development,” is a halfway measure between Scenario 1 and the full-blown carbon tax proposal outlined below. This would impose a larger, one-time carbon tax, say $10 a ton — translating to ten cents a gallon on gasoline and a ten percent increase in electricity — that would raise about $1 billion.

The tax would be revenue neutral, however. That means that any money collected at the gas pump or in power bills would be returned to consumers either by reductions in other state taxes, or by direct refunds.

This scenario would set more of “price signal,” giving consumers incentives to invest in energy efficiency, and energy suppliers incentives to invest in low-carbon technologies. It’s effect on long-term carbon emissions from the state are uncertain. At a $10 per ton level, it would probably slow but not reverse the state increase in CO2 emissions. It might, however, be more politically popular because it costs considerably less than Scenario 3.

Scenario 3 would impose a large carbon tax in an effort try to change consumer behavior and reduce state carbon emissions by 60 to 80 percent by 2050. It, too, would be revenue neutral, or nearly so, using the same offset mechanisms as described in Scenario 2, above.

The tax would imposed at the rate of $5 per ton of carbon emitted, and would be raised by that amount each year. At that rate, if the tax were imposed in 2008, for instance, it would reach $60 per ton of carbon by 2020. The price of gasoline would increase by nearly 50 cents a gallon in 2020 and electricity rates by about 45 percent.

The chief disadvantage of this strategy is obviously its high cost, leading most people to think it is politically impossible. Unfortunately, this doesn’t bode well for the political will to actually do something about climate change, because a proposal at this scale nationally is probably necessary to reduce carbon emissions to levels that will stabilize CO2 in the atmosphere at about 450 parts per million, the level that has been somewhat arbitrarily established as a goal. (Atmospheric CO2 levels prior to the industrial era were about 280 parts per million.)