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Research & Commentary: Regressive Carbon-Dioxide Tax Proposals Are Bad News for Vermont Families and Businesses

February 28, 2019

Proposals Would Cap At $40, $50 Per Ton, Respectively

Two proposals in the Vermont General Assembly would establish carbon-dioxide taxes on fossil fuels in the Green Mountain State. The purpose of the carbon tax is to decrease carbon-dioxide emissions by levying a tax based on the amount of emissions produced.

The first proposal would set up a $5 per ton tax in 2021. This tax would increase by $5 per ton each year until 2030, when it caps at $50 per ton. The second proposal, an updated version of last year’s Economy-Strengthening Strategic Energy Exchange (ESSEX) Act, would begin at $5 per ton in 2021 and increase by $5 per ton each year until 2028, when the tax would reach its cap at $40 per ton.

In the ESSEX Act, a third of the collected revenues would be refunded to Vermonters through a general rebate, while “rural customers” and those whose income is below 300 percent of the federal poverty level would each receive their own additional 33 percent rebate. The other proposal also calls for 33 percent rebates to rural and low-income households.

These rebates are necessary because carbon dioxide taxes are inherently regressive and disproportionally harm low-income families. The Congressional Budget Office (CBO) found a $28 per ton carbon dioxide tax would result in energy costs being 250 percent higher for the poorest one-fifth of households than the richest one-fifth of households.

CBO reports the reason for cost discrepancy is “a carbon tax would increase the prices of fossil fuels in direct proportion to their carbon content. Higher fuel prices, in turn, would raise production costs and ultimately drive up prices for goods and services throughout the economy … Low-income households spend a larger share of their income on goods and services whose prices would increase the most, such as electricity and transportation.”

An economic analysis of the original ESSEX Plan by Jonathan A. Lesser for the Ethan Allen Institute found the proposed tax would increase electricity costs in Vermont. “Rebates on current electricity rates will not compensate for the plan’s call for increased reliance on locally-sourced renewable biofuels and solar power,” Lesser writes. “The latter is currently five times more expensive than the average price of electricity in the New England wholesale electric market. The cost of the former will increase because the demand for biofuels will increase as a consequence of the tax.”

Lesser also notes the ESSEX Plan would have an adverse effect on transportation infrastructure funding, which was already facing a shortfall of $227 million in 2018. “To compensate,” for this drop in funding, Lesser notes, “the state will likely have to increase taxes on motor fuel, levy a tax on miles driven, or raise the state’s income tax. Alternatively, revenues raised by the carbon tax would have to be diverted from the proposed electric rebates, contrary to the plan’s promise of revenue neutrality.”

A 2013 report from the National Association of Manufacturers estimated a $20-per-ton carbon-dioxide tax in Vermont would result in a 40 percent increase in the price of natural gas. The report also estimated gasoline prices would be more than 20 cents per gallon higher and there would be an 19 percent increase in household utility rates in the first year alone. In July 2012, Australia established a nation-wide carbon-dioxide tax set at $23 (Australian dollars) per ton and repealed it just two years later after it produced the highest quarterly increase in household electricity prices in the country’s history.

One other substantial problem with the carbon-dioxide tax is that it would produce an insignificant environmental benefit, as Oren Cass, senior fellow at the Manhattan Institute, noted in National Affairs. “The effectiveness of a carbon tax as a matter of environmental policy [depends] not only on how it would directly alter the trajectory of [local] emissions but also on its ability to affect global emissions by driving globally applicable technological innovation or by influencing the behavior of foreign governments,” wrote Cass. “On each of these dimensions, the carbon tax fails.”

At 14.60 cents per kilowatt hour, retail electricity prices in Vermont are already 39 percent higher than the national average and are the seventh-highest in the continental United States, so legislators should refrain from taking any action that would cause these prices to increase. Further, the Tax Foundation ranks Vermont as having the fourth-worst business tax climate in the country. A carbon-dioxide tax would make everything more expensive for working families in Vermont, drive up costs for businesses, and have an insignificant effect on global carbon dioxide emissions.

The following documents provide more information about carbon-dioxide taxes and fossil fuels.

The ESSEX Carbon Tax Plan for Vermont: An Economic Analysis
http://ethanallen.org/wp-content/uploads/2013/01/EAI-Essex-Plan-report-012418.pdf
This economic analysis on behalf of Jonathan A. Lesser for the Ethan Allen Institute finds the ESSEX carbon-dioxide tax plan is premised on vague and incorrect economic assumptions and that enacting it would damage Vermont’s economy, place an undue and unfair burden on lower-income Vermonters, and encourage more people to leave Vermont in search of better economic opportunity.

The Carbon Tax: Analysis of Six Potential Scenarios
https://www.instituteforenergyresearch.org/wp-content/uploads/2018/10/The-Carbon-Tax-Analysis-of-Six-Potential-Scenarios_Final.pdf
This study commissioned by the Institute for Energy Research and conducted by Capital Alpha Partners uses standard scoring conventions to evaluate and model the economic impacts of carbon taxes set at a variety of dollar figures, with different phase-in durations, and with an array of revenue-recycling strategies. It finds a carbon-dioxide tax will not be pro-growth, is not an efficient revenue raiser for tax reform, depresses GDP and introduces with long-term fiscal challenges playing particular stress on the states, and is inconsistent with meeting the long-term Paris Agreement emissions reduction goals.

Carbon Taxes: Bad for the People, the Economy, Government Revenues (Guest: Jordan McGillis)
https://www.heartland.org/multimedia/podcasts/carbon-taxes-bad-for-the-people-the-economy-government-revenues-guest-jordan-mcgillis
In this edition of the Heartland Daily Podcast, Jordan McGillis of the Institute for Energy Research (IER) discusses an economic analysis produced for IER of six different possible versions of a tax on carbon dioxide. The study found none of the of the six versions of the tax considered would be revenue neutral or satisfy the requirements of the Paris Climate Agreement, but each of them  would reduce economic growth, impede infrastructure development, and limit the government's ability to meet fiscal obligations and operations. People would stripped of choice and made poorer for no environmental gain.

Does a Carbon Tax Support Prosperity?
https://files.texaspolicy.com/uploads/2018/08/16104452/2018-04-PP-CarbonTaxSupportProsperity-ACEE-CEP-IngramGinn.pdf
This study from the Texas Public Policy Foundation finds that research supporting the imposition of a carbon-dioxide tax are based on modeling with flawed assumptions and the tax itself would cause crippling economic costs. Two real life examples of a carbon-dioxide tax gone wrong in British Columbia and in Australia show that its potential effects include skyrocketing household electricity prices and increasing unemployment. 

The Deeply Flawed Conservative Case for a Carbon Tax
https://www.heartland.org/publications-resources/publications/the-deeply-flawed-conservative-case-for-a-carbon-tax
In this paper published by the American Enterprise Institute, Benjamin Zycher says the “conservative” Climate Leadership Council’s (CLC) much-hyped carbon-dioxide tax proposal is “naïve” and “virtually all of the … assertions in support of its proposal are incorrect or implausible.” The CLC’s plan is “poor conceptually and deeply unserious,” wrote Zycher.

Legislating Energy Poverty: A Case Study of How California’s and New York’s Climate Change Policies Are Increasing Energy Costs and Hurting the Economy
https://www.pacificresearch.org/wp-content/uploads/2018/12/LegislatingEnergy_F_Web.pdf
This analysis from Wayne Winegarden of the Pacific Research Institute shows the big government approach to fighting climate change taken by California and New York hits working class and minority communities the hardest. The paper reviews the impact of global warming policies adopted in California and New York, such as unrealistic renewable energy goals, strict low carbon fuel standards, and costly subsidies for buying higher-priced electric cars and installing solar panels. The report finds that, collectively, these expensive and burdensome policies are dramatically increasing the energy burdens of their respective state residents.

The U.S. Leads the World in Clean Air: The Case for Environmental Optimism
https://files.texaspolicy.com/uploads/2018/11/27165514/2018-11-RR-US-Leads-the-World-in-Clean-Air-ACEE-White.pdf
This paper from the Texas Public Policy Foundation examines how the United States achieved robust economic growth while dramatically reducing emissions of air pollutants. The paper states that these achievements should be celebrated as a public policy success story, but instead the prevailing narrative among political and environmental leaders is one of environmental decline that can only be reversed with a more stringent regulatory approach. Instead, the paper urges for the data to be considered and applied to the narrative.

The Case Against a U.S. Carbon Tax
https://www.heartland.org/publications-resources/publications/the-case-against-a-us-carbon-tax
In this paper from the Cato Institute, Robert P. Murphy, Patrick J. Michaels, and Paul C. Knappenberger examine carbon-dioxide tax programs in place in Australia and British Columbia and consider whether similar programs would be successful in the United States. They conclude, “In theory and in practice, economic analysis shows that the case for a U.S. carbon tax is weaker than its most vocal supporters have led the public to believe.” 

Economic Outcomes of a U.S. Carbon Tax
https://www.heartland.org/publications-resources/publications/economic-outcomes-of-a--us-carbon-tax
This report from the National Association of Manufacturers evaluates the potential impacts carbon-dioxide taxes whose revenues would be devoted to a combination of debt and tax rate reduction would have on the U.S. economy. The results consider the varied economic effects of fossil-fuel cost increases caused by carbon taxes, as well as the positive economic effects of the assumption that carbon-dioxide tax revenues would be used to reduce government debt and federal taxes.

Ten State Solutions to Emerging Issues
https://www.heartland.org/publications-resources/publications/ten-state-solutions-to-emerging-issues-2018
This Heartland Institute booklet explores solutions to the top public policy issues facing the states in 2018 and beyond in the areas of budget and taxes, education, energy and environment, health care, and constitutional reform. The solutions identified are proven reform ideas that have garnered significant support among the states and with legislators.

The Carbon Tax Shell Game
https://www.heartland.org/publications-resources/publications/the-carbon-tax-shell-game
Oren Cass of the Manhattan Institute argues the carbon-dioxide tax is a shell game. The range of designs, prices, rationales, and claimed benefits varies so widely that assessing the validity of most proposals is nearly impossible to accomplish. In this article for National Affairs, Cass says the effect of carbon-dioxide taxes on emissions has proven to be insubstantial, a fact he says is ignored by the tax’s proponents when promoting its purported benefits.

The Social Benefits of Fossil Fuels
https://www.heartland.org/publications-resources/publications/the-social-benefits-of-fossil-fuels
This Heartland Policy Brief by Joseph Bast and Peter Ferrara documents the many benefits from the historic and still ongoing use of fossil fuels. Fossil fuels are lifting billions of people out of poverty, reducing all the negative effects of poverty on human health, and vastly improving human well-being and safety by powering labor-saving and life-protecting technologies, such as air conditioning, modern medicine, and cars and trucks. They are dramatically increasing the quantity of food humans produce and improving the reliability of the food supply, directly benefiting human health. Further, fossil fuel emissions are possibly contributing to a “Greening of the Earth,” benefiting all the plants and wildlife on the planet.

Climate Change Reconsidered II: Fossil Fuels – Summary for Policymakers
https://www.heartland.org/publications-resources/publications/climate-change-reconsidered-ii-fossil-fuels---summary-for-policymakers
In this fifth volume of the Climate Change Reconsidered series, 117 scientists, economists, and other experts assess the costs and benefits of the use of fossil fuels by reviewing scientific and economic literature on organic chemistry, climate science, public health, economic history, human security, and theoretical studies based on integrated assessment models (IAMs) and cost-benefit analysis (CBA).

Less Carbon, Higher Prices: How California’s Climate Policies Affect Lower-Income Residents
https://www.heartland.org/publications-resources/publications/less-carbon-higher-prices-how-californias-climate-policies-affect-lower-income-residents
This study from Jonathan Lesser of the Manhattan Institute argues California’s clean power regulations, including the state’s renewable power mandate, is a regressive tax that harms impoverished Californians more than any other group. 

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Environment & Climate News, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Lennie Jarrett, a state government relations manager at The Heartland Institute, at ljarrett@heartland.org or 312/377-4000.