Guest commentary by Yoram Bauman

Everyone from Treasury Secretary Janet Yellen to Elon Musk thinks putting a price on carbon is an important step in the fight against climate change. Politically, however, carbon taxes and cap-and-trade systems face an uphill battle, in part because they could drive up the prices of household staples like gasoline and electricity. There are many interesting proposals to address this concern, mostly focused on the idea of ​​using revenues from carbon pricing to pay for things like per capita dividends, green investments, or payroll tax cuts.

But what if you could put a price on carbon without drive up consumer prices? In California, for example, the impact of the cap-and-trade system on residential electricity bills is significantly reduced by the semi-annual climate credits that households receive on their bills.

The purpose of this article is to invite comments and ask for help on an even more direct way to do it that might work in about 20 states, some cities, and maybe other countries as well. The bottom line is that many jurisdictions impose taxes on electricity consumption – sales taxes, gross revenue taxes, value added taxes – and that replacing these existing taxes on electricity with a carbon tax on electricity produced from fossil fuels can approach the implementation of a carbon tax. “free”.

Table 1 shows some preliminary figures for 18 states (and two municipalities, New York and Washington, DC) that have significant residential electricity taxes. The table shows that in Alabama (for example), the current state sales tax of 4% on electricity is roughly equivalent to a carbon tax of $ 12 on electricity. By ‘rough equivalent’ I mean that in 2019 these two taxes would have generated roughly the same amount of government revenue and therefore would have had roughly the same impact on consumer prices.

Details and cautions

• The main impact of carbon pricing in the electricity sector is to change the behavior of utilities rather than changing consumer behavior, i.e. making renewables more attractive than fossil fuels. rather than reducing electricity consumption. This situation is undoubtedly specific to the electricity sector, so this idea of ​​tax conversion is probably not applicable in other sectors.
• These carbon prices – generally between $ 10 and $ 20 per tonne of CO₂– are modest but not insignificant. A $ 10 carbon tax is about 1 cent per kWh of coal-fired electricity, half that of natural gas, and nothing for non-fossil sources.
• The above analysis focuses on residential electricity consumption but could be expanded to cover commercial electricity consumption (and in rare cases even industrial consumption) provided that they also pay existing taxes on electricity. electricity that could be traded for a carbon tax. Note that many jurisdictions exempt entities such as industrial consumers, schools, hospitals, and government agencies from existing electricity taxes; these same exemptions could be carried over to the carbon tax.
• In the short term, the carbon tax rate could be set to generate roughly the same amount of revenue as the sales tax or other existing tax it replaces. In the long run, carbon tax revenues would decrease as carbon emissions decrease. It is possible to reduce these losses – for example, by increasing the carbon tax rate over time, or by reinstating the existing sales tax after, say, 20 years – but there is also a strong case for it. in favor of a simple reduction in taxes on electricity. On the one hand, it will be easier to “electrify everything” if electricity is cheaper. Perhaps more importantly, most states exempt grocery store foods from sales tax due to regressive concerns about impacts on low-income households, and residential electricity taxes are even more regressive. The revenue loss resulting from the reduction in residential electricity taxes would account for about a third of the revenue loss resulting from existing tax exemptions for groceries.
• The carbon tax would ideally be based on the carbon content of the electricity consumed by customers of each utility in the state (for example, on data similar to that contained in these ESG reports) rather than the carbon content of electricity produced in the state. As a result, the tax swap works best in states where electric utilities have similar carbon profiles. To the extent that they have different carbon profiles, there would be a net saving for low carbon electricity customers and a net cost for high carbon electricity customers.
• It might be possible to pursue similar ideas at the municipal level – where electricity taxes are often extremely high – but municipalities may be limited by state law as to the types of taxes they can. impose. Municipalities may also be more dependent on these revenues than states.

How you can help: Do you have questions or concerns that are not addressed in detail and warnings? Can you think of a good analogy to help explain this idea? Do you live in any of the states listed above and if so would you like to help push this idea forward with lawmakers or NGOs or maybe even (if applicable) with a voting measure ? (FYI, I have participated in ballot measurement efforts in Washington State and Utah and am exploring “24/7” opportunities for 2024 ballot measurement efforts in at least 7 states.) If you live outside of the US, can you tell if there is VAT or other taxes on your residential electric bill and if so, would you like to help explore this idea? in your country? I will do my best to participate in the Comments section and I am also available by email.