Carbon Tax Fact Sheet

How Does a Carbon Tax Work?

A carbon tax would levy a charge on the CO2 emissions from fossil fuels purchased for combustion in the state, as well as on the carbon content of electricity imported from other states. In Washington, a carbon tax of $30 per ton of CO2 would net an estimated $2.3 billion each year. The proceeds could be used to reduce taxes on families and businesses, or to provide funding for transportation, clean energy technology, or public education.

What Other Jurisdictions Have a Carbon Tax and What Have Been the Results?

Washington’s next door neighbor, British Columbia, is home to the world’s most complete and effective carbon tax. BC’s policy is structured as a “revenue neutral” tax swap that taxes carbon in order to reduce personal and corporate income taxes. Since BC’s carbon tax was introduced in 2008, the province has reduced greenhouse gases, undercutting Canadian emissions in virtually every sector – including natural gas, diesel, motor gasoline, and coal – even while the province is outpacing the rest of Canada in GDP growth.

Starting on January 1, California will also begin applying a price on carbon emissions when it begins its cap-and-trade program. A range of other jurisdictions – from Boulder, Colorado to European countries – have some form of carbon pricing on the books. The most recent entrant to the carbon tax club, Australia, rolled out a nationwide tax on July 1, 2012.

Why Should Washington Move to a Carbon Tax?

It reduces greenhouse gas emissions. A tax rate of $30 per ton is big enough to modestly curtail fossil fuel consumption by state residents. More importantly, it is likely to yield sizeable benefits by affecting large-scale investment decisions. For example, a single utility like Puget Sound Energy that imports coal-fired electricity into Washington could reduce statewide emissions by perhaps as much as 10 percent simply by factoring a carbon tax into its long-term energy supply planning.

It benefits our economy. Why tax good things when you can tax bad things, like emissions? Substituting a carbon tax for some of our current taxes — on property, on businesses, and on workers — should be a no-brainer and, in fact, the idea has support nationally from economists across the political spectrum.

A carbon tax could support economic competitiveness and boost job growth by replacing some elements in Washington’s existing tax regime that penalize business revenue and property ownership.

Alternatively, we could invest carbon tax revenue in state priorities that lack adequate funding, such as transportation or education or clean energy development.

How Would a Carbon Tax Impact State Residents?

A tax of $30 per ton would translate into some price increases: about 30 cents per gallon of gasoline and diesel, about 3 cents per kilowatt-hour of electricity from coal, and about half that for power from natural gas. Energy from hydropower, solar, and wind would pay nothing, and reductions in existing taxes could offset price increases.

A carbon tax works by encouraging residents to switch to cleaner sources of energy. That’s a smart move for the state’s economy given that Washington produces no oil, gas, or coal and typically spends roughly $16 billion annually to import fossil fuels from elsewhere.

A Washington carbon tax could avoid regressive impacts on low-income families by rebating a portion of the revenue directly to state residents, just as BC does. For example, the currently unfunded Working Families Tax Rebate could directly mitigate impacts on low income families, while modest property tax reductions could ease the transition for the middle class.

How do carbon taxes compare to other pricing mechanisms like cap and trade?

Carbon taxes and cap-and-trade programs are fundamentally similar: both put a price on carbon pollution. Either policy can be well designed or poorly designed, but both begin the transition toward a clean energy economy.

Right now, the political climate seems to favor carbon taxes. The Washington legislature considered a cap-and-trade proposal in 2009, but declined to advance the bill out of committee. Congress nearly passed a cap-and-trade measure the same year, but the policy stalled in the Senate. In 2012, however, a surprisingly diverse range of advocates and analysts are making the case for carbon taxes.

More resources

Yoram Bauman and Shi-Ling Hsu, “The Most Sensible Tax of All,” New York Times, July 4, 2012.

Eric de Place and Yoram Bauman, “Washington, Oregon Should Take Cue from B.C.’s Carbon Tax,” Vancouver Sun, July 9, 2012.

Brad Plumer, “How Would a Carbon Tax Work? Let’s Ask British Columbia,” Washington Post Wonkblog, September 19, 2012.

Sustainable Prosperity, “British Columbia’s Carbon Tax Shift: The First Four Years,” University of Ottawa, June 2012.

British Columbia, “Making Progress on B.C.’s Climate Action Plan,” 2012.

Published: October 17, 2012