Tax reform would strengthen economy, UVM economist says

As Vermont legislators consider introducing the first U.S. state carbon tax, University of Vermont economist Jon Erickson says taxing carbon pollution can help the economy and the environment.

UVM asked Erickson, an expert on climate and energy policy, about the proposed tax in advance of a Dec. 3 carbon tax debate in Montpelier at 7 p.m.

How would the carbon pollution tax work?

The proposed tax reform would reduce income and state sales taxes and increase taxes on fossil fuels. This is called a “tax shift.” You tax specific "bads" like pollution, and cut taxes broadly on "goods" elsewhere to promote in-state jobs and economic development.

One proposal would put 90 percent of the tax back to Vermonters through rebates and reductions by law. Ten percent would support investments in energy efficiency, such as weatherizing people’s homes; sustainable transportation infrastructure; and the ongoing transition to renewable energy.

What would it cost Vermonters?

The state would tax fossil fuel distributors on carbon pollution, which results from the fuels they sell. For example, $10 per ton of CO2 emissions could be taxed initially, increasing annually by $10 per ton over a 10-year implementation period.

Studies of recent state gas tax changes suggest that fuel distributors pass between one-half to one-third of taxes to their consumers. So if we start at $10/ton of CO2, consumer prices at the gas pump would go up four or five cents per gallon in year one, ramping up to 50 to 60 cents after ten years.

But remember, there are equivalent tax reductions and investments elsewhere. Higher fuel prices would be offset by tax rebates and reductions, and all proposals include rebates for low-income Vermonters. So, it may cost people more to fill up their tank, but they’ll have more spending power. The tax creates an important financial incentive to reduce fossil fuel dependence, and re-invest energy savings and tax cuts into the economy.

What stops people from filling up across the border?

Even with a carbon tax, Vermont gas is expected to be cheaper than New York, Massachusetts and Quebec for several years. New Hampshire would likely remain cheaper in the near-term, but most Vermonters live an hour or more away. A two-hour round trip for gas simply isn’t worth it. And even New Hampshire is considering raising state gas taxes to pay for underfunded education, pensions and transportation infrastructure.

Also remember that fossil fuel prices are lower than they've been in a decade. And gas prices vary considerably. Even within Vermont, retail prices vary by more than 45 cents per gallon on any given day. That’s well within the high end of price changes from a proposed carbon pollution tax. People do comparison shop, but it stops being worthwhile the longer you drive.

How do we know the tax would even work?

Clear evidence exists that carbon tax reform reduces pollution and strengthens economies. For example, in 2008 the Canadian province of British Columbia phased in a carbon pollution tax over four years and reduced fuel consumption by 16 percent, while the rest of Canada increased by 3 percent. They also used carbon tax revenue to cut personal income tax rates to the lowest in Canada, and outperformed the rest of the Canadian economy.

There is good research on Vermont’s carbon tax proposal, as well. A 2014 study conducted by leading non-partisan researchers REMI concluded that a carbon pollution tax, paired with a “tax shift” and renewable energy investments, would result in a positive net impact on Vermont’s economy.

Who will the tax help, and who will it hurt most?

A carbon tax would cut into the profits of out-of-state fossil fuel producers, and in-state dealers, which are a small part of our retail sector. You can expect them to be vocal opponents.

Distributors won’t pass the whole tax onto consumers, because they would have to compete with clean energy alternatives. Some fuel oil dealers are already diversifying into electric heat pump installation. The portion of pollution taxes that are passed on to the average consumer will be offset by tax cuts that benefit Vermonters directly.

As far as winners, I would say most Vermonters. By fixing our tax system in favor of Vermont workers and Vermont businesses, our state has an opportunity to reach our carbon pollution reduction goals, invest in our own energy independence and make our economy more competitive by reducing the tax burden elsewhere. 

Why do it when our neighbors aren't? 

History suggests that the first states with carbon taxes will reap several benefits, including a head start on attracting investment, leading innovation and creating expertise for the new climate economy. Over a dozen states have raised gas taxes recently and carbon tax proposals are being actively considered in Washington, California and Massachusetts.

More generally, reducing other taxes on our workforce and businesses, as the proposed carbon tax shifts do, would absolutely make Vermont a more competitive economy, as the REMI study shows. Such policies have been shown to attract new businesses and talent into future-looking business opportunities instead of an outdated status quo, while enhancing citizens’ spending power and choice.

A carbon tax would also increase our energy independence by reducing our reliance on expensive, unpredictable, foreign-controlled fuel sources.

How can a small state like VT affect global climate?

Vermont has comparatively low, economy-wide C02 emissions per capita, but we have relatively high oil dependence in our transportation and home heating sectors. Climate economists estimate the global impact of our greenhouse gas emissions at over $100 per ton of CO2, an annual impact that totals nearly a billion dollars of damage.

By meeting our state's greenhouse gas reduction goals (50 percent and 75 percent below our 1990 baseline by 2025 and 2050), we would be reducing hundreds of millions of dollars of global economic damages for which we are directly responsible; a portion of which our own state has experienced in the form of greater storm intensity and variability between droughts and floods.

Vermont’s rural economy is largely dependent on sustainable natural environment, from Lake Champlain to the Green Mountains, so many people would argue that Vermonters have both moral and economic reasons to take action on climate change.

Jon Erickson is a professor in UVM’s Rubenstein School and a fellow of the Gund Institute for Ecological Economics.

Erickson will participate in a carbon tax debate on Dec. 3 in Montpelier, Vermont, at 7 p.m.