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Tilting at Windmills

My own state representative, Aaron Regunberg, is among a group of legislators who have been pushing to make Rhode Island the first state in the country to pass a carbon tax. Rhode Island would join the province of British Columbia in Canada, which passed a carbon tax-and-rebate in 2008.

It's exciting to see this discussed, and yet nothing has been passed yet. I have tremendous respect for Aaron, and for the other legislators who are supporting this measure, but I have a tweak to suggest to their proposal: rebate all of the money to taxpayers, instead of just 70% of it, as currently proposed. I think this would help us become the first state to pass a carbon tax.

A carbon tax works by putting a price on carbon pollution. The point of doing this is to “internalize” the cost of that pollution. In other words, it makes the person causing pollution pay for it, instead of spreading, or “externalizing” that cost across the entire community. A parallel would be a requirement to make dog owners pick up their pets’ poop (or else face a fine). If dog owners don’t clean up after their pets, it’s not as if the poop disappears. It merely becomes the problem of the entire community. So it goes with carbon dioxide: the problems caused by carbon pollution are disconnected from the motives to use more energy.

According to a report on the bill at RINPR, 70% of the money would be put into rebates to Rhode Island families. Families that wished to use that rebate to pay higher energy costs could, but smart recipients of the rebate would of course do well to spend their rebate on something else.

The RIPNR report states that:

The rest of the money raised by the carbon tax would go into the state’s newly established Green Infrastructure Bank to invest in energy efficiency, conservation, and renewable energy. Supporters say that would add jobs to those sectors. And they’ve marshaled support from more than 100 small businesses in Rhode Island.

It makes more sense to drop this part of the bill, and refund all of the money. It’s not to say that investment in clean energy or energy efficiency are not good goals, but the mechanism of the carbon tax should give people enough incentive to do this on their own. As carbon pricing gradually increases, there would be more and more reason to insulate one’s home with the rebates from the carbon tax, or to put the rebates into renewables. Allowing consumers to do so on their own rather than directly investing in particular companies would mean that there’d be competition to fill these needs in an efficient way.

Imagine a wind energy company that receives money from the carbon tax. Does that company’s executive get paid too much? Is that company investing in the right kinds of wind investments to make sure it stays ahead of the marketplace in renewables? Are its choices about where to put windmills the smartest they could be? They may be, but maybe not. If a company is padding its bottom line, there’s not necessarily any check or balance to fix that. And when a company gets special assistance, even if it has the best and most upright of intentions, there is a natural human tendency to slack off, and relax, due to the incentives created by free money. No regulator can truly keep track of all the details.

On the other hand, if consumers pay a higher cost for energy, but receive all of that money back, then the highest energy users will pay more, while those who economize will benefit. That means that those consumers can choose a variety of ways to make changes. Some might find that their electricity bill is the best way to approach the problem, while others might drive less. Some may choose to insulate their house or apartment, or to rent out a room so that the energy cost is shared across more people. That decentralized approach is what makes the carbon tax such a good tool, and is why 100% of funds, not 70%, should go back to consumers.

There’s a segment of the Republican Party that does not accept the existence of climate change, and perhaps among this segment there isn’t much that can be done to build support for any type of climate action. But there’s also a smarter group of people who may accept the need to take climate action, but resent the handout of government money to people perceived as insiders. Amending the carbon tax bill to be a true rebate will address this concern, and broaden the coalition for climate action. George H. W. Bush worked to solve acid rain through a similar measure, so there's truly an argument that this is the conservative way to resolve climate change.


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