‘Carbon Cashback’ Bill, Or Just Another Tax? - A Rebuttal
A recent Civil Beat commentary by Brian Barbata expressed his opposition to H.B. 2278, a carbon fee and dividend bill. It was, unfortunately, replete with inaccuracies. To ensure Mr. Barbata and, importantly, readers have a complete understanding of the bill, I’m offering the following rebuttal of the misconceptions raised and inaccuracies in the commentary.
The Purpose of a Carbon Tax
At the beginning of his commentary, Mr. Barbata misstates the economic reasons for a carbon tax and suggests that it is to punish people for their “destructive ways.”
The purpose of a carbon tax is to correct an existing market failure; it is not meant to punish people. In fact, because carbon emissions have no price, energy sources that have no carbon emissions are unfairly penalized because the cost of fossil fuels does not include the cost of the damages that they impart. A carbon tax addresses an externality, or consequence, in the current market, namely carbon emissions. Carbon emissions are a negative externality because they cause environmental damage, and no one pays for these damages. In summary, a carbon tax corrects an existing market failure and causes goods and services to be priced correctly.
How a Carbon Tax Rate is Determined
The carbon tax rate specified in HB2278 is based on the latest publicly available data. It is based on the Federal government’s estimate of the social cost of carbon (SCC). HB2278 is well-grounded in science and economics, and its rate is carefully defined. Recently, an appeals court reinstated Biden’s $51 per ton social cost of carbon. The ruling allows the EPA, Department of Interior, Energy, and Transportation and other federal agencies to resume using the SCC in decision making.
The Impact of a Carbon Tax on Market Behavior
As for consumer and producer responses to a change in energy prices, it matters how this change in price arises. There is well-documented evidence that the response to known future price increases differs from the response to price fluctuations due to unforeseeable market forces (see Murray, Brian C., and Nicholas Rivers “British Columbia Revenue Neutral Carbon Tax: A Review of the Latest “Grand Experiment in Environmental Policy”, Duke University, Nicholas Institute, Working Paper NI WP 15-04, May 2015). That is, a rising carbon tax is different from fluctuating market prices.
A long-term rising carbon tax over a decade or more will impact consumer perceptions and behavior differently from historical market price swings. Early research shows consumers will react differently to a long-term predictable carbon tax (known as “tax salience”) than unpredictable periodic market price shocks. (“Salience of Carbon Taxes in the Gasoline Market”, Nicholas Rivers, Brandon Schaufele, June 10, 2013). This study found that “[A]t $25/tCO2 e, the carbon tax is 7.1 times more salient than the market price of gasoline.” That is, consumer response to a carbon tax was 7.1 times greater than the response to a rising price caused by unforeseeable market forces.
If a person knows that the price of driving a gasoline powered car will continue to increase relative to other modes of transportation – bus, biking, or electric vehicle. Then the person is more likely to switch to these other modes because they will become more and more cost-effective in the future. Whereas when oil prices move up and down because of international shocks, people are less likely to change their behavior because they expect prices to return to normal levels.
Fossil Fuel Consumption in Hawaii
Mr. Barbata stated, “Today, the average price of regular [gasoline] in Hawaii is about $5 (Source: AAA), and consumption is fairly close to the average for the last 15 years.”
During this 15 year period, Hawaii’s population has increased by 11%, its gross State product has increased by 25%, and its total vehicle miles traveled has increased by 18%. In other words, as a state, we are receiving far more for each gallon of gasoline today than we were 15 years ago. Our vehicles are more efficient.
The Carbon Price on a Fossil Fuel Depends on its Carbon Content
Barbata states, “So, a $4.68 tax on jet fuel will make you want to fly less, but it will take $5.27 to make you drive less or buy an electric car.”
HB2278 places a price on carbon. How this translates to tax on each barrel of refined petroleum product (RPP) depends on the product’s carbon content. The carbon tax for a specific product is the price of carbon multiplied by its carbon per barrel. Jet fuel has less carbon per barrel than gasoline, so it has a lower per barrel tax rate.
A Carbon Tax Creates the Incentive to Reduce Fossil Fuel Consumption
The piece states: “Of course, the expectation that a carbon tax passed through to Hawaii consumers will drive us all to adopt electric vehicles is not based on any real data or science.”
A carbon tax creates the incentive to reduce fossil fuel consumption and leaves it up to the consumer what choice to make. It does not mandate a specific intervention. For instance, a resident might choose from many transportation solutions, e.g., driving a more fuel-efficient gas car or an electric vehicle, taking public transit, and/or riding a bike. Others may choose a job with no or a short commute. Some may carpool.
Basic economics tells us that raising the price of something will cause us to demand less of it. So yes, placing a price on carbon will, on average, move people away from gasoline-powered vehicles.
HB2278 will Rebate Carbon Tax Revenue to Residents in Equal Shares
The piece states: “But wait! The bill eases the pain. You’re going to get some of that money back as a Hawaii resident!”
This misrepresents the refund provision in HB2278. The policy is based on the UHERO studies, which found that the average household would receive more back than they’d have to pay because of increased energy prices. The policy works because it changes relative prices, making the price of fossil fuels higher relative to non-fossil fuels, thus incentivizing consumers and producers to move away from fossil fuels.
The piece implies that different individuals receive different amounts. (“The state is going to tax your gasoline, and then give the money back?”) On the contrary, everyone gets the same rebate amount, regardless of the amount of fossil fuel consumed. The bill treats every adult the same and gives each adult the same share. The UHERO studies show that this policy would benefit the average household in every quintile.
HB2278 is NOT a State Revenue Generator
Mr. Barbata states, “It’s a multi-billion dollar annual revenue windfall for the state.”
The math is incorrect. The estimated amount of CO2 emissions for the state of Hawaii in 2025 is about 13 million tons of CO2, and the carbon price would be about $60/ton of CO2 so the total revenue would be about $780 million (13 million tons of CO2 multiplied by $60/ton of CO2).
Second, most of the tax revenue is returned to people rather than the government. There is some money set aside for administrative costs, and over time, these costs should decline so a greater share of the revenue could go to people.
Electric Vehicle Adoption is Starting to Ramp Up
“The state has over a million cars on the road. Currently, only 17,000 of them are electric, after over 20 years of their availability.” - Barbata
There are around 17,000 electric vehicles in the state, less than 2% of the passenger cars on our roads. Affordable, long-range electric cars have been available only in the past few years (not over 20 years that the author stated). The rate of adoption is increasing now that manufacturers are stepping up and offering models and price points that make them price competitive to gas cars. They are also much cheaper to operate than gas cars.
Without a doubt, the state (and the federal government) incentivizes electric vehicles' adoption. There are rebates for commercial charging stations and policies to expand public charging. In this session, there are also purchase rebates proposed to incentivize the adoption of electric vehicles.
However, the intent of HB2278 is much broader than encouraging the purchase of electric cars. As noted above, consumers can do many other things to reduce energy and gas consumption and shift to less fossil fuel-dependent activities. Many have nothing to do with driving an electric car.
Conclusion - HB2278 is good for Hawaii
HB2278 creates a powerful incentive to reduce and eventually eliminate our dependence on fossil fuels and shift to cleaner alternatives. It is good for the pocketbook, the economy, and energy security. It’s also good for the planet.
