Assuming it passes, the success of Initiative 1631, the proposed carbon fee on the ballot in Washington state, will depend on how wisely funds raised by the measure are spent. I-1631 would impose fees on carbon emissions. For example, it would add about 15 cents a gallon to the price of gasoline, increasing to about 45 cents a gallon by 2035. The carbon fee would bring the state about $1 billion a year in additional revenue.
The initiative, if well managed, will set us on the path to a clean energy future without necessarily hurting the economy. Here’s the deal: If the state hits its goal of lowering carbon emissions to 25 percent below 1990 levels by 2035 and is on track to hit 50 percent below 1990 levels by 2050, the fee rate freezes. Fees then start to decline as emissions decline. If targets are not met, however, fee rates continue to climb year by year without a cap.
A new report from the Low Carbon Prosperity Institute (LCPI), launched by the Washington Business Alliance, concludes that it’s only possible to achieve this fee freeze under two strict conditions. First, all available revenue must go into investments that will directly reduce carbon emissions. Second, investments must achieve very high levels of performance, requiring the kind of professional discipline typically seen in commercial investment funds.
I-1631 is a challenge to analyze because of its complexity. As the initiative is written, funds it generates would be spent in a broad range of areas, including improving forest health and clean water resources, while also supporting low-income residents and laid-off fossil-fuel workers. Some funds would be kept by utilities, while others would be spent in a system managed by multiple boards, with stipulations for certain uses.
To make sense of these complexities, we applied our Greenhouse Gas Reduction Explorer, a modeling tool we developed that has been reviewed by the Washington Departments of Commerce and Ecology. Lawmakers have used the Explorer to predict outcomes of possible carbon reduction policies, including Governor Inslee’s carbon fee proposal in the last legislative session.
According to our analysis, the price increases on gasoline and other carbon-emitting products resulting from the carbon fee will only reduce carbon emissions by about 14 percent of the total required to hit the fee freeze. This is because transportation is our biggest source of emissions, and how much we drive is relatively insensitive to the cost of fuel. If those goals are not met, carbon fees would continue to rise, having an increasingly harmful impact on our economy.
However, if the policy’s oversight board makes smart, cost-effective investments, those decisions will contribute significantly toward carbon reductions with less economic impact.
We measure the cost effectiveness of spending on carbon reduction as a return on investment, with the return being how much carbon is reduced over 10 years. Here’s an example of a smart investment: Adding $30 million of new equipment to an aluminum plant can reduce emissions by about eight million metric tons of carbon dioxide or the equivalent for other greenhouse gases over 10 years. This comes to about $3.50 per ton of reductions in carbon dioxide emissions. If the state used some of the revenue from the carbon fees to pay half that cost, the state would be spending just $1.70 to remove each ton of carbon emissions. That’s a great return on investment.
Here’s an example of a low-return investment: the solar system on top of my home. The $42,000 system will reduce about 45 tons of carbon dioxide emissions over 10 years, which comes to about $100 per ton of emissions reduction, even after accounting. The performance of solar systems is worse here than other places in the country because those systems displace relatively clean hydroelectricity, and are relatively inefficient in our cloudy climate. Even after accounting for the generous tax credit, the investment in a home solar system is 30 times more expensive per ton of emissions removed than aluminum plant investment.
Our analysis shows that I-1631 investments would need to average in the range of $15 to $45 per ton of emissions reduced to hit the fee-freeze goal. The high-end estimate assumes that nearly all funds raised would be applied toward goal attainment, while the low-end estimate assumes a greater share of money is diverted to programs with reduced or minimal carbon-reduction capacity, such as support for low-income communities.
Today, California is the only state in the country with experience in creating and managing a near economy-wide carbon reduction program. The California Climate Investments program, a statewide initiative launched in 2014, is a useful comparison to I-1631 because it also prescribes a significant share of revenue for social causes not directly related to reducing carbon emissions. Based on results to date, the state has spent, on average, a costly $67 per ton of emissions reduction.
Beating California’s investment performance will be a challenge, but it can be achieved by focusing on budget-friendly projects in our state such as capturing methane from waste, smart meters, electrification or biomass fuel switch, organics and recycling programs, cellulosic ethanol, bus fuel efficiency, increasing forest lands, and heating/cooling upgrades.
Conversely, I-1631 would not achieve the fee freeze if it invests too heavily in projects with costs above the $15 to $45 per ton of emissions reduction range that it must achieve. Budget-buster examples include certain types of low carbon biofuels, wind turbines, home solar panels, urban forestry and transit and intercity rail.
In our view, the success of I-1631 would require investments that hit on all cylinders — investing all apportionable funds into high-performing and cost-effective projects, harnessing emerging and rapidly cost-declining technologies, engaging businesses and governments, resisting pressure to spend on low-performing projects, and building public enthusiasm through transparent reporting and early success.
A well-managed I-1631 can pave the way for significant reductions in carbon emissions as other states, and perhaps even other countries, follow our lead. If it is poorly managed, critics of the carbon fee will say, “We told you so,” and there will be a clamor to overturn it. That would be an important lost opportunity at a time when reducing carbon emissions are critical to our planet.
David Giuliani is cofounder and director of the Low Carbon Prosperity Institute and the Washington Business Alliance. An engineer and entrepreneur, Giuliani revolutionized oral health by inventing the Sonicare toothbrush.