The idea behind the ballot initiative is that the city would build in a carbon tax for companies as an alternative to payroll tax (remember San Francisco has an additional city payroll tax.)
The big question is Will it Work? and what are the challenges to such a tax. Is this type of tax fair to all types of business? Who does it penalize unfairly and what are the real chances of this tax initiative being passed?
In this post, I take a deep dive into letting you know what a Carbon Tax is, how it operates, how it is different than a Cap and Trade system and how San Francisco's initiative is unique among all carbon tax proposals.
What is a Carbon Tax
This idea of a carbon tax is not an entirely new idea. In fact there is a non-profit, called the Carbon Tax Center, dedicated to helping to get a national carbon tax approved in congress. So what is a Carbon Tax? (descriptions are courtesy of the Carbon Tax Center)
A carbon tax is a tax on the carbon content of fuels — effectively a tax on the carbon dioxide emissions from burning fossil fuels. Thus, carbon tax is shorthand for carbon dioxide tax or CO2 tax.
To the extent carbon is included in a product such as plastic, but is not burned, that carbon will not be taxed. Similarly, to the extent the carbon used to produce energy is permanently sequestered rather than released into the atmosphere, that carbon will not be taxed or a tax credit will be provided.
Very little taxation of carbon is presently in place in the world (see this page). Nevertheless, a large and growing number of economists, policy-makers and concerned citizens regard stiff carbon taxes as essential for combating the climate crisis that gravely threatens humankind and other living things.
What is the Rational for a Carbon Tax?
The rationale for a carbon tax is simple: the levels of CO2 already in the Earth’s atmosphere and being added daily are destabilizing established climate patterns and threatening the ecosystems on which we and other living beings depend. Very large and rapid reductions in the United States’ and other nations’ carbon emissions are essential to reverse runaway climate change and avert resulting severe weather events, inundation of coastal areas, spread of diseases, failure of agriculture and water supply, infrastructure destruction, forced migrations, political upheavals and international conflict.
A carbon tax must be the central mechanism for reducing carbon emissions. Currently, the prices of gasoline, electricity and fuels in general include none of the costs associated with devastating climate change. This omission suppresses incentives to develop and deploy carbon-reducing measures such as energy efficiency (e.g., high-mileage cars and high-efficiency heaters and air conditioners), renewable energy (e.g., wind turbines, solar panels), low-carbon fuels (e.g., biofuels from high-cellulose plants), and conservation-based behavior such as bicycling, recycling and overall mindfulness toward energy consumption. Conversely, taxing fuels according to their carbon content will infuse these incentives at every chain of decision and action — from individuals’ choices and uses of vehicles, appliances, and housing, to businesses’ choices of new product design, capital investment and facilities location, and governments’ choices in regulatory policy, land use and taxation.
A carbon tax won’t stop global climate change by itself — other, synergistic actions are required as well. But without a carbon tax, even the most aggressive regulatory regime (e.g., high-mileage cars) and “enlightened” subsidies (e.g., tax credits for efficiency and renewables) will fall woefully short of the necessary reductions in carbon burning and emissions.
Is Anyone Using a Carbon Tax Today?
A research fellow for the Kansas Energy Council, Trisha Shrum, has produced an excellent report on climate policy issues that includes a survey of carbon taxes in place around the world. We recommend Trisha's report highly. Click here. Below, we have vetted and digested Trisha's material for Finland, Sweden, Great Britain and New Zealand.
How is a Carbon Tax Different from a Carbon Trading System?
A tax on carbon emissions isn’t the only way to “put a price on carbon” and thereby provide incentives to reduce use of high-carbon fuels. A carbon cap-and-trade system is an alternative approach supported by some prominent politicians, corporations and mainstream environmental groups.
CTC has no ideological animus against cap-and-trade systems. In fact, the U.S. sulfur dioxide
cap-and-trade system instituted in the early 1990s deserves some of the credit for efficiently reducing acid rain emissions from power plants. However, the scale of a carbon trading system — it would be up to 100 times larger than that for sulfur — combined with the lack of readily available “technical fixes” for filtering or capturing CO2, appear to rule out the sulfur cap-and-trade system as a model for carbon.
We regard a carbon tax as superior to a carbon cap-and-trade system, for five fundamental reasons:
- Carbon taxes will lend predictability to energy prices, whereas cap-and-trade systems will do little to mitigate the price volatility that historically has discouraged investments in less carbon-intensive electricity generation, carbon-reducing energy efficiency and carbon-replacing renewable energy.
- Carbon taxes can be implemented much sooner than complex cap-and-trade systems. Because of the urgency of the climate crisis, we do not have the luxury of waiting while the myriad details of a cap-and-trade system are resolved through lengthy negotiations.
- Carbon taxes are transparent and easily understandable, making them more likely to elicit the necessary public support than an opaque and difficult to understand cap-and-trade system.
- Carbon taxes can be implemented with far less opportunity for manipulation by special interests, while a cap-and-trade system’s complexity opens it to exploitation by special interests and perverse incentives that can undermine public confidence and undercut its effectiveness.
- Carbon tax revenues can be rebated to the public through dividends or tax-shifting, while the costs of cap-and-trade systems are likely to become a hidden tax as dollars flow to market participants, lawyers and consultants.
What is Unique about San Francisco's Carbon Tax Initiative?
Well the biggest thing that makes San Francisco's Carbon Tax Initiative unique is that is also a proposal to begin eliminating, or at least reducing, the payroll tax in San Francisco.
While a Carbon Tax sounds interesting, I personally think that there are some inherent problems with a Carbon tax in the first place (like that it only contemplate carbon emissions and is not a comprehensive sustainability tax) but the San Francisco Carbon Tax has some problems that may make it difficult to get passed.
- Companies with lots of LOCAL employees and naturally low LOCAL carbon footprints (like large .com companies) get enormous benefits because most of their carbon emissions are due to their data centers (which are not local) yet they have huge payroll taxes available for them to offset;
- Companies with lots of LOCAL physical assets, but yet have relatively few LOCAL employees will not get a fare deal in this type of a carbon tax.