Can a state fill a budget gap with a price on carbon? Wash. may soon know 

Source: Scott Detrow, E&E reporter • Posted: Sunday, December 14, 2014

On Wednesday, Washington Gov. Jay Inslee will unveil a new plan to lower his state’s greenhouse gas emissions. And while the Democrat hasn’t tipped his hand on whether he’ll push for a cap-and-trade system or a carbon tax, Inslee and his administration have dropped several hints about how they’ll likely frame the carbon pricing plan as a way to help solve the state’s budget deficit.

Inslee’s budget director recently told reporters that Washington will face a $2.35 billion shortfall over the next two years. Nearly half of it stems from a court order to increase education funding by more than $1 billion. And pitching cap and trade or a carbon tax as a budget fix may help sell the proposal to a skeptical Legislature, where the Republicans who control the Senate have raised serious concerns about how either plan would affect energy costs.

In an era where states have legalized everything from gambling to recreational marijuana as a way to raise budget revenue, Washington’s upcoming carbon fight may provide a road map for how state legislatures choose to comply with U.S. EPA’s Clean Power Plan. Specifically, whether lawmakers otherwise hostile to the idea of lowering greenhouse gas emissions and increasing energy costs may embrace cap-and-trade systems or carbon taxes as a way to fix budget holes or restructure their tax codes.

Carbon plan will be ‘a pretty hard sell’

Inslee has spent most of 2014 paving the way for the new proposal. “This is the right time to act, the right place to act, and we are the right people to act,” he said in April, when Inslee formed an executive commission to study how Washington should approach a carbon pricing proposal.

But even in a green, liberal state like Washington, the proposal will likely have a hard time clearing the Legislature. “I wouldn’t hold my breath,” said Todd Donovan, a political scientist at Western Washington University. Donovan pointed out that despite major spending from environmental groups during this year’s election, Republicans control the state’s Senate. “I think in any situation, that would have been more likely with solid Democratic control in both chambers.”

“Any type of cap-and-trade or carbon tax offering from the governor will be a pretty hard sell,” said Republican state Sen. Doug Ericksen, who chairs the Energy, Environment and Telecommunications Committee. Ericksen said he’s keeping an open mind about Inslee’s specific proposal until it’s announced next week, but has previously warned the governor that “Washington’s taxpayers cannot afford your proposal.”

That may be why, according to the Associated Press, Inslee “has suggested using that [revenue] to help pay for court-ordered education mandates or fix transportation problems.”

“We’ve got to raise $5 billion for [education] funding” because of a court order and a separate ballot measure, said Democratic state Rep. Jeff Morris after appearing on a National Conference of State Legislatures panel in Washington, D.C., this week. “So there’s a lot of talk that whatever comes from cap and trade or a carbon tax can be used to fill that need.”

The money can materialize

There’s no question that cap-and-trade systems can raise a lot of revenue. California allocated more than $830 million from cap-and-trade proceeds in this year’s budget, and the state’s Legislative Analyst’s Office predicts that “total cap-and-trade revenues from all auctions through 2020 could range from $12 billion to $45 billion.” In the Northeast, the Regional Greenhouse Gas Initiative, or RGGI, has already generated nearly $1 billion for its nine member states.

These existing cap-and-trade programs have mostly driven that money back into environmental and energy programs. About 65 percent of RGGI revenue has gone to energy efficiency efforts, with smaller portions funding clean energy research, greenhouse gas abatement efforts and utility rebates. Several California laws, including a measure passed earlier this year, dictate where the Golden State’s revenue should go: to projects directly linked to lowering greenhouse gasses, particularly in heavily polluted and economically disadvantaged communities. A large portion of that money will be used for transportation projects.

Former California Senate President Pro Tem Darrell Steinberg understands the appeal of fixing budget gaps with carbon revenue. After all, the Democrat helped patch unfathomable $30 billion and $40 billion deficits during his leadership tenure. But Steinberg, who left office earlier this month, urged Washington and other states to steer potential revenue toward lowering greenhouse gases.

“I think people would lose a lot of faith in the climate imperative if the money was used on things unrelated to improving the climate,” he said. That’s the approach Inslee’s commission recommended, too — using money to advance green projects, as well as help lower-income Washington residents pay their electric bills and transition to the new energy economy.

Still, politics and budget holes have occasionally intruded on California’s and RGGI’s revenue. New York borrowed $90 million from its RGGI fund in 2009 to help fund education. “While the funds were officially a loan, there was not an expectation that they would be repaid from the state,” said Peter Iwanowicz with Environmental Advocates of New York. (Indeed, Iwanowicz said the loan is still outstanding.)

California Gov. Jerry Brown angered environmentalists last year by borrowing a far greater total — $500 million — to pay for general government expenses. And this year, the Democrat successfully pushed for a quarter of future cap-and-trade revenue — an amount likely to total hundreds of millions of dollars a year — to go toward his increasingly unpopular plan to build a high-speed rail line from San Francisco to Los Angeles.

But the politics may require innovation

The idea of approving a cap-and-trade system or carbon tax is still daunting for legislators in liberal states like Washington and Vermont, let alone more conservative environments (ClimateWire, Dec. 3). But that dynamic may change in future years, if EPA’s Clean Power Plan forces states to drastically lower their greenhouse gas footprints. That’s why one conservative think tank is encouraging lawmakers to use a carbon tax as an opportunity to overhaul states’ tax codes by using the revenue to lower other levies.

“As much as I wish the EPA rule would be done away with … this is really the best way for states to deal with it,” said Lori Sanders, a senior fellow at the R Street Institute. “Whether it’s cutting corporate income taxes or personal income taxes, they can get rid of those and be pricing their carbon externality.” Sanders made it clear, however, that R Street is not in favor of using a carbon tax to plug budget holes, as Washington’s Inslee may recommend next week. “That’s not really our jam,” she said.

And she conceded that Republican-dominated states likely wouldn’t be interested in creating a new tax, no matter what the circumstances are. “I think the states where [a revenue-neutral carbon tax] works are the states that are the right mix of being Republican enough to look for market-oriented solutions, but maybe Democratic enough that the idea of a carbon price doesn’t scare them away.”

Virginia, with a generally liberal governor and generally conservative Legislature, is one example of a state with that particular political mix. Sanders viewed the request for additional flexibility in the commonwealth’s Clean Power Plan comments as an indication Gov. Terry McAuliffe may be at least considering proposing a carbon tax.

But other conservative policy groups are quick to throw water on the proposal. “Elected Republicans almost universally oppose a carbon tax,” said Chris Prandoni, the director of energy and environmental policy at Americans for Tax Reform. “Embracing unpopular EPA mandates will not change this dynamic and would never give Republicans cover to enact a carbon tax.”

If EPA’s rule goes into effect, the number of states with some sort of carbon pricing system will most likely increase. Whether states use that money for environmental programs, general budgets or tax cuts, California’s Steinberg has one suggestion for lawmakers: Make sure there’s a detailed spending plan on the state’s books. “If you allocate hundreds of millions or billions of dollars annually without a plan, you are going to have a free-for-all,” he said.

“The next great technology, or entity that has close ties to the administration — or you can guess at a number of different scenarios where everyone is at the trough every single year. And there won’t necessarily be a coherent [strategy] over time in the way the money is actually spent.”

It was a history lesson Washington’s governor might be able to reapply later this year.