Tax time is here, and it’s a sure bet that many of you reading this will be writing checks out to Uncle Sam yet again this year. And just as death and taxes are two of life’s certainties, it’s also a pretty good bet that most of us feel we are paying too much to federal and state governments—especially at a time when we are well aware of the beneficial tax breaks available to some of our country’s top earners (both individuals and corporations). I don’t know about you, but as I drop that return in the mailbox next month, I will surely be thinking, “There has got to be a better way.”
In fact, a few years back my colleague John Trotti proposed a different approach to taxation—instead of making our dues based on income, create a system of taxation based on energy use. As John pointed out in a 2007 editorial, “because energy use was a sure measure of industrial activity—and also an area open to abuse—then it, rather than revenue, might be a superior means of assessing taxes.”
In his 2007 editorial, John highlighted the decision by Boulder, CO, voters to institute a tax surcharge “based on a per-kilowatt-hour usage with an maximum annual cap (see Table 1). The tax is collected by the utility as part of the normal billing process.” While the goal of Boulders Climate Action Plan (CAP) tax plan was to “reduce greenhouse gas emissions to seven percent below 1990 levels by 2012,” the plan has also generated significant revenue for the city: Approximately $1.6 million was collected in 2010. Although the plan has met with success, so far the law is still scheduled to cease in March 2013.
A couple of other communities have followed Boulder’s lead. In 2008, the Bay Area Air Quality Management District, which covers nine San Francisco Bay Area counties, passed a carbon tax on businesses of 4.4 cents per ton of carbon dioxide (CO2). And in May 2010, Montgomery County, MD, passed what’s been called, “the nation’s first county-level carbon tax”, which “calls for payments of $5 per ton of CO2 emitted from any stationary source emitting more than a million tons of carbon dioxide during a calendar year.” Unlike Boulder’s plan, Maryland’s tax currently affects only one 850-MW coal-fired power plant owned by Mirant Corporation, which filed a lawsuit in June 2010 challenging the tax.
Although these energy tax proposals have been derided and challenged—primarily by big business interests and their political compatriots—some of the nation’s largest corporations support a tax system based on energy use, including FedEx CEO Fred Smith;James Owens, CEO of Caterpillar; and Paul Anderson, CEO and Chairman of Duke Energy.
It’s important to clarify that in this case we are not specifically talking about increased taxes at the gas pump or as subsidies to encourage one type of energy use over another. Instead, the idea is that taxation on income may not be the most effective way to raise revenue in light of the fact that energy use—and abuse—inevitably impacts all areas of modern life, from industrial processes to national security to individual activities and responsibilities. Additionally, “cap-and-trade” is not the thrust of this argument. With cap-and-trade, the primary goal is to reduce the emission levels of greenhouse gases (GHGs) via caps while permits that allow GHG emissions are allocated (via grandfathering) or auctioned to polluters. While there may be some economic advantages associated with cap-and-trade—and both systems incentivize GHG reductions—an energy tax focuses on energy use as an overall indicator of economic activity, and as well as a reflection of the true cost of that activity.
As Fred Smith, CEO of FedEx, stated in 2009—when commenting on cap-and-trade legislation approved by the House—certain industries free pollution permits that would distort the market. “We very much believe that a straightforward graduated tax on carbon is better than the cap-and-trade.”
So what do you think? Would a tax on energy use increase efficiency and spur demand for distributed generation? Does it matter if energy use is taxed as part of scheme to increase revenue or as a plan to reduce GHGs? Can cap-and-trade and energy taxes coexist? Are we having the right conversation, or are we focused so much on climate change and our dependence on fossil fuels that we are missing the larger issue? And can energy use really be a barometer of economic activity accurate enough to eventually displace a tax system based primarily on income?