Governor Tom Wolf wants to cut carbon emissions from the electricity sector by joining the Regional Greenhouse Gas Initiative (RGGI), a cap-and-trade system across eleven Northeastern states that puts a price on carbon emitted by their electric power plants (Members of the business community are skeptical because pricing carbon will raise electricity prices for households and businesses. (The state estimates that auctions of RGGI emissions rights will raise some $300 million a year in revenue.) Republicans in the state legislature are skeptical, too. If they win the governorship in 2022 then they could withdraw from RGGI meaning that the next few years will be filled with exactly the kind of uncertainty that paralyzes business investment and economic growth.”
There might be a way to avoid all this drama, a way to make progress on climate change that respects the budget constraints facing Pennsylvania households and businesses. It’s faster and stronger than RGGI, and in the long run it will reduce regressive taxes on electricity. Accomplishing all that may sound impossible, but it might be done with a simple tax reform two-step.
The first step is to cut taxes: eliminate the state’s 5.9% Gross Receipts Tax on electric utilities. Although this tax is formally levied on the utilities, they pass the tax along to consumers. (If you need convincing, just look at your bill.) Eliminating this tax will save taxpayers some $900 million a year, according to the state Tax Compendium.
The second step—and this is where the carbon reduction happens—is to impose a carbon tax on electric utilities in Pennsylvania based on the carbon content of the power they deliver to customers. A carbon tax of $20 per metric ton of CO2, for example, amounts to about 2 cents per kilowatt-hour of coal-fired power, half that for natural gas, and nothing for wind, solar, hydro, or nuclear power. That’s more than double the carbon price that’s likely to come from RGGI, where prices are stuck in the single digits. (At least one RGGI state, New York, is considering layering an additional carbon price on top of RGGI.)
Putting a strong price on carbon will give utilities a financial incentive to speed up the shift to renewables. Until that shift is complete, though, utilities would have to pay the carbon tax, a burden that would likely get passed along to customers. As it turns out, a $20 carbon tax on electricity in Pennsylvania would generate about $900 million a year. In the short run, then, you’d move one step forward and one step back: $900 million in carbon taxes instead of $900 million in Gross Receipts Taxes.
As time passes, though, the carbon tax will push utilities to shift away from fossil fuels. If and when they do so entirely, there will be no more electric-sector carbon emissions, and consequently no more $900 million in tax revenue. That’s a long-term victory for taxpayers, especially low-income households. It’s doubly good for emissions reductions: carbon-free electricity is a huge win, and electrifying other sectors like transportation will be easier if electricity is cheaper. It’s also a manageable budget problem for state legislators. Pennsylvania’s General Fund takes in over $30 billion in taxes every year, so they’ll have to adjust to a long-run revenue loss of about 3 percent. (That’s roughly equal to the value of the state’s sales tax exemption for groceries. While taxes on groceries disproportionately burden the poor, taxes on residential electricity are even more regressive.)
Republican legislators could pass this tax swap as part of a package deal that also blocks RGGI, for example by requiring legislative approval to join. Democrats, including Governor Wolf, could support it as a way to supercharge climate action while also cutting regressive taxes. The business community would get a policy environment with less uncertainty and more efficiency. It’s not a free lunch, but it’s pretty close.
Yoram Bauman is an environmental economist who focuses on state-level climate policy. Will Delavan is an Associate Professor of Economics at Lebanon Valley College.