Opinion: Greening the Garden State Gas Tax

Andrew Sidamon-Eristoff | July 13, 2017 | Opinion
A revenue-neutral way for New Jersey to lead the way on carbon pricing

Andrew Sidamon-Eristoff
Trigger alert: Please don’t read this column if, despite the overwhelming weight of scientific opinion, you don’t believe in climate change, the risks it poses to human beings and the environment, or that it is necessary or even worthwhile to reduce greenhouse-gas emissions. Let’s save that argument for another time. However, if you agree that managing known risks is both rational and prudent, read on …

The race is on. Sometime in the next couple of years, a U.S. state will defy the national leadership vacuum on climate change and adopt some form of carbon tax. By embracing a market-driven approach to managing climate risks that avoids imposing unnecessary and inefficient regulatory burdens on economic growth, that state will set a groundbreaking example for the federal government, other states, and local governments in the United States and beyond.

Why not New Jersey?

Here’s a simple idea for a small step forward: New Jersey should reconfigure the calculation of its gas tax (which actually consists of two separate taxes — the motor fuels tax and the petroleum-products gross receipts tax) from a tax based on volume to one based on the fuel’s carbon content. This switch could be effected without any immediate change in prices at the pump, and would not disrupt existing constitutional dedications of New Jersey’s gas tax revenue to the Transportation Trust Fund.

Would basing the gas tax on carbon content provide an effective incentive to reduce carbon dioxide (CO2) emissions? Yes, but it would be modest. Academics have suggested that to be effective in driving the desired behavior — lower emissions — a tax on carbon should at least equal the externalities or cost that CO2 emissions impose on society (the “social cost of carbon” or SCC).

Social cost of carbon

According to a 2016 Brookings Institution report, global SCC estimates for 2015 ranged from $11 to $105 (in 2007 dollars) per metric ton of CO2, reflecting a range as to the impact of temperature change. The same report suggested that a carbon tax of $25 per ton of CO2 would translate into about 24 cents per gallon. Using that conversion rate, a carbon-content tax of about $39 per ton of CO2 could replace New Jersey’s current 37.5-cents-per-gallon gas tax. True, $39 per ton may not move the needle, especially since motor fuels wouldn’t actually cost more at the pump, but at the very least we will have established a new and important precedent that links taxes to environmental risk. And that’s the point. As President Ronald Reagan once noted, “If you want more of something, subsidize it; if you want less of something, tax it.”

For both economic and political reasons, I believe it’s critically important that the conversion of the gas tax to a carbon-content tax base be revenue-neutral. In addition to being highly regressive, a sharp additional spike in fuel taxes could distort investment decisions and disrupt New Jersey’s fragile economy. Politically, any projected increase in net revenue would simply confirm opponents’ suspicions that any carbon-based tax is a stalking horse for more Jersey-style taxing and spending. That means that my friends in the environmental community should resist the temptation to push for more revenue to support clean energy and environmental programs. As Lincoln said upon backing away from a serious diplomatic crisis during the Civil War, “One war at a time.”

Economic distortion

OK, but if a carbon content base is at all effective in reducing fuel use, wouldn’t it generate a declining amount of revenue? Yes, and for that reason, the conversion should include a mechanism for periodic adjustments to maintain the revenue base. Annual adjustments would maintain a stable revenue base while minimizing economic distortion. Some might complain that this would somehow “punish” those who take steps to reduce their use of fossil fuels; others would argue that an adjustment would actually benefit those taxpayers by increasing their comparative cost advantage.

Of course, even hewing to a revenue-neutral paradigm, New Jersey’s policymakers could set a relatively high carbon-content tax and use the revenue to reduce other taxes or provide a rebate to taxpayers. Although it may be tempting and beneficial to use carbon-content revenue to pay for growth-friendly tax cuts, I would counsel caution at the outset. A complicated tax cut debate would be divisive and could easily distract policymakers from the core objective of pricing the risk of CO2. Moreover, it would be easier to work with, rather than against or around, New Jersey’s constitutional dedication of motor-fuels taxes to the Transportation Trust Fund.

Would the conversion to a carbon-content base really amount to a true “carbon tax”? Yes, but let’s not oversell this idea. Most academics would design a carbon tax to cover anything that involves the emission of CO2 through combustion, including heating oils, natural gas, and the use of coal or other hydrocarbons to generate electricity. Extending the conversion concept to other combustible fuels such as heating oil and natural gas might indeed be worth exploring, but it would be complicated (and controversial) because a broader tax would necessitate numerous adjustments to other existing taxes and exemptions. Again, one war at a time. At least for now.

Is this some whacky idea out of left field? Nope. With the growing support of most of its business community, the Canadian province of British Columbia has maintained a carbon tax since 2008. According to the World Bank, at least 18 countries and five subnational jurisdictions had adopted a carbon tax as of 2015. Significantly, most existing carbon taxes complement an emissions trading (or “cap and trade”) system, suggesting that a carbon-content base would complement bringing New Jersey back into the Regional Greenhouse Gas Initiative (RGGI) that currently includes nine Northeastern states.

Republican interest

We’re even seeing interest in carbon taxes in the United States, including some from unexpected quarters. Earlier this year, a group of prominent senior Republican leaders, including former Secretary of State James A. Baker, former Secretary of State George P. Schultz, and former Treasury Secretary Henry M. Paulson Jr. proposed a national carbon tax as a “conservative climate solution.” Former GOP presidential candidate Mitt Romney has endorsed the plan. Meanwhile, a growing number of states are considering a carbon tax as part of their efforts to address climate change, notwithstanding President Donald Trump’s decision to opt out of the 2015 Paris Climate Accord.

As the late U.S. Supreme Court Justice Louis Brandeis noted, the genius of our American federal system is that the states “may, if [their] citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.” In the absence of affirmative federal leadership on climate change — arguably the defining challenge of our times — states can and must step up and fill the vacuum. New Jersey is ideally suited to lead the way.