What’s a Carbon Tax?

by Tom Yamachika, President, Hawaii Tax Foundation

Recently, the Hawaii Tax Review Commission’s primary consultant, PFM Group, issued a final report to the Commission asking it to review many taxing alternatives, including a “carbon tax” that had the potential to put an additional $360 million per year into our state coffers (assuming a tax rate of $20 per metric ton of CO2 released).

PFM Group pointed out that we in Hawaii already had enacted a very ambitious climate change policy, Act 234 of 2007, that requires state greenhouse gas emissions to be reduced to 1990 levels by the year 2020.

An economist from UHERO, the University of Hawaii Economic Research Organization, recently posted an analysis arguing that strong, decisive action such as a carbon tax is going to be needed if we are going to achieve the greenhouse gas goals. “But without any specifics as to how we are to achieve [greenhouse gas] reductions – through a carbon tax or otherwise – it is largely symbolic,” she argues.

So what is a carbon tax? It is a tax imposed on the carbon content of different fuels. Typically, it is due and payable when the fuel is either extracted and placed into commerce, or when it is imported. At present, neither the U.S. federal government nor any U.S. state has enacted a carbon tax. The city of Boulder, Colorado, enacted one by referendum in 2006; it applies at the rate of $7 per metric ton of CO2 and is imposed on electricity generation only. Several European Union countries, Japan, and South Africa have carbon taxes.

In Hawaii, we have a liquid fuel tax (chapter 243, Hawaii Revised Statutes). Like a carbon tax, the fuel tax is imposed upon import and entry into commerce. So, PFM Group thought that the systems and processes we now have in place to collect fuel tax in Hawaii can be adapted to a carbon tax, and for that reason concluded that a carbon tax would entail “[l]ittle administrative burden.” There are, however, several important differences between the two:

Both the county and state governments are given the power to impose fuel tax. One big question up for discussion will be whether, and to what extent, the counties will have a piece of any carbon tax.

The fuel tax is now earmarked for Highway Fund use, and the money in that fund is spent by the Department of Transportation. As a result, vehicles that don’t use the highways, such as tractors and other farm machinery, are exempt from fuel tax. A carbon tax would need to apply to both on-road and off-road use, as long as the CO2 generated from burning it gets into the atmosphere.

The potential big losers will be the electric companies, because electric generation accounted for 6.8 million metric tons of CO2 in 2013 out of a total 18.3 million metric tons. However, the electric companies won’t simply absorb the tax, but can be expected to pass on the enhanced costs to anyone who gets an electric bill.

Finally, the fate of our existing fuel tax needs to be decided. If a carbon tax is going to be layered on top of the existing fuel tax, which the PFM report assumes, people who pay the fuel tax now (anyone who drives a motor vehicle, for example) may complain that they are being unfairly treated. If it is going to replace the fuel tax, there will be winners and losers such as farmers and the Department of Transportation.

Both the Tax Review Commission and our lawmakers are in for a lot of hard work as they wrestle with the issues surrounding carbon taxation.