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Tax CO2 at the state level to encourage in-state industry and clean, in-state produced energy. Sales tax can be completely eliminated.



The Proposal

Reduce or eliminate the state sales tax and replace it with a charge on CO2 emissions from the direct consumption of fuel, and the emissions attributable to the embedded energy in imported manufactured products. Reduce the sales tax rate so that the net effect is revenue neutral.

The Problem

Interests that profit from the continued production of fossil fuels have effective veto power for changes in law and policy at the national level. This is the political reality that confounds all who see the urgency in the need to reduce emissions of greenhouse gases. Action on climate change at this time won’t come from the national government. 
The Trump executive branch is aggressively reversing steps taken by its predecessor to put the country on a faster track to a clean energy economy. Effectively, the legislative branch and executive branch are on the side of CO2 pollution.

The Opportunity

The political landscape is not uniform at the state level,  however. Producer states, the black-ink states, benefit from the status quo. They want to keep the extraction game going as long as possible. Their voice dominates in Washington. 
Red-ink states, the ones dependent on imported energy, pay for raw fuel and the energy embedded in every product manufactured inside or imported from outside their economy. It’s mostly dirty energy. Roughly 20 pounds CO2 is produced for every gallon of gasoline-equivalent consumed. 
Red-ink states can save money by taxing CO2 emissions. Tax revenue generated will all stay within the state economy and can be used to reduce other tax burdens. Fossil fuel and all products with embedded dirty energy will become marginally more expensive. This will gradually reduce consumption of that paid-for-with-cash commodity.  For red-ink states, the payoff will be an improved balance of trade. In-state clean energy production and economic activity using that in-state energy will gain economic advantage. 

Is this proposal for a practice or a project?


What actions do you propose?

Actions — Massachusetts Leading

Cut the sales tax by a third. Make up the lost revenue with a tax on CO2 emissions.

Massachusetts GDP in 2016 was $507.9 billion. A reasonable assumption is that most of it was spent by Massachusetts consumers. Much of that spending was subject to sales tax.
Projected revenue from the sales tax for 2017 is $6.1 billion, slightly more than 1% of state GDP.
Though the tax is small compared to the state’s total economy, it is very visible. Perhaps because of its complex, and in some cases inexplicable, rules regarding exemptions, it is an outsize annoyance for many people. At 6.25% it is not inconsequential for the items covered. People drive to New Hampshire to shop, to avoid the sales tax.


A cut in the sales tax rate to 4%, approximately one third, would result in a reduction in state revenue of $2.2 billion.
Massachusetts total carbon dioxide emissions for 2017 will be in the range of 60 million metric tons. A metric ton is approximately 2,205 pounds.
If the sales tax cut were offset with a tax on CO2, what would be the required rate of this emissions charge? About $37/ton. ($2,200 million/60 million tons) At 20 pounds CO2 per gallon of fuel burned, the tax required would add about 33 cents at the pump and maybe 2 cents/kWh on the electric bill.
Want more impact? How about a 50% cut in the sales tax. Add 46 cents a gallon for gasoline.

In Perspective

For many states, energy is a red ink line item for the economy. Massachusetts will likely spend $16 billion on imported energy in 2017, about 3% of GDP. What about the other 97% of GDP? How much CO2-producing energy is embedded in all the other product that makes up the economy? Might the energy cost for raw material extraction, manufacture, and transportation of goods partially finished outside the state equal 3% of the total GDP? If so, count another $16 billion. And how about imported finished goods, automobiles made in Korea, for example? Best add in all the other stuff in the big box stores that comes from China and Vietnam as well.
Precise estimates of the value of dirty energy flowing through the Massachusetts economy, and paid for by the people of the state, is beyond the scope of this proposal, however, it should be clear that it is a large number. $50 billion a year is plausible. Much of that financial drain could be eliminated with smart tax policy, replacing much or all of the sales tax with a tax on CO2. (Note: Dollar values are based on current, relatively low and stable oil and natural gas prices, $50/bbl and $3.00/MMBtu.)

Logical Next Step

The sales tax could be eliminated completely. Imagine that total energy cost, including embedded energy in imported finished products, is $50 billion. For all practical purposes, it’s still mostly fossil fuel energy. What would the carbon tax rate be to exactly offset the loss from total elimination of the sales tax? $6.1 billion/$50 billion = 12.2% 
If the same CO2 emissions intensity of fuel consumed within Massachusetts, 60 million tons from $16 billion, is assumed for imported finished goods and goods in process, what should the CO2 fee be in order to make up for loss of $6.1 billion of sales tax revenue? 
The total cost of energy for this hypothetical example: Cost of $16 billion for raw fuel, embedded cost for import of goods in-process that will be finished in-state, $16 billion, embedded cost of finished goods imported, $18 billion. Total: $50 billion.
Suppose that total $50 billion of energy (including embedded energy) consumed by the people of Massachusetts produces CO2 at the same rate as the already recognized imported raw fuel ($16 billion for 60 million tons CO2 = $267/ton. Currently for every $267 of fuel consumed in state a ton of CO2 is released). 
If the CO2 released elsewhere is actually the responsibility of the people of Massachusetts, how big is that number? It is 50/16 times 60 million tons, (60 million, the part already properly counted) They have responsibility for and a target of a total of 187.5 million tons of CO2 to be taxed. 
Cost per ton to make up the needed revenue to eliminate the sales tax completely: $6.1 billion/ 187.5 million tons = $33/ton. Tax the carbon content of everything at thirty-three dollars per ton of CO2, about 30 cents a gallon.

Who will take these actions?

Every state that isn’t a fossil fuel net producer, the “red-ink” states should look at this as a viable, beneficial, tax policy change. Regardless of whether there is the political will to aggressively act on climate change, there is a recognizable economic opportunity. This is pragmatic, prudent, economics for those who send away hard cash for fossil fuel energy.
Immediate actors might include organized groups actively lobbying for action on climate change. Sierra Club, National Wildlife Federation,, etc. should consider directing their efforts to the state level where the reception will be warm on the basis of immediate economic benefit. "We will get a return on our investment," is an easier sell than the less tangible "we have a responsibility to preserve the environment for future generations."

Where will these actions be taken?

Massachusetts is a good place to start. The political environment is favorable. Renewable energy standards are already in place that confirms awareness and general acceptance of the fact that climate change is an urgent challenge. 
Other states that have the most to gain include Florida, New York, New Jersey, Georgia, North Carolina, Washington, Tennessee, Missouri, Minnesota, Wisconsin, South Carolina, Maryland, Iowa, Oregon and all the other New England states. 
In many of these states, conservative governors and conservative legislatures are in power. These politicians are generally friendly to the fossil fuel industry. There’s good evidence that in many cases protection of the industry takes precedence over the best interest of the state’s citizens as a whole. The kind of tax policy change suggested in this proposal will likely not get a hearing in these places until there is a change of leadership or until there is overwhelming demand for climate action from the voters.

In addition, specify the country or countries where these actions will be taken.

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What impact will these actions have on greenhouse gas emissions and/or adapting to climate change?

Greenhouse gas emission impact is always an uncertain projection. In this case, the calculated carbon tax required to make this proposal revenue neutral is $33/ton if the sales tax is eliminated completely and if all carbon emissions, including the ones embedded in imported, intermediately-processed goods as well as finished goods are counted and taxed.
A tax burden of $50/ton is frequently mentioned as necessary for meeting the year 2050 global goals. Exxon Mobil started including a price on CO2 emissions in strategic planning in 2007. $60/ton is assumed.
More recently the Climate Leadership Council, a group of prominent industry leaders announced support for a carbon tax of $40/ton.
Regardless, the exact number required to reach emission reduction targets that scientific consensus sees as necessary to avoid warming above 2 degrees Celsius, this proposal is in the ballpark for the state of Massachusetts. Other states with a similar sales tax program in place likely have a similar opportunity. 

What are other key benefits?

Any policy change that tips the balance in favor of cleaner technology helps to accelerate the adoption of that technology. The spectacular decline in the price of PV solar is a good example of how economies of scale have made any investment in conventional electricity generating capacity problematic. Coal will stay in the ground because it can’t compete based on the economics.
With Tesla’s Gigafactory and others on a parallel track in Asia and Europe, battery storage for transportation energy and to solve the renewable energy intermittency challenge is now cost competitive and continuing to decline.
This proposed tax policy change will create incremental demand for clean energy technology, helping to drive the economy-of-scale price curve.
Closer to home, there should be a positive impact on employment. Increased transportation cost, particularly long distance transportation, which is likely to remain fossil fuel dependent, will make locally produced goods more competitive. A little less will be imported and a little more made close to home.


What are the proposal’s projected costs?

For states that choose to adopt this policy, the cost will be zero. The net effect will be cash flow positive for the state’s economy and neutral for government revenues.
Difficulties may include efforts by supplier states and companies to sabotage any change that reduces the market for fossil fuels. Also, at this time, Washington will not be supportive. Sales taxes have always been state-level, and in some cases local level, prerogative, but that does not preclude the possibility that status-quo beneficiaries will seek help at the national level or in the courts.


This is a do now project. It is not dependent on or constrained by external factors, and benefits will accrue as soon as it is implemented.

About the author(s)

Bill Ferree has been a student of the climate-energy-politics nexus for the past several years. During this period the urgency of the task of reducing greenhouse gas emissions has become more and more obvious. The actual track of climate change is closer to the “worst case” side of the range of earlier forecasts.

Bill lived in Florida for two decades and held elected office there. He sat on a regional transportation planning board. He witnessed close-up some of the recent political foolishness regarding the issue of global warming, the outright denial of the state’s certain vulnerability to rising, warming waters.

This proposal is a logical continuation of earlier efforts, which included co-founding a small company that installed electric car charging stations, writing a book that advocates for a faster transition away from fossil fuels based on the economic benefit. Empty Tank, Empty Wallet advocates for "red-ink" states to take action to reduce their fossil fuel use because they will save money. Bill's continuing effort also includes a proposal in the current CoLab contest for ideas on transportation. Detox the Fleet proposes conversion of existing commercial vehicles to battery electric.

For the past year and a half, Bill has been a historic tours trolley conductor in Savannah, Georgia. 

Related Proposals

The Little Engine That Could: Revenue Neutral Carbon Fee and Dividend  This proposal urges instituting a national carbon emissions tax that is made revenue neutral through dividend payments back to individual taxpayers. It proposes an escalating rate that eventually would be sufficient to reduce CO2 emissions below generally agreed to targets.


Sweeten the Carbon Deal  Carbon emissions taxes would be remitted to taxpayers through a reduction in payroll taxes. FICA tax rates would be cut by one-third. The bulk of that lost revenue would be made up by a $60/ton tax on CO2 emissions. That, combined with some adjustment to FICA caps and a small financial transactions tax would provide the $333 billion of revenue required for balance.