Who would bear the burden of a Hawai’i carbon tax?

The other day Sherilyn Wee wrote about our State’s broader effort to reduce greenhouse gas emissions.  Sherilyn, like most economists, sees the advantages of a carbon tax: it helps us move toward cleaner energy in a flexible and efficient way.  It might do more for the environment than our 100% Renewable Portfolio Standard for electricity, and be less costly as well, for it would target vehicle, shipping and air transportation, and generally encourage everyone to strike a better balance among alternative ways of reducing emissions.

One key question about a carbon tax, especially in Hawai‘i, concerns who would bear the burden of it. We often hear complaints that the carbon tax burden would fall disproportionately on lower income households, which may be one reason carbon taxes have been difficult to impose.  If this is a problem, there are ways to address to address it, like offsetting the carbon tax with reduced sales taxes and credits for low-income families, as was proposed in Washington’s failed ballot initiative. But at least in the case of Hawai’i, and possibly even more generally, it’s not really clear where the tax burden would fall.

The first thing to consider is that nearly all our fossil fuels are imported. Hawai‘i is a small part of the world market, so our tax would have little influence on world prices of oil, our principal fossil fuel.  Transport of fossil fuels to our remote islands, however, is a more specialized industry, one that may bear some of the tax burden.

Next, we need to consider who uses our fossil fuels. There are basically four big chunks: fuels for vehicles, ships, airlines, and electric power.  The military also uses a substantial share of each chunk, and while states cannot directly tax the federal government, there is a good chance that the military would implicitly pay at least some of tax, and possibly a large share.  Besides the military, a remarkably large share of the airline and electric power is used by commercial businesses, many of which serve the tourism industry.  Over 70 percent of electric power is non-residential. Thus, tourists and owners of the various businesses would bear a substantial share of the tax burden, many of whom are not Hawai`i residents. Similarly, nonresidents may bear a substantial share of shipping, airline and other forms of transportation.

A carbon tax may hurt the tourist industry to some extent, but it’s also possible that many of the relevant businesses may be less than perfectly competitive.  Businesses with market power might include specialized luxury hotels and shipping.  Some suggest that Hawai’i shipping industry has outsized market power due to the Jones Act, but this can be difficult to discern.  Businesses with market power normally would bear a considerably larger share of a carbon tax burden than competitive industries would. There could even be a compensating positive effect on tourism, by improving the state’s reputation as environmentally friendly.

Should we do it?  Like most economists, I find the economic rationale compelling.  I’m torn, however, about the local political economy.  On the one hand, the idea of Hawai’i embracing a carbon tax as an opportunistic way of taxing tourists and off-island investors is far from any impartial notion of fairness. And even if Hawai’i were to eliminate all fossil fuel emissions, this would have essentially no effect on global warming.  A national or global tax makes much more sense, if feasible. On the other hand, over time I have grown a greater appreciation for faddish nature of policy—the idea that a few states or nations might provoke others to follow suit.  Hawai’i, though small, may have an outsized influence in this regard given how many people visit the state as tourists.  Hawai’i’s example could be both symbolic and opportunistic.

One last issue I’ll flesh out another day: While a carbon tax may encourage less carbon-emitting transportation methods, its effect on our electricity system will depend a lot on the new performance metrics for the utility.  Under current regulation, fuels are a pure pass-through from the utility to customers; HECO has little or no direct incentive to reduce emissions in the face of higher fossil fuel taxes.  The new performance metrics might change that.

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