Modeling shows costs and benefits of carbon pricing
OFFICIALS DEVELOPING A new regional approach to reducing tailpipe emissions on the East Coast are considering policies that would add between 5 cents and 17 cents to the cost of a gallon of gasoline, generating over $1 billion in the first year spread among all the participating states.
No price is set in stone yet, and it’s an open question how many of the roughly one dozen states will sign at the bottom once the agreement is finalized. On Tuesday afternoon, after the announcement, New Hampshire Gov. Chris Sununu announced his state would not participate in the collective approach, tweeting that TCI is a “financial boondoggle” and “drivers will bear the brunt of the artificially higher gas prices.”
Championed by Gov. Charlie Baker, the transportation and climate initiative, dubbed TCI, aims to syphon money from gasoline and diesel wholesalers and pump it into other transportation priorities. The initiative is supposed to go into effect in two years, and Baker has said half of the Bay State’s proceeds would be steered into the Commonwealth Transportation Fund and the other half to unspecified local transportation priorities.
The “cap and invest” program for the transportation sector would be similar to the Regional Greenhouse Gas Initiative that has helped drive coal plants out of the electricity market while funding popular efficiency programs such as Mass Save.
The agreement is scheduled to be finalized next spring, at which point a carbon cap would be set and officials in the roughly one dozen participating states will decide whether to sign onto it. The cap, which will decline over time, will play a large role in determining the downstream cost impact on consumers filling up on gas.
In a telephone presentation, officials from various states said modeling exercises indicate TCI would help curb emissions, raise gas prices, and not be a drag on the economy. In fact, under most scenarios the economy would grow slightly.
Here is a breakdown of three key elements of TCI:
Since the ambitious initiative was announced a year ago, the biggest questions have been how much more drivers would need to pay and how much money would it raise for the states.
On Tuesday, officials from Massachusetts and Maryland who have been leading the TCI effort described their plan as more carrot than stick, minimizing the monetary pain on drivers, at least for starters.
The officials modeled three different scenarios that would have varying degrees of impact on gas prices, state revenues, and corresponding decreases in carbon output.
If the cost of the carbon allowances were totally foisted onto consumers rather than absorbed by distributors, then the price of a gallon of gas would increase 5 cents, 9 cents or 17 cents in 2022, under the scenarios the group is modeling. In future years, as the carbon cap tightens, that could drive prices up further.
“It encourages the market to respond by innovating and by trying to pass on as little of that price as they can to consumers to keep themselves competitive,” said Massachusetts Energy and Environmental Affairs Secretary Kathleen Theoharides, who said the cap amounts that the group is looking at would result in a “relatively small increase in the price of gasoline at the pump.”
In fact, those year-one gas price impacts that the group looked at were all smaller than the size of fluctuations in gasoline prices from 2017 to 2018, according to Chris Hoagland, an official in Maryland’s Department of the Environment.
The 17-cent-per-gallon increase is also 2 cents shy of the 19-cent gas tax increase that former governor Deval Patrick suggested a decade ago. It is more than five times larger than the 3-cent gas tax increase Massachusetts lawmakers passed in 2013. Unlike the state’s 24-cent gas tax, which remains static until the law is changed, the TCI program would continuously tighten the market for gasoline and diesel emission allowances, pushing prices upward. Baker strenuously opposed hitching the gas tax to inflation and was part of the successful campaign to repeal a law that would have linked the gas tax to inflation in 2014.
Under the scenario where TCI drives up the price of gas by 5 cents per gallon, emissions would fall 20 percent over that period, and the region would raise $1.4 billion in the first year. Under the more aggressive scenario where gas prices go up 17 cents, the region’s emissions would fall 25 percent, and the program would raise a total of $5.6 billion at the start. Those figures were publicized before New Hampshire dropped out. If Massachusetts’s revenues were commensurate with its share of emissions, that would mean the Bay State’s early annual revenues could range between $140 million and $560 million.
In a press release, the Office of Energy and Environmental Affairs said the program could bring in $500 million that Massachusetts could use to “enhance transit system infrastructure, reduce roadway congestion and deliver more resilient, efficient transportation programs.”
For every dollar the program charges fuel distributors per ton of carbon emissions, that works out to about 1 penny increase in the gas tax, Chris Dempsey, director of Transportation for Massachusetts, told lawmakers earlier this month. By that metric, the 5-cent-to-17-cent range outlined Tuesday lines up pretty closely to two scenarios floated by the Commission on the Future of Transportation one year ago. That report suggested that a high-end price of $15 per ton of emissions would cost the average Massachusetts driver about $7 per month, and the low-end price of $4.50 per ton would cost the average driver $2 per month.
Jonah Kurman-Faber, a senior research associate at the carbon-pricing advocacy group Climate X Change, said ideas presented Tuesday suggest “not a particularly strong carbon price, but it does raise substantial revenue for clean modern transportation investment.”
According to Theoharides, the group wants to limit the economic pressure on drivers before greener transportation choices become more widely available. The initiative could create a chicken-egg dynamic, where funding raised by the new carbon fee would create greener transportation modes, which might then justify putting more of a squeeze on gas prices.
For several months, state lawmakers have touted goals of raising the gas tax and other revenue sources to better finance transportation goals, including the MBTA, but they have so far failed to produce any real proposals – never mind passing them into law.
Meanwhile, Baker, a generally tax-skeptical governor, has forged ahead with this regional approach that would bake new carbon fees into the price of fuel in Massachusetts. If many other states signed on, that would limit the competitive disadvantage of the higher prices in Massachusetts, which is one reason why some business groups have bought into the idea.
The idea has kicked off a familiar debate pitting those eager to chip away at greenhouse gas pollution against those fearful of who would need to pick up the bill.
Ahead of Tuesday’s announcement, a group of fiscally conservative organizations from each of the participating jurisdictions argued against the proposal, saying the idea is to “make purchasing transportation fuels so painfully expensive that the astronomically high price discourages people from buying it.”
The letter, which was organized by the Massachusetts Fiscal Alliance and the National Federation of Independent Business Massachusetts, urged state lawmakers to vote on the proposal – which would thus force legislators into a controversial vote – rather than allowing the states’ chief executives to make the decision on their own. Grover Norquist, president of Americans for Tax Reform, was among the signatories to the letter.
The proposal has also created some odd pairings on Beacon Hill, as a group of mostly Republican lawmakers (along with Dracut Democrat Rep. Colleen Garry) have aligned themselves against the Republican governor’s plan.
House Transportation Committee Chairman William Straus, who supports raising transportation revenues, is highly skeptical of the approach the governor is taking. He says he believes all of the money would have to go into the Transportation Trust Fund, not half as the governor suggests. He also worries the money would not provide the steady revenue stream needed to leverage bond financing.
“It’s an interesting idea, but it’s not transportation financing,” he said of TCI.
Massachusetts is responsible for about 10 percent of the transportation emissions among the states that embarked on the climate initiative – a region that stretches from Vermont and Maine up north down to Virginia in the south, according to the Baker administration.
But divvying up the carbon cap might not be that clean cut. According to the Georgetown Climate Center, which has helped coordinate the multi-state effort, TCI would set an emissions cap for the region as a whole and specific apportionments of that cap for each jurisdiction – and those specific apportionments are still under discussion.
According to the policymakers working on the proposal, even without TCI, because of technological advancements and fuel efficiency standards, transportation emissions will probably drop 19 percent over the course of the decade beginning in 2022. That would be a dramatic change from the current trend of transportation emissions ticking upward despite past fuel-efficiency advancements and concerns about global warming.
Transportation emissions, which can also cause all types of health problems, make up around 40 percent of the greenhouse gas emissions in each of the jurisdictions participating in the initiative, according to the draft agreement.
The TCI plan that officials wheeled out Tuesday would help reduce transportation emissions, but Paul Craney, spokesman for the Massachusetts Fiscal Alliance, argued the benefits would be relatively insignificant. According to current projections, a business-as-usual approach would reduce transportation emissions 19 percent between 2022 and 2032. TCI, meanwhile, would curb emissions 20 percent, 22 percent, or 25 percent depending on the pricing of allowances. “Our region can expect to see a significant reduction in carbon emissions without TCI ever being implemented,” Craney said.
Theoharides, however, said the 19 percent drop is not guaranteed and could be far less if federal policies on vehicle emissions are dramatically changed. She said TCI would lock in those emission cuts and more.