By Jonathan A. Lesser, Ph.D.
I was asked by Vermont’s Ethan Allen Institute to prepare an economic analysis of The ESSEX Plan, the most recent carbon tax proposal for Vermont. I’m quite familiar with Vermont, having lived there for 14 years and because I served as Director of Planning at the Vermont Department of Public Service during Gov. Douglas’s administration.
The ESSEX Plan proposes, when fully implemented over eight years, to impose a carbon tax on heating oil, gasoline, diesel, natural gas and propane sufficient to bring in $240 million a year. According to the Plan, the state would use those dollars to subsidize electricity rates and give rebates to what it calls “working families” and “rural residents.”
My economic analysis of the proposal yielded these conclusions:
- The Plan will provide an economic incentive for Vermonters to avoid paying the tax by purchasing fossil fuels from outside the state; the higher the carbon tax, the greater will be that incentive. Preventing such behavior will either be impossible or administratively costly. Such “free-riding” behavior will also inequitably transfer monies from Vermonters who do pay the tax to those who do not.
- The Plan will reduce Vermont’s economic competitiveness by increasing the cost to produce goods and services, including Vermont’s famous maple syrup.
- Many Vermonters will be unable to afford the capital investments necessary to reduce their carbon tax payments.
- Electric rates will increase under the Plan, not decrease. Rebates on current electricity rates will not compensate for the Plan’s call for increased reliance on high-cost, locally-sourced renewable biofuels and solar power.
- The Plan will cause the cost of biofuels to increase because the demand for biofuels will increase as a consequence of the tax, harming lower-income Vermonters who rely on wood to heat their homes.
- The Plan’s call for developing more residential and commercial solar power using “net-metering” will benefit higher-income Vermonters at the expense of lower-income ones, who will bear increasing shares of the costs of back-up generation and the fixed costs associated with operating
- local utility infrastructure. Increased reliance on solar power will also mean having to pay the costs for more back-up generation and storage, which will cause electric rates to increase further.
- The Plan is likely to adversely affect funding to maintain Vermont’s aging transportation infrastructure, which is already underfunded. To compensate, the state will likely have to increase taxes on motor fuel, levy a tax on miles driven, or raise the state’s income tax. Alternatively, revenues raised by the carbon tax would have to be diverted from the proposed electric rebates, contrary to the Plan’s promise of revenue neutrality.
- The Plan will be complex and costly to administer. Retailers will have no way of distinguishing the sales to residential, commercial, and industrial customers, and the Plan is silent on how the amount of money to be rebated to electric ratepayers will be determined. Administering the Plan will require providing the state’s electric utilities with Vermonters’ confidential taxpayer information. Connecticut estimated a similar carbon tax program would have a five percent administrative burden , meaning that the administrative costs could total $12 million per year.
- The Plan may increase local air pollution as more Vermonters switch to wood-burning to avoid burning natural gas and fuel oil.
- The Plan’s rationale, reducing carbon emissions, will provide no climate benefits whatsoever because the predicted reductions in carbon emissions will have no measurable impact on climate. Nor will the Plan encourage other states or nations to enact their own carbon tax measures.
As a onetime Vermonter who was deeply involved in the state’s energy planning, I conclude that the ESSEX Plan is premised on vague and incorrect economic assumptions. Enacting it will damage Vermont’s economy, place an undue and unfair burden on lower-income Vermonters and encourage more people to leave Vermont in search of better economic opportunity.
Click here to read “The ESSEX Carbon Tax Plan for Vermont: An Economic Analysis.”
Jonathan A. Lesser is president of Continental Economics. He is a former policy director for the Vermont Department of Public Service.