Transportation Carbon Tax Debate Starts Again

First published this morning by the Thomas Jefferson Institute for Public Policy.

By Steve Haner

Having imposed a carbon tax on Virginia electricity generation in 2020, the General Assembly starting in January 2021 will consider adding a similar tax on every gallon of gasoline and diesel sold for vehicle use. The Transportation and Climate Initiative, an environmentalist dream for a decade, is finally ready for its close up.

Advocates in the 12-state region that would make up the proposed interstate compact held two webinars in September, one focused on additional modeling on the project and the other discussing all the racially and environmentally just ways they believe states can spend the billions in new taxes.

The new modeling results did not change the basics of the program. TCI is a cap, tax and trade system that imposes a dollars-per-ton cost on the carbon dioxide emissions released by burning the fuels. The tax rate is set by an interstate auction, and the tax itself is imposed on the fuel wholesalers. The amount of fossil fuel emission credits that wholesalers may bid for will be capped and then will shrink a certain percentage every year. 

The advocates have still not released a new memorandum of understanding, which Virginia would need to agree to. During the 2020 General Assembly, members of Governor Ralph Northam’s administration stated the issue would be brought before the full General Assembly and he would not simply sign the deal on his own.

Once approved, the details of implementation would need to be worked out in a regulatory process imposing the supply cap and tax mechanism on all wholesalers serving the Virginia markets. Maryland will be the only adjoining state in the compact, creating additional pressure on the fuel industry along most of Virginia’s borders.

That still-hidden-in-the-weeds MOU will be crucial because it will set the reduction targets. The higher the targets, the higher will be the carbon tax and the steeper will be the slope on the reduced amounts of fuel for sale. The new models still project that a 20% reduction over a decade will start with a tax of 5 cents per gallon, while a 25% reduction will start with 17 cents per gallon and climb from there.

The final MOU is expected to include mechanisms to decrease the amount of emissions available slightly if auction prices drop too or increase them if they spike quickly. But there will still be a steady decrease in the number of gallons available for sale throughout the region, a form of rationing.

Governor Ralph Northam was just branded with a grade of “F” by the Cato Institute in part for raising gasoline taxes ten cents per gallon in some parts of Virginia and almost 18 cents per gallon in other parts of the state. That will put the state gas tax around 34 cents per gallon by July 2021.

With TCI carbon taxes added on, Virginia’s fuel taxes may exceed 50 cents per gallon by next summer. Legislators seeking their own re-election, or seeking a statewide office, may need to explain why some parts of Virginia saw fuel taxes triple in two years.

The increases imposed this summer and fall have been all but invisible, with fuel prices down in the recession. A year from now could be different, the economy and fuel prices up, and another fuel tax hike then might be quite apparent to voters and business owners.

And to accomplish what? The new TCI modeling shows what the old version did: With no action whatsoever, market forces are already driving down emissions in the transportation sector. Old vehicles are being replaced by new, more efficient models, and electric vehicles are growing in popularity. By 2030 vehicle-related emissions could drop 19% or even more, without any caps or carbon tax.

Against that backdrop, the TCI goal is really to add only one to six additional percentage points of reduction in CO2 emissions. To claim substantial environmental or even health-related benefits from that is a stretch. The Thomas Jefferson Institute’s David Schnare, Ph.D., dismantled the earlier environmental and health benefit claims in a 2019 review, still valid apparently.

One of Schnare’s criticisms is the money being raised by the TCI carbon tax is not going to transportation infrastructure, while the declining cap on fuel sales will reduce the traditional sources of revenue for road construction and maintenance funds. The TCI organizers want to use the new tax revenues to subsidize electric cars and trucks, mass transit and non-vehicle travel (bike and pedestrian options). Their models depend on assumptions that doing that will reduce fuel sales.

One of the TCI sales pitches will be promising to focus the financial aid on lower income communities. A major topic of that webinar’s discussion was the premise that urban and low-income citizens have been overburdened by traditional energy development and related pollution. At the webinar, Chris Bast of the Virginia Department of Environmental Quality touted the 2020 Virginia Environmental Justice Act and Northam’s creation of a cabinet-level Chief Diversity Officer.

Programs outlined in other states included subsidies for electric cars and buses, building out EV charging stations, residential development on transit lines and for home energy efficiency projects. The General Assembly debate could quickly devolve into a sticky contest between drivers who would pay the higher taxes or feel the pinch from a supply cap  — heavily business, suburban and rural — and those who believe they will benefit from the new taxes, mostly urban.

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35 responses to “Transportation Carbon Tax Debate Starts Again

  1. Maybe the GA can use the extra billions in tax money to assist lower-income individuals in buying the ultra-high-priced gasoline they will need to run their older, less efficient vehicles…

  2. Given that gasoline and diesel fuels are the tobacco of today (completely addictive and ultimately leading to one’s premature death – in this case planetwide) it seems to me a much greater sin tax would be more effective at changing behaviors toward their use.

  3. Yeah I see problems with VDOT and road infrastructure needs.

    But it’s plain dumb luck that pre-taxed gasoline prices have cratered and later if they go on – people will blame the gasoline suppliers not the government and in the end – just as with electricity and LEDs – people will gravitate towards more fuel-efficient vehicles – which really is not a bad thing.

  4. California has a cap and trade (hidden) carbon tax on fossil fuels.

    So behind the scenes, California charges money to fossil fuel companies. If it was a pump per gal tax, consumers would see it and object. So the idea is, what you do not see, you do not care.

    At first couple years it had no impact, but you can see Cali gaso prices are sky high now. But I have not recently heard estimates of how much of that high cost is the hidden carbon tax.

    I am not aware of any other states trying that.

    • PS- Steve – say more about Northam’s gaso tax increases…I had not heard about the “unequal” amount to +18 cents on some people as quoted…

      • There nowdays – “tax districts” that have supplemental taxes that can only be spent on projects in those districts. NoVa has one, so does Hampton Rds and the I-81 corridor. VRE commuter rail is funded that way also. I think Richmond area also has one now.

  5. Hasn’t Virginia gone to taxing at the wholesale level? Don’t recall seeing per gallon tax on gas pumps any more.

  6. Virginia’s tax has always been collected “at the rack,” or at the wholesale point. It is back to being “cents per gallon” rather than a % of the wholesale price, and the “regional” fuel taxes are now statewide in application. So right now the tax is just under 29 cents per gallon, come July 2021 it goes to just under 34 cents per gallon, and then the indexing to inflation kicks in.

    Now that the GA has approved indexing when it works to increase government revenue, time to try it again when it works to the taxpayer’s benefit….

    • this is where I got the info provided:

      https://www.dmv.virginia.gov/commercial/#taxact/tax_rates.asp

      it seems to be at odds with what you saying. Any ideas why?

    • So I think the inference is we are going to more equal gaso taxes over Virginia, and so the lower tax areas are seeing bigger increase. OK but I have long felt the tax bifurcation slamming NoVA with the tax burden has been over done.

      So I possibly find myself in agreement with both increasing gaso tax (we were essentially about the lowest gaso tax state after Alaska is some parts) as well as making it more universal. Among other things, this may capture more out-of-state drivers passing through Virginia. Let’s put some easy-to-access stations right on I95 to make it easy for them to stop by.

      • We now have both statewide and local gas taxes (for some regions).

        But what has dramatically change transportation funding in Virginia is Smart Scale. Basically almost all projects that will receive any funding from VDOT have to go through a statewide rating process known as Smart Scale.

        What that means is that no locality or region is going to get preferential funding.

        It also does away with the prior six-year funding plan where projects would get initially approved but not fully funded and so would wait for years to get enough allocated funding to proceed.

        Now, if a project is approved in Smart Scale – it is fully funded.

        The regions that have their own transportation districts get to keep that money and have a choice of spending it on their own priorities or using money to leverage the scores of their projects on Smart Scale.

        Now that the gas tax is automatically indexed – the politics of funding and project selection has been significantly dampened.

        The ability of local developers or even regional “boosters” to influence a project has been blunted. If that project does not “perform” in Smart Scale, it will never get funded.

        The Smart Scale process assigns the following weights to different scoring criteria:

        45% Congestion mitigation. …
        20% Land use. …
        15% Accessibility. …
        10% Environmental quality. …
        5% Safety. …
        5% Economic development.

        • With your usual red herring tactics, Larry, you have moved the discussion away from the point. Come January the GA will be asked to add another layer of tax, perhaps as high as another 17c per gallon, for this green transportation nonsense. And that tax, too, will not be fixed but is expected to climb annually.

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