California Climate Tax is Reducing Electricity Bills

Have you ever broken out into a smile from opening your electricity bill? I just did when I opened this month’s bill and saw I owed $4.91. At first I thought there must have been a mistake. But after much searching on my four-page bill I found a one-line item called the California Climate Credit that cut my bill down to less than $5.

This credit is the latest of California’s outside-the-box public policy ideas for addressing climate change: California is taxing climate changing pollution to fund credits on residential electric bills.

How the California Climate Credit reduces electric bills

The California Climate Credit is an idea enabled through California’s AB32 legislation that mandates a 29 percent cut in emissions below the levels the state is currently projected to produce in 2020. To achieve this scale of emissions reduction, California has adopted a free-market approach of taxing pollution called cap and trade.

Cap and trade is similar to a game of musical chairs. Each year California sets a lower threshold of permissible CO2 emissions -- in effect, removing a “chair.” If you are a refinery or power plant, then you have to bid against other polluters to “sit at a chair” and continue to emit CO2. Like musical chairs, each year the number of chairs -- or the amount of allowable pollution -- is reduced. That means polluters either figure out how to pollute less or increase their bid price to buy a seat from the ever-shrinking inventory of available chairs.

A cap and trade system is proven to be successful in reducing pollution. Remember acid rain? Remember the smog so thick in cities like Los Angeles that it made your throat raw? Federal and state government coalitions created cap and trade programs to increase the price of SO2 and NOX that causes acid rain and smog. The cap and trade auction process raised the price to pollute over time, and polluters responded by figuring out how to pollute less. The result is that we no longer worry about acid rain ruining our car's paint, and visiting LA is again a pleasant experience.

This same path is what California envisions for its cap and trade auctions on CO2 emissions that account for more than 80 percent of the state’s green house gas emissions. California will slowly but surely raise the price to emit climate-changing pollution. California expects that with ever-increasing economic incentives tied to not polluting that polluters will figure out how to operate their facilities with reduced CO2 emissions.

What is really intriguing is that California has decided to use some of this cap and trade tax revenue to lower electric bills. The basis for doing so is to provide funds to consumers, through lower electric bills, with the expectation that they will use these funds to invest in energy efficiency. Whether utility customers will make the leap to invest their utility bill savings in energy efficiency is a question. But without a doubt the idea of benefiting voters through lower electric bills tied to increased taxes on pollution looks like a innovative path for convincing voters that pollution taxes have a bottom line benefit not only for the environment but also for people.

Better link needed between bill credit and energy efficiency investment

The startup of the Climate Credit program does have marketing and economic issues. In terms of marketing, the marketing of this program consisted of a letter from the California Public Utility Commission that is included with a customer's electric bill. The letter was a well-written history of the legislation and regulatory decisions behind the Climate Credit.

What was glaringly missing was marketing material that linked the Climate Credit to ideas for using this credit to further reduce electric bills by investing the credit into energy efficiency items like higher efficiency light bulbs or window shades for western facing windows. An even better marketing outreach campaign would have been to have promotional coupons in the electric bills that could be redeemed with retailers and service providers that were willing to offer a special lower price on energy efficiency products/services tied to utility customers investing their Climate Credit into energy efficiency.

This lack of marketing innovation will likely negatively impact the economics of the California Climate Credit program. Both economics and marketing research suggests that without easy-to-implement ideas for investing the Climate Credit in energy efficiency, most consumers will look at this credit as windfall income that is typically spent on “discretionary” items. It is likely that the failure to generate a marketing campaign that promotes the California Climate Credit as a path toward investing in energy efficiency will result in consumers using the credit to make purchases rather than investing the funds to reduce their environmental footprint.

Smiles make great public policy

Taxing pollution through cap and trade is proven to work. Taxing what you don’t want, like pollution, is good economics. This type of tax assigns to polluters the externality cost of their pollution. It creates cost incentives for polluters to figure out how to pollute less, and it creates a pricing advantage to competitors that can pollute less. Free-market based systems like a cap and trade tax are much preferred in the business community to the complexity and challenge of complying with an ever-growing volume of regulatory law.

California’s idea of returning the funds of a pollution tax to utility consumers is an interesting innovation. The economics could be suspect if consumers then use this credit to consume more energy as a result of seeing a lower bill. But it can be great economics if consumers, supported through a marketing campaign focused on easy-to-implement action items, actually used their Climate Credit to save even more money by investing in energy efficiency. This can also be good public policy if the combination of bill credits and increased consumer awareness on the price being charged on higher-polluting goods and services then results in reduced consumer purchases of those goods and services.

At a time when tax policy seems to be a consistent thorn in the side of taxpayers and elected offices, it is worth noting that my shocked reaction at seeing a $4.91 utility bill was a big smile. The idea of using a tax on pollution not only to reduce environmental consequences but also to put money in the consumer's pocketbook is worth further public policy exploration. California’s innovation of taxing pollution to fund reduced electric bills is a path that public policymakers should consider for reducing pollution while also putting a smile on the faces of the 90 percent of utility consumers who have not seen real income growth for 15 years.

Image credit: Energy Upgrade California via Facebook

Bill Roth is an economist and the Founder of Earth 2017. He coaches business owners and leaders on proven best practices in pricing, marketing and operations that make money and create a positive difference. His book, The Secret Green Sauce, profiles business case studies of pioneering best practices that are proven to win customers and grow product revenues. Follow him on Twitter: @earth2017