Impose a carbon tax

Assumptions

• Increase commercial utility users’ tax 2.5 percent, to 10 percent total
• Impose residential utility users’ tax of 5 percent

Analysis

A fee on utility services – a utility user’s tax – as a proxy for a carbon tax could be a significant source of potential revenue to the City. It also has a potential double dividend, leveraging even further emission reductions by reinvesting revenue into energy efficiency retrofits. While the residential utility user’s tax reduces more emissions than increasing the commercial tax, low-income households should be exempt from the tax to compensate for its regressive nature. In addition, revenues from the tax should go to cost-effective energy efficiency retrofits for these households. Adding this tax citywide would require voter approval. Because many residents of San Francisco rent and don’t have many options for improving energy efficiency in their homes, a carbon tax could be paired with the adoption and marketing of a ”green lease” program, which would create financial incentives for landlords to improve building efficiency.

What we do now
The easiest way to implement a carbon tax is to modify an existing, collected tax that serves as a proxy for carbon use. San Francisco collects a fee on commercial utility services, known as the utility user’s tax. This tax on telephone, electricity, natural gas, steam and water use is 7.5 percent. About 50 percent of the revenue comes from charges on natural gas, steam and electricity use. San Francisco has the highest utility tax in the Bay Area, but it is lower than those in some other major cities in California, including Los Angeles and Long Beach. A residential utility user’s tax also could produce environmental benefits, but San Francisco does not have such a tax now. Many other cities in California impose a tax on residential use of utility services.

What we could do
SPUR’s recent study on tax shifting¹ found that a 10 percent increase in the price of energy will decrease commercial demand by 5 to 8, and reduce residential demand by 4 to 6 percent in the long run. We found that an increase in the commercial utility tax UUT to 10 percent could abate 12,000 tons of carbon a year, providing $11 million in revenue to the City. We found that the imposition of a residential utility user’s tax at 5 percent would save 23,000 tons of carbon and generate $19 million in additional revenue. New taxes such as this would require the approval of San Francisco voters.

Cost
A commercial utility user’s tax would be very inexpensive to administer because a framework already exists for collecting it through PG&E bills. However, an increase in the tax would increase the cost of doing business in San Francisco, which would negatively affect energy-intensive industries and possibly could curtail economic growth. A residential tax would be regressive, because lower-income utility customers and households would pay a higher percentage of their income toward a residential utility tax than would people with higher income. This potentially could be offset by exempting low-income households from the tax, and by providing additional energy efficiency retrofits and services for middle- to low-income households.

Carbon savings potential
The carbon savings potential of increasing the commercial utility user’s tax to 10 percent and imposing a residential tax of 5 percent is 35,000 tons per year. To the City, this is a net savings of $886 per ton, excluding administrative costs.The annual cost per ton is a range: $10-90.

Endnotes
¹ Lisa Bell and Egon Terplan, “More Work, Less Waste: Can Environmental Tax-shifting Work in San Francisco?, SPUR, September 2008, http://www.spur.org/publications/library/article/moreworklesswaste09012008