Clean Energy Policies in Hawai`i: The Lost Barrel Tax and an Introduction to Other Local Clean Energy Policies

As a continuation of our blog, we have decided to introduce the topic of local clean energy policies. This topic is timely, as the 2009 legislative session just recently came to an end. While a number of progressive clean energy policies passed this season, the much-talked-about "Barrel Tax" did not make it into law. This blog provides a background on this policy, why the bill didn't pass, and what this means for the future. The blog continues by introducing two other clean energy policies that are being pursued and implemented by Hawaiian Electric Company (HECO), and how they could apply in Kaua`i.


Before commenting on this topic, please keep in mind the following:

1. We are still not making specific recommendations; this is simply a primer to educate the Kaua`i community on local energy policies as well as to gather feedback on these policies.
2. This report is no where near an all-inclusive review of every clean energy policy out there-- the blog is not intended for that in-depth of a discussion.
   

Thanks for taking the time to read the blog. The SENTECH Hawai`i Team is looking forward to receiving your comments and integrating them into the Kaua`i Energy Sustainability Plan.

Aloha,
Marguerite Harden
mharden@sentech.org

___________________________________________________________________

Introduction

A number of well documented barriers to renewable energy penetration exist, which could limit the development of renewables unless policies are enacted to overcome these barriers and place renewable energy on a level playing field with traditional energy options (1). There are a number of policy choices that create clean energy funds that can provide a source for stable, long-term funding; each policy comes with particular advantages and disadvantages (2). The purpose of this blog is to review the State’s most recent attempt at creating a source for clean energy funding (the barrel tax), introduce and review other policies that are being considered locally, and create a forum for discussion on other policy options that could be implemented by the State, County, or Kaua`i Island Utility Cooperative (KIUC).

House Bill 1271: The Barrel Tax

In the State’s 2009 legislative session, House Bill (HB) 1271 was introduced to establish clean energy funding through a $1 surcharge on each barrel of oil imported into Hawai`i. Had this bill been enacted, over $30 million annually would have been generated and used for special funds established for energy security, energy systems development, and agricultural development and food security (3). The tax was expected to increase the State’s gas prices 2-3 cents/gallon at the pump.

During the legislative session an overwhelming majority in both the House and Senate supported this bill. However HB 1271 was vetoed by Governor Lingle due to the current economic situation, and the fact that the tax would ultimately impact consumers in utility prices and goods and services. The Legislature expected the bill to be vetoed, but at the last minute failed to override the veto due to lobbying by the airline industry and other heavy fossil fuel users (4). Ultimately, the policy was never enacted.

Why a Barrel Tax?

Proponents of the barrel tax saw the policy as necessary income to support renewable energy development, stabilize energy prices, and provide a price signal for consumers. For example, Kaua`i’s Representative Hermina Morita (14th District; Chair on the Energy & Environmental Protection Committee) stated that the tax was necessary to “put our money where our mouth is”; in other words, there needs to financial backing for the Hawai`i Clean Energy Initiative (www.hawaiicleanenergyinitiative.org) and the aggressive Renewable Portfolio Standard (RPS) and Energy Efficiency Portfolio Standard (EEPS) set by the state (5).

The barrel tax policy’s basis is in economic and political theories that are supported by historical evidence. Governmental policy has the ability to affect energy use by setting energy prices through taxation of non-renewable, polluting sources. The raising of fixed prices or the taxation of non-renewable, polluting sources can effectively direct consumer trends toward more efficient energy use and toward increased use of other energy sources.

Additionally, many analysts believe that a barrel tax allows for the internalization of externalities, which is necessary to avoid price distortion and reduce economic waste. Externalities occur as a result of the decisions and actions of producers or consumers, which affect the common resources of all, for better or worse. When externalities exist, market prices fail to signal a commodity’s actual cost to society. According to this view, environmental and societal costs of polluting energy sources should be accounted into the fixed price of that energy source (e.g., through a tax). Failure to internalize recognized externalities may be seen as implicit governmental subsidizing of polluting energy sources (6). Some renewable energy advocates believe that this form of subsidy is the main reason why fossil fuels continue to dominate the energy market. Thomas Friedman, for example, supports a carbon or gasoline tax as a price signal to encourage energy independence (7).

Why Not a Barrel Tax?

In Hawai`i, resistance to the barrel tax was met strongly by large fossil-fuel users, such as the airlines industry, whose business is negatively impacted by the rising price of oil. Considering the current economic situation, Governor Lingle did not want to pass another tax that would ultimately affect consumers and businesses that are reliant on the oil.

Opponents of barrel taxes also note that a tax on energy will disproportionately affect middle- and low-income households more, since a larger percentage of their income is spent on gasoline. In the U.S., the second lowest income quintile devoted 5.4% of their average annual expenditures to gasoline and motor oil in 2006, while the highest income quintile devoted just 3.7% (8).

Beyond a Barrel Tax: A Revenue-Neutral Barrel Tax

Because of the strong legislative support for HB 1271, one might speculate that this issue will be a priority in the next legislative session. However, the next legislative session is around elections, and passing legislation that increases taxes is historically very difficult during election seasons.

There is, however, the option to create a revenue-neutral barrel tax. A revenue-neutral barrel tax is politically savvy since it blunts the "no new taxes" demand that has been voiced by Governor Lingle and has held sway in American politics for over a generation. Revenue-neutral means that little if any of the tax revenues raised by taxing oil would be retained by the government (9). The vast majority of the revenues would be returned to the public through one of two primary return approaches listed below:

1. Rebate the revenues directly through regular (e.g., quarterly) equal dividends to all Hawai`i residents. In effect, every resident would receive equal, identical slices of the total revenue pie. This type of program has existed for three decades in Alaska, where residents receive annual dividends from the state’s North Slope oil revenues (10).
2. A “tax-shifting” approach causes each dollar of carbon tax revenue to trigger a dollar’s worth of reduction in existing taxes (for example Hawai`i’s sales or payroll taxes). As barrel-tax revenues are phased in, existing taxes will be phased out and, in some cases, eliminated. This “tax-shift” approach would ensure that the barrel tax is revenue-neutral, and also has the potential to benefit middle- and lower-income classes more, depending on how the taxes are shifted. This approach is supported by environmentalist and former U.S. Vice President Al Gore, who would like to see a carbon tax (which is more generally than a barrel tax in that it applies to all energy forms that release carbon dioxide and other greenhouse gases) (11).

Other Local and Near-Term Clean Energy Policies to be Aware of

On July 18, 2009, at a speech that declared the date as “Clean Energy Day” in Hawai`i, Lt. Governor Duke Aiona said the oil tax wasn't proper for the current economy and that there are other ways to fund the energy initiative (12). But what are the other policies being considered (or implemented) locally? The following two policies (Public Benefits Fund and Feed-In Tarrifs) are currently being implemented by the HECO Utilities. KIUC has both the advantage of viewing how these policies are enacted locally, as well as the perceived responsibility to follow suit or take on a leadership position.

Public Benefits Fund (PBF)

Public benefit funds (PBFs) are state-level programs typically developed during electric utility restructuring by some states in the late 1990s to ensure continued support for renewable energy resources, energy efficiency initiatives and low-income energy programs. These funds are most commonly derived from a very small surcharge on electricity consumption. PBFs commonly support rebate programs for renewable energy systems, loan programs, research and development, and energy education programs (13).

A well-designed and administered PBF increases public and private sector investments in cost-effective energy efficiency, resulting in reduced energy costs for electricity customers, emission reductions, and enhanced reliability. PBF charges generally range from $.27 to $2.50 on a residential customer’s monthly energy bill (14).

In January of 2009, HECO, MECO, and HELCO customers began getting a PBF surcharge on their utility bill. On July 1, 2009, a third-party PBF administrator—Science Applications International Corporation (SAIC)—took over the energy efficiency program from HECO, MECO and HELCO (15). Having a third-party administer the fund for energy efficiency is thought to be preferential since the utility is not incentivized to reduce electricity demand (i.e., if the utility sells less electricity, the utility loses money, creating a fundamental conflict between the utility’s interest in selling more energy and the public interest in conserving it). If a PBF is deemed appropriate for Kaua`i, a third-party administrator may not be necessary since the utility is a cooperative, operating with the community’s interest at heart.

Feed-In Tariffs

While Feed-in Tariffs (FITs) do not produce a clean energy fund in the same way as a barrel tax or PBF, a FIT acts as a price support mechanism for renewable energy that strongly encourages renewable energy development and overcomes significant barriers that renewable energy developers face. Under FIT legislation, the regional utility is obligated to buy renewable electricity at above-market rates as set by the government. The government does not fund the FIT; rather, the costs are passed on by the utility and shared equitably by all grid customers. The higher price helps to reduce the risk to renewable energy developers, and ultimately results in higher penetration of renewable energy (16). In addition to being based on the cost of generation, successful feed-in tariffs typically include three key provisions:

1. guaranteed access to the grid;
   
2. stable, long-term contracts (typically on the order of 15-20 years); and
   
3. a guarantee of payments for the entire electrical output of the renewable energy system.

In October 2008 the HECO utilities (HECO, HELCO, and MECO) and the Consumer Advocate (CA) signed a joint proposal that lead to the opening of Docket 2008-0273, which is considering the implementation of FITs for islands supplied by these utilities (17). The PUC is expected to release a publication on Hawai`i’s FIT legislation any day now, however the terms and structure of the price support is integral to its success, and this lengthy decision making process has therefore delayed implementation (18).

Other Innovative Policies

FIT legislation and PBFs are only two of many policy options that could support renewable energy development in Kaua`i. These two policies were selected due to their applicability in the local context, but do not indicate that Kaua`i is limited to these options. For example, policies such as decoupling; time-of-use energy rates; carbon cap and trade legislation; and innovative rebates, loans, tax credits, and project financing are being considered and implemented at global, federal, regional, and local levels.

At the community and stakeholder meetings held for KESP, a number of ways to build clean energy funds and reduce costs for renewable energy developers were suggested. The suggestions that encouraged the most support include the following:

• improve net energy metering and interconnection standards to encourage more distributed energy,
• perform a cost/benefit analysis of alternative energy and assign a risk-adjusted rate of return for the various renewable energy technologies, and
• streamline the permitting process to reduce upfront costs for renewable energy developers (19).

In the blog space below, please comment on the policy options described above and/or offer suggestions for other clean energy policy options that are applicable to Kaua`i’s situation. Your comments will be considered for the KESP.

References

1. Union of Concerned Scientists (Retrieved July 28, 2009), “Barriers to Renewable Energy Technologies”, http://www.ucsusa.org/clean_energy/technology_and_impacts/energy_technologies/barriers-to-renewable-energy.html.
2. Environmental Protection Agency (May 2008), “Advancing State Clean Energy Funds”, http://epa.gov/cleanenergy/documents/clean_energy_fund_manual.pdf.
3. House Bill 1271 (2009). “Food and Energy Security”, http://www.capitol.Hawai`i.gov/session2009/bills/HB1271_CD1_.pdf.
4. Blue Planet Foundation (July 15, 2009), “Senate Delivers Setback to Clean Energy Future”, http://www.blueplanetfoundation.org/releases/hb1271failure.pdf.
5. Hawaii Public Radio (July 2009), “Increasing the Barrel Tax”, http://www.hawaiipublicradio.org/hpr/index.php?option=com_content&task=view&id=3475&Itemid=71.
6. Department of Energy, Energy Information Administration (1999). “Federal energy market interventions 1999: Primary energy”, http://www.eia.doe.gov/oiaf/servicerpt/subsidy/pdf/sroiaf(99)03.pdf.
7. Whitlock, S. (September 2008) “NYT’s Tom Friedman on ABC: Slams McCain Energy Plan, Wants More Taxes”, http://newsbusters.org/blogs/scott-whitlock/2008/09/08/nyts-tom-friedman-abc-slams-mccain-energy-plan-wants-more-taxes.
8. Center for American Progress (June 2008), “Running on Fumes: Rising Gas Prices Add to the Strain on Families’ Already Squeezed Budgets”, http://www.americanprogress.org/issues/2008/06/pdf/food_gas.pdf.
9. Lugar, R.G. (February 1, 2009). “Raise the Gas Tax: A Revenue-Neutral Way to Treat Our Oil Addiction”, http://www.washingtonpost.com/wp-dyn/content/article/2009/01/30/AR2009013002728.html.
10. Hartzok, A. (2002) “The Alaska Permanent Fund: A Model of Resource Rents for Public Investment and Citizen Dividends”, http://www.earthrights.net/docs/alaska.html.
11. National Public Radio (July 17, 2008) “Al Gore’s Speech on Renewable Energy”, http://www.npr.org/templates/story/story.php?storyId=92638501.
12. Shikina, R. (July 19, 2009) “Oil tax debate overrides debut of Clean Energy Day”, http://www.starbulletin.com/news/20090729_oil_tax_debate_overrides_debut_of_clean_energy_day.html.
13. Database of State Initiatives for Renewables and Efficiency (June 2009), http://www.dsireusa.org/.
14. EPA, (April 2006), “Clean Energy-Environment Guide to Action: Policies, Best Practices, and Action Steps for States”, http://www.epa.gov/cleanenergy/documents/gta/guide_action_full.pdf.
15. Hawaii Energy Efficiency Program (July 2009), http://www.hawaiienergyefficiency.com.
16. Hinrichs, D. (2008), "Feed-in Tariff Case Studies", http://www.kauainetwork.org/_library/documents/kesp/technical%20libray/feed-in%20tariff%20case%20studies.pdf.
17. Department of Business, Economic Development & Tourism (October 2008). “Energy Agreement Among the State of Hawaii, Division of Consumer Advocacy of the Department of Commerce and Consumer Affairs, and The Hawaiian Electric Companies.” http://hawaii.gov/dbedt/info/energy/agreement/signed2008oct20.pdf.
18. FIT-Hawaii (June 2009), http://www.fit-hawaii.com/?FIT_proceedings_in_Hawaii.
19. Kaua`i Energy Sustainability Plan website (May 2009), http://www.kauainetwork.org/_library/documents/kesp/meeting-notes/all%20stakeholders%20meeting_5.14.09_v2.pdf.