Washington State voters rejected a proposal for the nation's first carbon tax Tuesday, defeating a landmark attempt to address climate change that had divided environmental activists. Despite being a major effort to reduce carbon dioxide emissions, some environmental justice advocates argued the measure would work against working people and the poor, a stance that put them uncomfortably aligned with the fossil fuel industry that also opposed the measure.

The carbon tax was expected to raise $2 billion annually through higher prices for gasoline and fossil fuel-fired electricity. It would have given all the money back, and then some, to the state's residents and businesses through a sales tax cut, rebates for working families and a tax break for manufacturers. Like all carbon taxes, Initiative 732 was designed to drive down global warming emissions by reducing demand for high-carbon fuels.

But it was unpopular with many social justice, environmental and health advocates who sought to use the revenue for renewable energy, mass transit and other green infrastructure projects, and to aid communities most affected by fossil fuel pollution or climate change.

"While tonight's outcome is disappointing...we have awakened a sleeping giant, and we look forward to continuing the fight for commonsense climate solutions for birds and for people," said Gail Gatton, executive director of Audubon Washington.

Proponents of the initiative hoped it could serve as a model for breaking the political gridlock that has stymied federal action on climate change.

For groups on the forefront of the climate action movement, the decision to withhold support from a carbon tax was wrenching.

"The people who came up with the idea of 'revenue-neutral' did it for a good reason, to defuse the partisan bomb that keeps us from getting everywhere on climate. But we can't find any political 'there' there," said KC Golden, a senior adviser to the Washington State nonprofit Climate Solutions.

"To tell labor and communities of color, 'We're going to change the incentives and benefits are going to flow' sounds...a lot like 'trickle-down' economics. They justifiably don't trust that story."

It put environmental activists in a challenging place, said Alan Durning, director of the Seattle sustainability think tank Sightline Institute. I-732 has "divided climate hawks so deeply that even writing about it is a task we undertake with trepidation," he wrote. Some Washington chapter members of the Sierra Club quit over the national organization's decision not to support the measure.

That put the Sierra Club and other climate action advocates on the same side as the billionaire libertarian Koch brothers. Environmental groups didn't spend money on ads opposing the measure, but they stood on the sidelines as Koch Industries and other oil refiners and energy-intensive industries poured $1 million into opposing it in the two weeks before the election.

The carbon tax was the brainchild of Yoram Bauman, an iconoclastic Seattle economist and founder of a small advocacy group, Carbon WA, who designed the proposal to attract support from the right.

"Climate action historically in this country has been in the purview of the Democratic Party," said Bauman . This, he said, was "a budget-friendly, business-friendly, market-friendly, pocket-book friendly approach. We think that's a model for action in other states and in Washington, D.C."

But I-732 preempted a separate carbon tax effort that had been underway in the state, led by a large coalition of environmental and public health groups, communities of color, and labor unions. The coalition had been working to design a plan that would spend the tax revenue on clean energy and water initiatives that would create jobs, as well as projects to alleviate the burden of pollution and climate risk in communities of color. The coalition said it tried to initiate discussions toward a compromise with Bauman's group, but Carbon WA was committed to the tax-swap approach.

"We think it's essential to have the revenue reinvested in climate solutions," said Aiko Schaefer, coordinator of Front and Centered , a coalition of 60 social justice and community groups that opposed I-732. The coalition includes the NAACP, the Urban League, Coalition, the Asian-Pacific Island Coalition, and the Latino Community Fund. "Pricing carbon, and then giving the money away in tax breaks—including corporate tax breaks—is not something we could support."

Although I-732 would give tax rebates to poor working families, there are about 340,000 low-income families who would not be covered by the program, Sightline Institute estimated. It would also not be fast or easy to fix that, since under Washington law, the state legislature cannot amend a voter initiative for two years.

Bill Corcoran, western director of Sierra Club's Beyond Coal Campaign, called the measure a missed opportunity to help accelerate the move away from fossil fuels while addressing worker dislocation and environmental and climate injustice.

"This is a transformational moment for our economy if we choose to take that opportunity. Unfortunately, Carbon WA has chosen a flawed political strategy and a small-bore approach that fails to grasp the opportunity to lift folks across the state of Washington."

Battle Lines: The Fight Over I-732

The carbon tax that Washington voters rejected was designed to levy $25 per metric ton of carbon by 2018, ramping up over 40 years to $100. At $25 per ton, the levy would add about 25 cents to the price of a gallon of gasoline, 2.5 cents to each kilowatt-hour of coal-fired electricity, and 1.25 cents to electricity generated by natural gas.

The money raised would flow immediately out of the state's coffers in a 1 percent cut in Washington's state sales tax, virtual elimination of the business taxes for manufacturers, and tax rebates of up to $1,500 per year to 460,000 low-income households.

The approach earned a key endorsement from pioneering climate scientist James Hansen, who has long favored a carbon tax with a 100 percent rebate of the proceeds to citizens as the most effective and fairest means of cutting greenhouse gas emissions.

"I-732 is not perfect, but it would be the best approach so far." Hansen wrote an op-ed in The Seattle Times. He urged a yes vote "for the sake of government transparency, and to provide an example for other states and the rest of the world, but most of all for young people, future generations, and nature."

More than 50 scientists from the University of Washington signed an open letter in support of the initiative, and DiCaprio used Twitter to urge voters support the measure. Audubon Washington stood apart from other major environmental organizations, taking a strong stand in favor of the measure and raising $1.3 million for advertising and other pro-carbon tax campaigning. Noting that the movement may not get another opportunity to enact a carbon tax, Audubon said, "The cost of inaction is too great."

Texas billionaire John Arnold and his wife, Laura, were the top donors to the effort to pass the carbon tax, contributing $250,000 to Audubon's campaign. Arnold, who made his fortune trading natural gas for Enron and his own hedge fund, now is a full-time philanthropist. Other top carbon tax supporters who gave through Audubon were Seattle engineer-turned-entrepreneur David Guiliani (whose company pioneered the Sonicaire toothbrush) and the Durst Organization, one of New York's largest family real estate empires and a pioneer in environmentally sustainable buildings.)

Together, Audubon and Carbon WA spent $3 million in support of the carbon tax. That was more than a 2-to-1 advantage over the $1.4 million raised by opponents, 70 percent of which came from oil refiners and energy-intensive industries in the final two weeks of the campaign. The American Fuel and Petroleum Manufacturers, the national trade group, led the late charge with a $250,000 donation. Other large contributors included Kaiser Aluminum, Nucor Steel, Ash Grove Cement, the Northwest Pulp and Paper Association, Puget Sound Energy, the state's most carbon-intensive electric utility. Koch Industries, which has no business locations in Washington state, gave $50,000.

The campaign to defeat the bill was relatively small for a measure with impact on big business; in contrast, the food industry spent $33 million to defeat a GMO-labeling ballot initiative in Washington State in 2013. For environmentalist opponents, the puny "no" campaign was proof that the fossil fuel industry did not view the measure as a threat. Proponents said, on the contrary, it demonstrated their success in crafting a measure that could gain wide support.

The measure's biggest challenge, however, was confusion over what it meant. Polls showed the number of undecideds increased from one-fifth of voters at the beginning of October to nearly one-third of voters by the end of the month.

Revenue-Neutral Controversy

The goal for I-732 was to be "revenue-neutral," but number-crunchers at the Washington state budget office concluded it would bring in about $225 million less annually than the payout in tax breaks. Others disputed that finding, but budget pressures are particularly acute because the state is currently in contempt of court for underfunding K-12 schools in violation of the Washington constitution. State employees have not seen a wage increase since 2008, while their pension and health care costs have risen. The divided legislature narrowly avoided a government shutdown in its last state budget session.

"Our state right now is under great turmoil, and let's be honest about which schools are going to be feeling the impact of more strain," said Schaefer. "And there will be other budget cuts, and often that means cuts to programs that impact people with low income. From our perspective, I-732 is written on backs of poor people."

Due to the budget concerns, Gov. Jay Inslee, a Democrat and an outspoken advocate of climate action, opposed I-732. Inslee, who is set to implement a new rule in January capping carbon emissions of the state's largest polluters, won re-election.

New York energy policy analyst Charles Komanoff, director of the Carbon Tax Center, said he believes that proponents of I-732 made a tactical error by framing the tax-swap as a way to appeal to fiscal conservatives, instead of stressing and explaining how it would protect low-income and middle-income families.

Washington State, which has no income tax, relies more heavily on sales taxes than other states, resulting in a regressive tax structure: Poor families pay a far greater percentage of their family income on tax than wealthy families. The sales tax cut helps address that inequity, says Komanoff, and poor and working families will see the benefit far more quickly than if the money went into infrastructure projects. "I think the policy they devised is fantastic, he said. "I think it's really fair and smart."

Carbon Tax: What's Next?

Bauman said the opposition from environmentalists was "not entirely unexpected."

"There's two stories you can tell about how to get climate action. One is our story, a bipartisan revenue-neutral approach, and the other story is kind of what I would refer to as a unite-the-left, or progressive takeover of the world," he said. "For folks who are very committed to the second story, the first story doesn't look so good.

"Our position all along has been not to let the perfect be the enemy of the good...We think that they're going to look back on this as a mistake that they made, of being on the wrong side of history," Bauman said.

With I-732 defeated, Schaefer said her coalition would move forward with an effort to gain support for its carbon tax proposal that uses the revenue to help communities and accelerate a clean energy transition. But they'll face the difficulty of explaining to voters why the approach is different than the measure they rejected. "Definitely, Carbon WA has made the job more difficult of everyone who wants to see climate action," Schaefer said.