Monday, February 05, 2007

Carbon Tax II

How much would a carbon tax cost actual consumers? (We naturally assume that no oil company is going to pay a chunk of its tax bill through lower profits.) Well, judging by the CO2 figures for various fuels available at the US Department of Energy, here and here, we can put some quick math together.

I'm going to keep assuming, for the sake of this discussion, that we have the Stern-approved level of $85/metric ton of CO2 emitted.

For a barrel of conventional oil (yes, Alberta still produces normal oil, even though the tar sands get all the press) we'd add about $2.50 to the cost of a barrel of oil. For the tar sands oil, the tax would be $7.50.

For gasoline and diesel, the tax would be in the range of 20 cents a litre.

For electricity derived from coal we'd be paying an extra 8 or 9 cents per kwh.

These taxes would amount to a 25% increase in the price of gasoline and a 100%+ increase in the price of electricity in some areas. So you'd pretty clearly want to start at a lower level and phase it in upwards. But what would the effects be?

Well, coal would immediately be uneconomic. Wind and even solar (yes, even in Canada) would rapidly be more profitable for business, and cheaper for consumers, than coal-fired electricity.

Meanwhile, natural gas costs would have about $4.60 tacked on to each 1000 cubic feet. (Prices for natural gas averaged $5-6 for the last year.)

So yes, prices for energy would go up substantially. That's actually the point. One thing I'll point out here is that in none of these examples would the price be outside the range we've seen in volatile energy markets recently.

Why do prices increase so much? Think of it this way: the scale of the price increase is directly proportional to the size of our problems.

The biggest problem today is that no business is being forced to pay a price for its environmental activities. Nicholas Stern has correctly called climate change the greatest market externality in history, and we need to find some way to impose a price on carbon.

So why not a cap-and-trade system, like what's fitfully beginning in Europe? Well the big reason is that these markets take time to build and to refine -- the Europeans just had a minor meltdown when they issued too many carbon permits. A tax on carbon has the virtues of simplicity, predictability, and it's something the government can put in place quickly. Predictability really is crucial -- business can plan around a stable price.

What could we do with all this money? Remember that we could raise about $60 billion a year at $85/tonne. Thinking big... well, we could retire every single one of Canada's 400,000 coal, gas, and oil workers and give them $50,000 a year tax free ($20 billion a year) and still have 2/3 of our bounty left over. This would have the obvious effect of making Canada totally dependent on energy imports as far as oil, gas, and coal in concerned. So let's start conserving: With the other $40 billion we could give each of the 12 million Canadian households $3,000 towards the purchase of a new hybrid car. (On the condition they get rid of their old one, of course.)

And the next year we'd have another $40 billion to play with (those pensioned carbon workers still need their money until they die, and some of these guys are still young.)

You can play with these numbers a bit, but the point is clear I hope: Any reasonable tax on carbon is going to raise some pretty large amounts of money, and as I've said there's no reason to stop at $85/tonne. Like any sin tax, the government may find it's useful on occasion to raise it further. (Sweden: $150/tonne.)

4 comments:

Sam L. said...

Won't you ideally not have the 40 bill the next year, because people will stop using so much electricity. Or if you do, shouldn't you (or I guess we, since obviously this applies to the US as well) be saving the money to cope with the climate catastrophes as they come?

I understand investing some in renewables and efficiency to reduce carbon emissions, but to the extend that there will be some carbon being emitted for the foreseeable future, shouldn't we spend the next decade creating a multi-trillion dollar global insurance policy to deal with climate change as it comes?

Olaf said...

Interesting as always John,

I don't know if I'm missing something, but if this happens:

Thinking big... well, we could retire every single one of Canada's 400,000 coal, gas, and oil workers and give them $50,000 a year tax free ($20 billion a year) and still have 2/3 of our bounty left over.

Than how could this happen:

And the next year we'd have another $40 billion to play with (those pensioned carbon workers still need their money until they die, and some of these guys are still young.)

Some of the rigs paying the carbon taxes may still need attendants, no?

john said...

Olaf,

I'm assuming that simply because we don't extract the fossil fuels doesn't mean we don't still use them. We will obviously still be burning plenty of coal, oil, and gas in year 2, though hopefully a bit less. (We'd presumably be importing it, and the imports would be taxes equal to domestic production.)

There'd be a marginal decline in the emissions from extracting the fossil fuels. The real problems come more like ten years down the road, as industry finally gets retooled for low-carbon work. Then, yes, we'd have a serious problem.

The point of that (entirely fantastical and not to be taken too seriously) idea would be to eliminate the domestic constituency for increased fossil fuel use. We could do that a number of other ways, and I was really just trying to illustrate the potential size of the revenue stream.

Charles said...

John's numbers look solid, though I haven't checked them myself. I love his approach -- particularly his emphasis on carbon taxes' simplicity, predictability and speed.

My enthusiasm should be expected, given that I just teamed up with a colleague to launch the (US-based) Carbon Tax Center. We make similar and additional arguments on our Web site (www.carbontax.org).

One difference is that we (CTC) propose dedicating the revenues to making the carbon tax as equitable as possible -- either through "progressive tax-shifting" or via equal rebates to all residents.

John and others -- contact us and let us know how we can work together.

-- Charles Komanoff, CTC