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Carbon tax
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A carbon tax is an environmental tax on emissions of carbon dioxide and other greenhouse gases. It is an example of a pollution tax.
Carbon atoms are present in every fossil fuel (coal, petroleum and natural gas) and are released as CO2 when they are burnt. In contrast, non-combustion energy sources—wind, sunlight, hydropower, and nuclear—do not convert hydrocarbons to carbon dioxide. Accordingly, a carbon tax is effectively a tax on the use of fossil fuels, and only fossil fuels.
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Encyclopedia
A carbon tax is an environmental tax on emissions of carbon dioxide and other greenhouse gases. It is an example of a pollution tax.
Carbon atoms are present in every fossil fuel (coal, petroleum and natural gas) and are released as CO2 when they are burnt. In contrast, non-combustion energy sources—wind, sunlight, hydropower, and nuclear—do not convert hydrocarbons to carbon dioxide. Accordingly, a carbon tax is effectively a tax on the use of fossil fuels, and only fossil fuels. Some schemes also include other greenhouse gases; the global warming potential is an internationally accepted scale of equivalence for other greenhouse gases in units of tonnes of carbon dioxide equivalent.
Because of the link with global warming, a carbon tax is sometimes assumed to require an internationally administered scheme. However, that is not intrinsic to the principle. The European Union considered a carbon tax covering its member states prior to starting its emissions trading scheme in 2005. The UK has unilaterally introduced a range of carbon taxes and levies to accompany the EU ETS trading regime. Note that emissions trading systems do not constitute a Pigovian tax, because they entail the creation of a property right.
The purpose of a carbon tax is to protect the environment by reducing emissions of carbon dioxide and thereby slow climate change. It can be implemented by taxing the burning of fossil fuels—coal, petroleum products such as gasoline and aviation fuel, and natural gas—in proportion to their carbon content. Unlike other approaches such as carbon cap-and-trade systems, direct taxation has the benefit of being easily understood and can be popular with the public if the revenue from the tax is returned by reducing other taxes. Alternatively, it may be used to fund environmental projects.
Background
In economic theory, pollution is considered a negative externality because it has a negative effect on a party not directly involved in a transaction. To confront parties with the issue, the economist Arthur Pigou proposed taxing the goods (in this case fossil fuels) which were the source of the negative externality (carbon dioxide) so as to accurately reflect the cost of the goods' production to society, thereby internalizing the costs associated with the goods' production. A tax on a negative externality is termed a Pigovian tax, and should equal the marginal damage costs.
A carbon tax is an indirect tax—a tax on a transaction—as opposed to a direct tax, which taxes income. As a result, some American conservatives have supported such a carbon tax because it taxes at a fixed rate, independent of income, which complements their support of a flat tax.
Prices of carbon (fossil) fuels are expected to continue increasing as more countries industrialize and add to the demand on fuel supplies. In addition to creating incentives for energy conservation, a carbon tax would put renewable energy sources such as wind, solar and geothermal on a more competitive footing, stimulating their growth. Former Federal Reserve chairman Paul Volcker suggested (February 6, 2007) that "it would be wiser to impose a tax on oil, for example, than to wait for the market to drive up oil prices."
Social cost of carbon
Many estimates of aggregate net economic costs of damages and benefits from climate change across the globe, the social cost of carbon (SCC), expressed in terms of future net benefits and costs that are discounted to the present, are now available. Peer-reviewed estimates of the SCC for 2005 have an average value of US$43 per tonne of carbon (tC) (i.e., US$12 per tonne of carbon dioxide) but the range around this mean is large. For example, in a survey of 100 estimates, the values ran from US$–10 per tonne of carbon (US$–3 per tonne of carbon dioxide) up to US$350/tC (US$95 per tonne of carbon dioxide.)
One must be very careful when comparing weights of carbon versus carbon dioxide, since carbon comprises only 27.29% (12.0107 / [12.0107 + 2 × 15.9994]) of the mass of carbon dioxide. In simple terms, there are only 27 tonnes of carbon in 100 tonnes of carbon dioxide.
In an October, 2006, report entitled the Stern Review by then HM Treasury official and former Chief Economist and Senior Vice-President of the World Bank, Nicholas Stern, he states that climate change could affect growth which could be cut by one-fifth unless drastic action is taken. Stern has warned that one percent of global GDP is required to be invested in order to mitigate the effects of climate change, and that failure to do so could risk a recession worth up to twenty percent of global GDP. Stern’s report suggests that climate change threatens to be the greatest and widest-ranging market failure ever seen. The report has had significant political effects: Australia reported two days after the report was released that they would allot AU$60 million to projects to help cut greenhouse gas emissions. The Stern Review has been criticized by some economists, saying that Stern did not consider costs past 2200, that he used an incorrect discount rate in his calculations, and that stopping or significantly slowing climate change will require deep emission cuts everywhere.
According to a 2005 report from the Association of British Insurers, limiting carbon emissions could avoid 80% of the projected additional annual cost of tropical cyclones by the 2080s. A June 2004 report by the Association of British Insurers declared "Climate change is not a remote issue for future generations to deal with. It is, in various forms, here already, impacting on insurers' businesses now." It noted that weather risks for UK households and property were already increasing by 2–4% per year due to changing weather, and that claims for storm and flood damages in the UK had doubled to over Ł6 billion over the period 1998–2003, compared to the previous five years. As a result insurance premiums are rising. In the UK the insurance industry normally offers insurance against natural disasters, however there is a risk that in some areas flood insurance will become unaffordable for some, and it has been mooted that cover may be withdrawn in some areas entirely unless there is government backing.
In the U.S., according to Choi and Fisher (2003) each 1% increase in annual precipitation could enlarge catastrophe loss by as much as 2.8%. Financial institutions, including the world's two largest insurance companies, Munich Re and Swiss Re, warned in a 2002 study that "the increasing frequency of severe climatic events, coupled with social trends" could cost almost US$150 billion each year in the next decade. These costs would, through increased costs related to insurance and disaster relief, burden customers, taxpayers, and industry alike.
Border Issues
Concerns have been raised about carbon leakage which is the tendency for energy-intensive industries to migrate from nations with a carbon tax to those nations without a carbon tax where some of the receiving nations might be less energy-efficient. A possible antidote is for carbon-taxing countries to levy carbon-equivalent fees on imports from non-taxing nations.
Petroleum (motor gasoline, diesel, jet fuel)
Many OECD countries have taxed fuel directly for many years for some applications; for example, the UK imposes duty directly on vehicle hydrocarbon oils, including petrol and diesel fuel. The duty is adjusted to ensure that the carbon content of different fuels is handled with equivalence.
While a direct tax should send a clear signal to the consumer, its use as an efficient mechanism to influence consumers' fuel use has been challenged in some areas:
- There may be delays of a decade or more as inefficient vehicles are replaced by newer models and the older models filter through the 'fleet'.
- There may be practical political reasons that deter policy makers from imposing a new range of charges on their electorate.
- There is some evidence that consumers' decisions on fuel economy are not entirely aligned to the price of fuel. In turn, this can deter manufacturers from producing vehicles that they judge have lower sales potential. Other efforts, such as imposing efficiency standards on manufacturers, or changing the income tax rules on taxable benefits, may be at least as significant.
- In many countries fuel is already taxed to influence transport behavior and to raise other public revenues. Historically, they have used these fuel taxes as a source of general revenue, as their experience has been that the price elasticity of fuel is low, thus increasing fuel taxation has only slightly impacted on their economies. However, in these circumstances the policy behind a carbon tax may be unclear.
Some also note that a suitably priced tax on vehicle fuel may also counterbalance the "rebound effect" that has been observed when vehicle fuel consumption has improved through the imposition of efficiency standards. Rather than reduce their overall consumption of fuel, consumers have been seen to make additional journeys or purchase heavier and more powerful vehicles.
Calculation
One way to calculate a carbon tax is as follows:
According to the , emissions total about 20 pounds of CO2 per gallon of petroleum (2.4 kilograms per litre, 2.4 kg/L), so a tax of $100 per ton of CO2 ($110 per tonne of CO2) would translate to a tax of about $1.00 per gallon ($0.26 per litre). To be precise: Emissions are 19.564 pounds of CO2 per gallon of motor gasoline, 22.384 pounds of CO2 per gallon of diesel fuel, and 21.095 pounds of CO2 per gallon of jet fuel (2344.3 g CO2 per L of motor gasoline, 2682.2 g CO2 per L of diesel fuel, and 2527.7 g CO2 per L of jet fuel). So a tax of $100 per ton of CO2 translates to a tax of $0.978 per gallon of motor gasoline, $1.119 per gallon of diesel fuel, and $1.055 per gallon of jet fuel ($0.258 per litre of motor gasoline, $0.296 per litre of diesel fuel, and $0.279 per litre of jet fuel). At a price between $2.50 and $5.00 per gallon, a tax of $100 per ton of CO2 would raise fuel prices by 40–20%.
For the purpose of looking at electricity generation, emissions total about 155 pounds of CO2 per million BTUs (66.6 g/MJ), so a tax of $100 per ton of CO2 ($110 per tonne of CO2) translates to a tax of about $7.75 per million BTUs ($7.35 per GJ). To be precise: The emissions are 156.425 pounds of CO2 per million BTUs from motor gasoline, 161.386 pounds of CO2 per million BTUs from diesel fuel, and 156.258 pounds of CO2 per million BTUs from jet fuel (67.2506 g of CO2 per MJ from motor gasoline, 69.3835 g of CO2 per MJ from diesel fuel, 67.1788 g of CO2 per MJ from jet fuel). So a tax of $100 per ton of CO2 translates to a tax of $7.82 per million BTUs of motor gasoline, $8.07 per million BTUs of diesel fuel, and $7.81 per million BTUs of jet fuel ($7.41 per gigajoule (GJ) from motor gasoline, $7.65 per GJ from diesel fuel, $7.41 per GJ from jet fuel).
Natural gas
According to the , emissions total 120.6 pounds of CO2 per thousand cubic feet, i.e., 60.3 tons per million cubic feet, so a tax of $100 per ton of CO2 translates to a tax of $6.03 per thousand cubic feet of natural gas. At a price of between $4 and $10 per thousand cubic feet, a tax of $100 per ton of CO2 would raise natural gas prices by 60–150%.
According to the , since 2001, the U.S has used, on average, of natural gas every year.
For the purpose of looking at electricity generation: emissions total 117.08 pounds of CO2 per million BTUs, so a tax of $100 per ton of CO2 translates to a tax of $5.854 per million BTUs.
Coal
According to the , emissions per ton of coal range from 1.40 tons of CO2 to 2.84 tons of CO2, depending on the type of coal (1.40 for lignite, 1.86 for subbituminous, 2.47 for bituminous, and 2.84 for anthracite, to be precise), so a tax of $100 per ton of CO2 translates to a tax of between $140 and $284 per ton of coal, depending on the type ($140 for lignite, $186 for subbituminous, $247 for bituminous, and $284 for anthracite). The price of coal delivered to electric utilities nationwide averaged $27.34 per ton in 2004; for that price, a tax of $100 per ton of CO2 means a price increase of 500–1,000% depending on the type (512% for lignite, 680% for subbituminous, 903% for bituminous, and 1039% for anthracite).
Because of the differences in the carbon content of different types of coal, it is easier to do the calculations in terms of BTUs rather than tons of coal. So: Emissions per million BTUs range from 205 to 227 pounds of CO2 per million BTUs (215.4 for lignite, 212.7 for subbituminous, 205.3 for bituminous, and 227.4 for anthracite, to be precise), so a tax of $100 per ton of CO2 translates to a tax of about $10 per million BTUs, depending on the type of coal ($10.77 for lignite, $10.635 for subbituminous, $10.265 for bituminous, and $11.37 for anthracite).
Electricity
The impact of a carbon tax on electricity prices depends on the amount of CO2 generated along with the electricity, and that depends on the type of fuel used and the efficiency ("heat rate") of the generator. At 100% efficiency, 3413 BTU = 1 kW·h.
In terms of fuel use, note from above that CO2 emissions per million BTUs (293 kW·h) range from 117.08 pounds of CO2 for natural gas and about 155 pounds of CO2 for petroleum to between 205 and 227 pounds of CO2 for coal, and that a tax of $100 per ton of CO2 therefore translates into a tax per million BTUs that ranges from $5.854 per million BTUs for natural gas and about $7.75 per million BTUs for petroleum to between $10.27 and $11.37 per million BTUs for coal. For comparison purposes: in 2005, fuel prices to electricity generators per million BTU were $7.70 for oil, $8.18 for natural gas, $1.53 for coal, and $0.48 for nuclear. Current electricity prices are in the neighborhood of $0.08 per kW·h.
Old-style generators have a heat rate in the ballpark of 10,000 BTUs per kW·h. At that heat rate, a tax of $100 per ton of CO2 translates into a tax of $0.05854 per kW·h for natural gas, about $0.0775 per kW·h for petroleum, and between $0.1027 and $0.1137 per kW·h for coal. As noted above, current electricity prices are in the neighborhood of $0.08 per kW·h.
New-style combined-cycle gas turbines currently (2005) use 6,572 BTUs per kW·h (51.93% efficient), a number that is expected to decline to 6,333 by 2015. At these heat rates, a tax of $100 per ton of CO2 translates into a tax of $0.0385 per kW·h for natural gas using 2005 technology and a tax of $0.0371 per kW·h for natural gas using 2015 technology and considering only emissions at the generator.
New-style combined-cycle coal gasification units currently (2005) use 8,309 BTUs per kW·h (41.08% efficient), a number that is expected to decline to 7,200 by 2015. At these heat rates, a tax of $100 per ton of CO2 translates into a tax of between $0.0853 and $0.0945 per kW·h for coal using 2005 technology and a tax of between $0.0739 and $0.0819 per kW·h for coal using 2015 technology and considering only emissions at the generator. Life cycle emissions from coal power tend to be concentrated at the generator, whereas with gas plants, upstream emissions can be more significant, depending on the source of the gas.
Implementation
European Union
On January 1, 1991, Sweden enacted a carbon tax, placing a tax of 0.25 SEK/kg ($100 per ton) on the use of oil, coal, natural gas, liquefied petroleum gas, petrol, and aviation fuel used in domestic travel. Industrial users paid half the rate (between 1993 and 1997, 25% of the rate), and certain high-energy industries such as commercial horticulture, mining, manufacturing and the pulp and paper industry were fully exempted from these new taxes. In 1997 the rate was raised to 0.365 SEK/kg ($150 per ton) of CO2 released. In 2007, Sweden will raise taxes on carbon emissions.
Finland, the Netherlands, and Norway also introduced carbon taxes in the 1990s. Finland was the first to introduce the tax, even though it emits only 0.3 per cent of the world's carbon emissions.
In Italy, carbon tax was introduced or modified with the article 8 of the law December 23, 1998, n. 448, according to the conclusions of the Kyoto Conference of 1–11 December 1997.
The United Kingdom Treasury imposed the Fuel Price Escalator, an incrementally-increasing pollution tax, on retail petroleum products from 1993. The increases stopped after politically-damaging fuel protests in 1999, at which time tax and duty represented more than 75% of the total pump price. Tax now represents about ? of the pump price.
United States
In 1993, then President Bill Clinton proposed a BTU tax. It would have taxed all fuel sources based on their heat content except for wind, solar, and geothermal. It was never adopted. His Vice President, Al Gore, had strongly backed a carbon tax in his book, Earth in the Balance, but this became a political liability after the Republicans attacked him as a "dangerous fanatic". In 2000, when Gore ran for President, one commentator labeled Gore's carbon tax proposal a "central planning solution" harking back to "the New Deal politics of his father." In April 2005, Paul Anderson, CEO and Chairman of Duke Energy, called for the introduction of a carbon tax. In January 2007, economist Charles Komanoff and attorney Dan Rosenblum launched a Carbon Tax Center to give voice to Americans who believe that taxing carbon emissions is imperative to reduce global warming.
In November 2006 voters in Boulder, Colorado have passed U.S. first-ever municipal "carbon tax", is a tax on electricity consumption (utility bills) that goes to fund programs by the City of Boulder, Colorado to reduce greenhouse gas emissions. However, because it is a tax on net electricity usage instead of on carbon, the tax also applies to carbon-free sources of electricity unless the consumer buys their electricity through Xcel's WindSource program (wind-generated electricity).
In May 2008, the Bay Area Air Quality Management District, which covers nine counties in the San Francisco Bay Area, passed a carbon tax of 4.4 cents per ton.
Some states are considering the imposition of carbon taxes. For example in 2006, the state of California, passed AB-32 which requires California to reduce greenhouse gas emissions. In a effort to execute AB-32, the California Air Resources Board put forth the idea to implement a carbon tax but has yet to reach agreement with the Western States Petroleum Association who represent the refineries in the state. The WSPA holds that AB-32 only allows a carbon tax to cover administrative costs.
Canada
On February 19, 2008, the Canadian province of British Columbia announced its intention to implement 2.4 cents carbon tax beginning July 1, 2008, making BC the first North American jurisdiction to implement such a tax. The tax will increase each year after until 2012, reaching a final price of 7.2 cents per litre at the pumps .
Unlike previous proposals, legislation will keep the pending carbon tax revenue neutral by reducing corporate and income taxes at an equivalent rate.Also, the government will also reduce taxes above and beyond the carbon tax offset by $481 million over three years.
In the 2008 Canadian federal election a carbon tax proposed by Liberal Party leader Stephane Dion, known as the Green Shift, became a central issue in the campaign. It would have been revenue-neutral, with increased taxation on carbon being balanced by tax cuts for individual citizens. However, it proved to be unpopular and led the Liberal Party to its worst share of the popular vote since Confederation.
New Zealand
In 2005 New Zealand proposed a carbon tax, setting an emissions price of NZ$15 per tonne of CO2-equivalent. The planned tax was scheduled to take effect from April 2007, and applied across most economic sectors though with an exemption for methane emissions from farming and provisions for special exemptions from carbon intensive businesses if they adopted world's-best-practice standards of emissions. After the 2005 election, the minor parties supporting the Government opposed the proposed tax, and it was abandoned in December 2005.
Support
Carl Pope, exectutive director of the Sierra Club, supports a carbon tax over cap-and-trade because employers will know exactly what they paid for the carbon dioxide they produced, and because a cap-and-trade system rewards those who have the highest emissions now and have done the least to reduce them previously.
Former Vice-president of the U.S. Al Gore said:
- "We should start using the tax code to reduce taxes on employment and production, and make up the difference with pollution taxes, principally [on] CO2. Now I fully understand that this is considered politically impossible. But part of our challenge is to expand the limits of what's possible. Right now we are discouraging work and encouraging the destruction of the planet's habitability."
On December 11, 2008, Rex Tillerson, the CEO of Exxonmobil, said a carbon tax is "a more direct, more transparent and more effective approach" than a cap and trade program, which he said, "inevitably introduces unnecessary cost and complexity." He also said that he hoped that the revenues from a carbon tax would be used to lower other taxes so as to be revenue neutral.
Gary Becker, a conservative economist, expressed his support for carbon taxes over cap-and-trade. Becker won the Nobel Prize in economics in 1992.
See also
External links
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- — analysis by Global Policy Forum
- — Richard Cooper, on behalf of the Harvard Project on International Climate Agreements
- Arguments for an Ecotax.
- is a web application which simulates world climate change policies and their impacts at the world level.
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