A carbon tax is an essential part of the Climate Change solution. If done right, its cost doesn’t have to be passed on to consumers. It will fund a new industry, which is needed to sequester carbon from the atmosphere, and it will incentivize the decline of fossil fuel use.
The carbon tax should have two parts – generation and industrial use. For generation sold to consumers (e.g., gasoline, home heating, and residential electric generation), the fossil industry would pay the carbon tax on the greenhouse gas equivalent of the fossil fuel sold without the ability to pass the cost on to the consumer. For fossil fuel used by rest of industry, the industry would pay the carbon tax on the greenhouse gas equivalent of the fuel used. Both taxes could be averted with proof of greenhouse gas sequestration (“carbon capture”) equivalent for each amount of fossil fuel sold/used.
This plan rightfully puts responsibility on the creators of Climate Change without being simply punitive. Although punitive action against the fossil industry might feel better, after years of greedy profits subsidized to the tune of $600 billion/yr (by the G20) with reckless abandon of the climate, the money in the industry is just not there, as shown below.
It will cost at least $40 trillion for the US to solve its part of the Climate Change problem – about $20 trillion to convert the electric grid to renewables[1] and about $20 trillion to convert the currently feasible convertible portion of fossil-fueled energy to renewable electricity. A key component to the Climate Change solution is to convert as much energy use as possible to electricity because electricity can be made green and thus without carbon emissions.[2] The US emits about 7 billion tons/yr of greenhouse gas. If we could capture and sequester the carbon in this amount of gas, that might help significantly during the energy transition period and serve to (slowly) reclaim the damage to the atmosphere we did prior to conversion. Current optimistic costs for carbon capture are $100/ton so $50/ton is a reasonable target. At that price, $350 billion/yr plus capital expenses, say another $5 trillion, would capture all the greenhouse carbon the US emits.
So, the total (US) Climate Change solution cost might be $45 trillion capital plus $500 billion/yr operating (350 for carbon capture and 150 for maintenance). For reference, the US annual GDP is about $20 trillion.
Making fossil energy companies pay for the solution would be consistent with tobacco, asbestos, and oxy industry precedents, but there’s not enough money in this industry to cover the numbers noted above, as shown by the table below for the US big boys (rounded):
| Company | Market Cap ($B) | Revenue ($B/yr) |
| ExxonMobil | 300 | 200 |
| Chevron | 200 | 100 |
| Conoco | 100 | 20 |
| Duke Energy (includes elect.) | 80 | 22 |
| US Coal Industry | ? | 20 (50% decline in 10 yrs) |
Many other dirty industries have also profited from creating Climate Change, but they have even less means. For example, electric utilities own only $2 trillion of capital with combined revenue of only $600 billion/yr and the cement industry generates only $10 billion/yr of revenues. If 15% of all this other dirty revenue went to climate change solutions, it would add up to about $150 billion – not even enough to pay for all the carbon capture, albeit still helpful.
Applying that $150 billion to Climate Change solutions can’t hurt, but we still need the carbon tax. It works totally in the right direction. Faced with such a tax (and the above tithe on dirty company profits), companies (fossil and others) will be incentivized to find alternative energy. Moreover, if carbon capture can be sold to them more cheaply than the tax, they will line up to buy/fund such new technology rather than pay the tax. Any tax still paid, can be used by the government for Climate Change solutions. Winner, winner, chicken dinner. Consider the example, below.
Pay for Sequestration
Suppose the Carbon Sucking Company wants to go into the carbon capture business. Its costs are definable – $50/ton of CO2 sequestered – but where will it get income? Assume it needs income of $100/ton to cover the cost of capture, running the company, and profit. The company might go begging to the government for funding, but the government will be too busy trying to find that $40 trillion for renewable electricity conversion. The one thing the government might do to help, however, is to pass a law establishing a tax on emitted greenhouse gas of $150/ton.
The Carbon Burning Company, which emits a million tons/yr of CO2, is outraged at such a high tax and approaches the Carbon Sucking Company with a proposal for a better deal. It will pay the latter $100/ton, thus saving $50/ton in taxes ($50 million/yr – not peanuts). The Carbon Sucking Company has just found its business model. Moreover, more people want to create new carbon capture companies because they see a positive business model and plenty of customers. An essential industry is born.
Similarly, the Carbon Pumping Company is mad about the carbon tax it must pay for the carbon it produces from the ground because it can’t pass it on to consumers (70% of what it generates goes to transportation and residential). Its stock price is plummeting because stockholders are jumping ship (they don’t call it “fossil” for nothing) and it had to cut its CEO’s pay way down from $100 million/yr. It is stepping up its research on alternative energy and its acquisition of available alternative energy companies so it can stay in business mostly without selling fossil fuel in a future fossil-free world. Also, as long as it still generates fossil fuels, it will hire the Carbon Sucking Company to help it avert the higher tax.
Incentivize Conversion
Resigned to its new world of climate change mitigation, the Carbon Burning Company is happy with its new deal for now, but it would ultimately like to minimize its sequestration costs so it can get back to buying gold watches for its managers. It hires the Big Brain Company to figure out how to minimize its emissions. After much R&D spending/employment and after hiring the Retool Company to build a new carbon squeezer for the company (more employment), the Carbon Burning Company cuts its emissions in half. It still needs carbon sequestration for the rest, however, because it still doesn’t want to pay the higher tax on the other half, so it keeps the Carbon Sucking Company onboard because they have figured out how the sequester carbon cheaper than their competition. Despite the general decline in emissions, the competition still has plenty of work because there’s plenty of legacy greenhouse gas in the atmosphere still left to get sucked and the Carbon Pumping Company still generates fossil fuel. The carbon capture industry continues to flourish.
The beauty of this example is that it puts government in its proper role – creating sound policies, not handouts. It will be tricky to establish the carbon tax on the fossil industry without letting them fiddle their books to pass it on surreptitiously to consumers, but hopefully Congress still has some game left in it to accomplish that. The fossil lobbyists will undoubtedly argue (they already do) that a carbon tax will simply raise fossil prices, but this argument is myopic, outdated, and not true (at least for consumers) if Congress does its job properly. It is essential to create the tax while preventing its cost to be passed on to consumers because such an approach will incentivize fossil fuel reductions and help establish the carbon capture industry. The government should also stop paying fossil companies subsidies for production and instead pay it (if they must) to subsidize carbon sequestration and reduced emissions.
Even if consumers end up paying more for fossil fuel because of a carbon tax, that is not necessarily a bad thing. For a hundred years, and more so now, politicians have believed they needed to keep fuel prices low to stimulate industry and to keep consumers happy – thus the $600 billion/yr of subsidies to the fossil industry. Although climate change denial has declined even among most consumers, they still balk at energy inflation, but can they be re-educated to accept it if it means fighting climate change? Everyone will need to pay one way or another; energy inflation is inevitable.
Another elegance of this approach is that it makes the Climate Changers pay to the extent possible. They need to realize that it can no longer be business as usual.
Solutions to Climate Change will require out-of-the-box innovation for
both policy and technology. It’s past
time to move definitively. The
suggestion herein is the easy part. Can
we even get that done?
[1] Shifrin, N.S., 2016. Solar Power for the United States. BRG Review, Berkeley, CA.
[2] Shifrin, N.S. 2021. The Little Book of Answers. Amazon.