There is little question of the utility of a carbon tax to incentivize greenhouse gas emission reductions. But this raises three other questions of a more practical nature:
- Why hasn’t the government established one?
- Should the tax be passed on to consumers?
- What is the right number?
Below are some pertinent points to ponder.
Since a carbon tax would not cost the government anything and offers actually to make money for the government, why hasn’t it passed such a law? The answer probably is that the oil lobby is against it. A secondary answer is resistance by consumers (voters) who fear a carbon tax would raise the price of fuel. But the price of fuel will undoubtably rise until renewables are plentiful enough and cheap enough to compete with fossils.
The pain of a carbon tax must be shared by industry and consumers alike and subsidized by the government. If a carbon tax is passed on solely to consumers it will ruin its purpose. It would create consumer discontent while allowing business as usual for the oil companies. Sure, the oil companies would prefer happy consumers, but consumer anger has never stopped them from raising retail prices before? With no recourse to the oils, unhappy consumers will vent their anger at the ballot box – thus politicians’ hesitancy. The fact that a strong carbon tax resolution failed to come out of COP26 is testament to the worthlessness of that venue. Greta, we hear you.
But how can the oils be prevented from passing the tax to consumers. A clever Congress (an oxymoron?) might write a law so as to prevent price increases for anything except raw material increases, but the oils will cry foul regulation of the free market and they are likely to cook their books to evade the tax anyway. Fixing climate change will require paradigm changes, so perhaps some free market regulation is in order. If the oils are prevented from passing through the tax, another consideration raised is how much of a hit can those companies take without going bankrupt? Oil companies make about 15% profit (some say it’s as low as 7%) and the government subsidizes their production by $20 billion/yr in the US. At total revenues of $110 billion for 2020 (it’s been as high as 220, so $150 billion might be a better number), that leaves about $20 billion in profits and another $20 billion in subsidies available to cover a carbon tax. Let the oils keep half their profit (hardly leaving them bankrupt) and use the subsidies for carbon reduction instead of carbon production, which leaves $30 billion/yr available for carbon reduction/tax from the oil industry.
The US consumes about 20 million barrels/day of oil (7 billion bbl/yr) and oil consumption generates about 5 billion metric tons/yr of greenhouse gas equivalents. From the numbers provided above, $30 billion/yr available, that amount would cover a tax of $6/ton. A much larger tax is needed, however.
Coming at it from a different direction, an effective carbon tax would be priced so as to encourage a carbon capture industry to develop. That would achieve two purposes – actual carbon capture and emission reduction incentives. US DOE estimates that carbon capture should cost about $60/ton, while the IEA estimates a current midpoint cost of about $75/ton for stack gas capture and $250/ton for open air capture. Let’s be optimistic for the latter and realistic for the former and assume an average carbon capture cost of $100/ton, That would result in a total annual cost of $500 billion/yr ($70/bbl) if all today’s emitted greenhouse gas was captured. That ain’t peanuts; oil profits and subsidies are far short of covering this. The number is the equivalent of doubling the price of oil/gas. Keep thinking about a paradigm change.
Nearly all climate change experts now agree that carbon capture will be needed to avoid a greenhouse catastrophe. A favorable scenario would be for a growing renewables supply to allow a decline in fossil use with carbon capture sucking up the balance from continued fossil use and historical residual. So ultimately, we will need less than $500 billion/yr for carbon capture. Is $100 billion/yr possible? (It would require ultimately an 80% replacement of fossils by renewables.) If so, that $30 billion available from the oils starts looking significant. Conceptually, the notion is that a tax should be high enough so emitters will pay for carbon capture to avoid the tax, high enough make carbon capture a viable alternative, industry to develop and high enough to incentivize the big wean (off fossils), but not so high as to break the bank.
Going out on a limb, the tax must be on the order of $100/ton. That would make carbon capture competitive with the tax while incentivizing the big wean. At that rate, everyone will still feel pain (did you think it would be free?), but at least we will have a place to live.