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Frank Bernheisel: The View From Here
Frank Bernheisel
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Frank Bernheisel
Posted 09.1.17
Just Outside Washington

FRANK BERNHEISEL

CARBON TAX: STILL A GOOD IDEA

A carbon tax is a fee imposed on carbon-based fuels (coal, oil, gas, etc.). The purpose of a carbon tax is to reduce damage to the environment and eventually eliminate the use of fossil fuels.

Burning of carbon fuels releases carbon dioxide into the atmosphere, which rises into the upper atmosphere and remains resident there, typically for around a 100 years. There it traps heat radiated from Earth's surface and causing global warming and other harmful effects.

No, no, not climate change, bad, bad.

The U.S.'s plan to meet the Paris Agreement, which the Obama administration submitted in March 2015, set the goal of reducing greenhouse gas emissions by 26 percentage to 28 percentage by 2025. The baseline against which this reduction is measured is 2005. In 2005 the US emitted 6,132 million metric tons (1) of carbon dioxide into the atmosphere. A carbon tax could meet the Paris Agreement goal.

A carbon tax makes the users of carbon fuels pay for the environmental damage caused by releasing carbon dioxide into the atmosphere. The more carbon in the fuel -- coal, oil, gasoline, or natural gas -- the more tax the user would pay. This becomes a powerful monetary disincentive that motivates changes to clean energy across the economy. The carbon tax delivers an economic pay off to move to energy efficiency and non-carbon energy, such as solar or wind.

The amount of CO2 released in burning any fossil fuel is strictly proportional to the fuel's carbon content as shown in the chart.

chart

Burning (oxidizing) a fossil fuel combines its carbon and hydrogen atoms with oxygen and releases heat. The heat is put to productive uses -- generate electricity, run a car, heat a house, etc. Natural gas, with a high ratio of hydrogen to carbon, is the least carbon-intensive fuel, while coal is the most. Note: Wood and solid waste release slightly more CO2 per BTU (2) when burned than coal.

The carbon content of every fossil fuel is precisely known or can be measured. A carbon tax is linked to these measurements; taxing coal heavily, petroleum products less, and natural gas, even less. This makes a carbon tax simple to manage and lowers the administrative costs.

The easiest method for applying the carbon tax is at the point where fuels are extracted from the earth, refined, or imported. This limits the number of entities from which the tax is collected. Fuel suppliers and processors are free to pass along the cost of the tax to the extent that market conditions allow. Placing a tax on carbon gives consumers and producers a monetary incentive to reduce their carbon dioxide emissions. The tax rates should be applied to the heat content of each fuel (dollars per million BTU). The approach based on physical quantities of fuel isn't tenable, due to wide natural variations in carbon content within each fuel type.

In 2016, U.S. carbon dioxide emissions from fossil fuel combustion were approximately 5 billion metric tons. The total energy consumption per year has been essentially unchanged since 2000 but coal utilization has declined, and natural gas and renewables (wind and solar) have increased. A carbon tax of $49 per metric ton of CO2 would generate an estimated $245 billion in annual revenue. Table 1 shows impact of this carbon tax on the prices of the various fossil fuels.

chart

According to Gilbert Metcalf and David Weisbach (3), a well-designed carbon tax can capture about 80 percentage of U.S. emissions by taxing only a few thousand taxpayers, and almost 90 percentage with a modest additional cost. They recommend full or partial delegation of rate setting authority to an agency to ensure that rates reflect current information about the costs of carbon emissions and abatement. Also, they propose an origin-basis system for trade with countries that have an adequate carbon tax, and a system of border adjustment taxes for imports from countries without a carbon tax.

As mentioned above, a carbon tax of $49 per metric ton of CO2 would raise an estimated $245 billion in annual revenue. This revenue could be used to reduce other taxes and/or pay down the debt. A group, led by former Secretary of State James A. Baker III, with former Secretary of State George P. Shultz and Henry M. Paulson Jr., a former secretary of the Treasury, say that taxing carbon pollution produced by burning fossil fuels is "a conservative climate solution" based on free-market principles.

They suggest that all the money raised would be returned to consumers in what the group calls a "carbon dividend" amounting to an estimated $2,000 a year for the average family of four. This would offset the negative impact of the carbon tax on low-income families. Their calculations show almost two-thirds of the population would be money ahead with the carbon dividend. The full dividend converts a regressive policy into a progressive one. Because wealthier people have larger-than-average carbon footprints (they buy more stuff, live in bigger houses, fly more, etc.) and they will pay more carbon tax. For most middle-income and all low-income families, the carbon dividend will exceed the carbon tax that they pay.

The carbon tax is a viable solution to lowering the carbon footprint of the U.S. It will promote growth, which is why many corporations (4) support it; Rex Tillerson, when he was head of Exxon/Mobil, said: "We have long supported a carbon tax as the best policy of those being considered". Also, a carbon tax will provide new jobs in low carbon industries and, because of the border adjustment; it is a fair trade approach. Environmental groups have long favored a carbon tax. The U.S. Congress and President Trump do not seem to have gotten the message. Maybe they are going to Repeal Climate Change.

NOTES:

1. A metric ton is 2205 pounds.
2. The BTU or British thermal unit is the traditional unit of heat; it is defined as the amount of heat required to raise the temperature of one pound of water by one degree Fahrenheit.
3. The Design of a Carbon Tax (Gilbert Metcalf & David Weisbach, Harvard Environmental Law Review, 2009.
4. Corporations in favor include: BP, ExxonMobil, General Motors, Johnson & Johnson, PepsiCo, Procter & Gamble, Santander, Schneider Electric Unilever, Total, and Shell
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