Can a carbon tax capture oil’s emissions?

One of the knottiest problems for people who want to reduce carbon emissions with cap-and-trade and command-and-control regulation is that it is impossible to include motor vehicles in these schemes.

The Obama administration is now concentrating on coal plants and other stationary sources. This affects coal and possibly gas plants, but the oil industry gets off scot-free. And cars and other moving sources constitute almost half the carbon we’re putting into the atmosphere.

The idea that keeps popping up, which would deal with these difficulties and perhaps make climate issues less partisan, is a flat tax on carbon products. The tax would fall on coal, gas and oil and be collected at the mine or wellhead. $20 per ton is the number most often mentioned. Coal would pay the largest share, oil second-most and natural gas the least, since they differ in carbon content. But everything else is equal across the board. It doesn’t matter what people do with the fuel once they’ve claimed it. If you conserve energy, you burn less fuel, if you switch from high-carbon coal to natural gas. And if you discover a true alternative that doesn’t rely on fossil fuels, you pay nothing.

In theory, it’s an ideal solution. Adele Morris of the Brookings Institution has calculated that a modest carbon tax of $20 per ton would allow us to lower the corporate tax to 25 percent, just below the world average, and still leave $199 billion for deficit reduction over the 10 years. Most important, though, is that a carbon tax would capture non-stationary sources, which is the Achilles’ heel of cap-and-trade. When it comes to mobile sources of carbon, regulators just throw up their hands. “You can’t measure emissions from individual vehicles,” they say. But a carbon tax captures everyone, including cars and trucks, which are impossible to monitor as individual vehicles. In the end, it is a much better system than that now being pursued by the EPA.

So what would this mean for alternative vehicles?

Corn ethanol would be a big winner. It is not derived from fossil fuels, and it’s already in 10 percent of gasoline that is dispensed at the pump. Morris estimates that a tax of $20 per ton on carbon would mean a 4-to-5 cents per gallon increase in gasoline. E85 now undersells gasoline in the Midwest by that same amount, and a carbon tax would make it even more attractive. Other parts of the country might start taking notes as well, since E85 can be sold anywhere; it just hasn’t caught on yet.

Methanol would not have the same advantages, since it is currently made from natural gas. But gas has only about two-thirds of the carbon content of oil, and a carbon tax would work in its favor. In addition, methanol can be derived from other sources: It’s the simplest alcohol and can be distilled from municipal waste, forest wastes and any number of the other sources that now go unused.

CNG and LNG do not stand up quite as well. Both would have to pay the carbon tax but would enjoy a small advantage over diesel, became the carbon content of gas is lower. Still, they would see their own price go up, because they are fossil fuels.

Electric cars, on the other hand, would be the big winner. Their cost advantage would widen, and they would have a leg up on gasoline and diesel. Of course, electricity must come from somewhere. It is now generated largely from coal and natural gas, and prices would rise. But the tax would encourage a shift from coal to gas, or non-fossil sources, and prices would eventually come down again. Morris calculates that revenues from the tax will eventually taper off from $160 billion to $60 billion by 2030 because of adjustments in the economy.

The carbon tax has a long and curious history. Conservatives often claim credit for it under Milton Friedman’s dictum, “I you want more of something, subsidize it. If you want less of something, tax it.” The Heritage Foundation actually backed a carbon tax in the early days, when the Obama administration was trying to impose cap-and-trade on the entire economy. But other factions of the conservative movement became convinced that the Democrats would just spend the money on renewable energy projects, so Heritage backed away.

Now the ball is being carried by a group of moderates who have a reputation for viewing things with a level head. The Brookings Institution has been at the forefront, arguing that a carbon tax promises to save billions. “By providing simple, transparent, but powerful market-based incentives to reduce damaging greenhouse gas (GHG) emissions, this levy could supersede the array of costly regulatory command-and-control approaches and expensive subsidies aimed at reducing dependence on fossil fuels and promoting clean energy,” writes Morris for Resources for the Future, another non-partisan group. Environmental Defense Fund, another moderate group that takes sensible positions, has said a carbon tax would bring everyone “simplicity and happiness.”

The carbon tax does have its problems. It comes down particularly heavy on the poor, who pay a much larger portion of their income for things that require oil and gas. Morris suggests putting 20 percent of the tax aside and earmarking it for the poor. This undoes some of the benefits of the tax and, in practice, is very difficult to do, and it creates a new distribution problem. It also hurts the middle class and especially Middle America.

Carbon taxes have been tried in other countries, with mixed results. Australia tried to impose a blanket tax a few years ago, but by the time it stopped awarding special exemptions and dispensations, the program was such a mess that oil refineries and others were making out better than before. The tax fell particularly heavily on farmers, whose operations, it turns out, are heavily dependent on fossil fuels. On the other hand, a tax in the United States might push more of agriculture into ethanol, since E85 is already widely available in the Midwest and would substitute nicely for gasoline.

Special pleading by individual parties is always the problem. France tried a carbon tax a few years ago, but by the time they were through, the law was so loaded down with exceptions and exemptions that it was practically meaningless. Sweden, on the other hand, has a flat $200 per ton carbon tax – four times the highest rate being suggested by the U.S – and no one seems to mind. The Swedes eliminated all special exemptions and used the revenue to lower personal income and estate taxes. True, the Swedes pay a higher price for gasoline – close to $4 per gallon – but they are happy with the simplicity of the system and accept the higher price as a fact of life. Of course, Sweden is a much more egalitarian country, with few truly poor people, but the population is happy and no one complains.

And the main problem is that the amount of tax will really not introduce any behavioral change. Five cents a gallon is just a tax – it will not create any real incentive to change to alternative fuels. What is blocking off alternative fuels today is not price, as they are already cheaper. It is the monopolistic structure of the car and distribution market. Even if gas prices were a dollar higher, the market first needs to be opened to competition so people could actually choose a fuel.

A carbon tax would cross political lines and maybe prove to be one of those rare instances where we can all agree. Conservatives would show that they take climate change seriously, and liberals would have to give up on their complex regulatory schemes and admit that simplest sometimes works best. Most of all, it would show the public that things can get done in Washington. However, a prerequisite for any tax or other solution is to open the market for competition by other fuels. Otherwise, the consumer will not have any option, and it will be just a new government tax.

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