What Would be an Effective Carbon Tax?

Carbon taxes could be effective if they are high enough. None are high enough now.

Look around, and you are struck by the myriad ways we use and waste fossil fuels. Live pigs are shipped by the airplane load from the US to China. Wildfires caused by global warming are fought with tanker airplanes. Plastic shopping bags by the trillion are churned out for single use followed by permanent entombment. Back-country hikers rely on helicopter rescues to get them out of jams. And of course we burn them with abandon for transport, heat, and electricity. Fossil fuels are far too cheap- from merely an efficient use perspective, quite apart from their disastrous role in climate heating, other forms of pollution, and overall sustainability.

The last decade has seen astonishing progress in renewable energy technologies, bringing them to par price with fossil fuels or even cheaper. But this price relationship is misleading, since it only reflects the low-hanging fruit of adding sporadic power to a grid that runs largely on fossil fuels with highly flexible dispatch characteristics. Making progress to a fully renewable and stable grid, and extending this to transportation, industrial processes, and chemicals will take vastly more work, including technologies not yet in hand.

We have such a long way to go to decarbonize.

The most  effective way to do this is to price the vice: price CO2 emissions. A uniform price will reach all the uses of fossil fuels, (I would add biomass as well, which generate CO2 emissions just the same), and harness the same capitalist motivation that has spent decades thoughtlessly expanding their destructive use. Government regulation can do a great deal, and is gradually driving coal to oblivion. But it will not be enough to drive the more complete transition that is needed, especially at the speed required. Climate heating is already rampant and highly destructive. 2040 is a mere 18 years away- nothing in infrastructure terms, and not much more in transport vehicle lifetimes. Natural gas remains the fuel of choice across the electric grid, residential, and industrial applications. Within twenty years, it needs to be demoted to minor status.

So what would be an effective carbon tax? One can take the baseline to be the carbon cap and trade system instituted by California, which ends up as an auction price for carbon emission credits. This is a very light tax with lots of exceptions, which has had a commensurately light effect. The price currently stands at ~$23 per ton of CO2 emitted. This is equivalent to about 22 cents per gallon of gasoline. This is not going to change many people's behavior, obviously. At ten percent or less of the retail price, this scale of tax is not going to drive a transition to electric vehicles. Overall in California, this tax brings in roughly a billion to two billion dollars per year, and is thought to be having a beneficial effect, but only as a fractional part of a much broader portfolio of regulations and policies.

In Sweden, the carbon tax is over $130 per ton. This is more significant, on the order of a dollar per gallon of gasoline. Again, there are so many exceptions, especially for heavy industry, that it touches only forty percent of emissions. Overall, it has caused only an eleven percent reduction in transport carbon emissions. Europeans pay much higher prices for motor fuels to start with, for many reasons beyond the carbon tax, so the relative effect of even such a larger tax is small. Europeans already use gasoline at a rate roughly one fifth that of the US, so are already very thrifty. We can expect in the US to have much greater elasticity to higher fuel prices, assuming a bit of political maturity instead of whining about our god-given right to cheap gasoline. 

At the same time, unless alternative fuels, forms of transport, or social behaviors appear, especially in the truck and other heavy vehicle segments, this kind of tax would still have limited effect and serious economic costs. So the modeler and prognosticator has to wonder where the response to carbon taxes will come from. The pandemic showed that we can telecommute very effectively, thereby saving prodigious amounts of fuel. Tesla has shown the way in electric vehicles- a segment that had previously been brutally decimated by GM in various bait-and-switch schemes. Hybrid technology is edging into in larger cars and transit. It will take a big price signal to switch these markets in a dramatic way. Even doubling the price of gasoline, which in the US would take a carbon tax on the order of $400 or more per ton of CO2 emitted, would only bring our fuel prices to those of Europe, which still drives, has traffic jams, and emits vast amounts of CO2 from the transport sector. Such a tax would bring in about $400 billion per year in the US, easily within the normal taxation and economic capacity of a $20 trillion economy.

Yet now there are replacement technologies, so a carbon tax will, in classic economic fashion, create change, not just disgruntlement and economic pain. It will also bring forth more replacements, while working at every margin to drive conservation. Do we need continued technology investment? Absolutely. Do we need more public policy and infrastructure investments, such as reducing give-aways to the fossil fuel industries, charging them for their many immediate as well as long-term harms, and reconfiguring electrical grids and natural gas grids? Yes. A carbon tax is an accellerant to save the biosphere from incalculable harm. Its revenue can be administered right back to citizens or into the government accounts, displacing other taxes. So its net economic effects could be minimal, even while its effects on economic reconfiguration and conservation would be strong. 

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