Carbon Taxes

CARBON TAXES….My back-of-the-envelope arithmetic convinced me long ago that any feasible gas tax would have only a modest impact on actual gasoline consumption. Today, Daniel Sperling of UC Davis tells me that real research backs this up:

The one sector where carbon taxes will work well is electricity generation, which accounts for 20% of California emissions (and 40% of U.S. emissions). The carbon tax works because electricity producers can choose among a wide variety of commercial energy sources — from carbon-intense coal to lower-emitting natural gas to zero-emission nuclear or renewable energy. A modest tax of $25 per ton of carbon dioxide would increase the retail price of electricity made from coal by 17%. Given the many choices, this would motivate electricity producers to seek out lower-carbon alternatives. The result would be innovation, change and decarbonization.

Transportation is a different story. Neither producers nor consumers would respond to a $25-a-ton tax….A CO2 tax of $25 a ton would raise the price of gasoline only about 20 cents a gallon….A recent study at the UC Davis Institute of Transportation Studies found that the “price elasticity” of demand for gasoline has shrunk; a price increase of 10% induces less than a 1% reduction in gasoline consumption. Thus, that 20-cent increase would be barely noticeable. In the transport sector, a carbon tax would have to be huge to induce change.

None of this is to say that a carbon tax isn’t a good idea. It is, and probably at levels higher than Sperling’s $25 per ton. But the hard fact is that it would have only a modest effect on gasoline usage. If we’re serious about cutting back, we need other, better policy instruments, like low-carbon fuel standards (Sperling’s suggestion), higher CAFE standards, refundable gas guzzler taxes, and so forth. Carbon taxes are only a start.