carbon tax/shutterstockMany individuals and organizations strongly advocate taxing fossil fuels consumption as a strategy to reducing U.S. carbon emissions.  Besides increasing fossil fuels costs and reducing consumer demand, the carbon tax revenues could also be used to support Government priorities such as renewable energy development.

The Federal Government has previously implemented many energy policies to reduce fossil fuels consumption and increase renewable energy supplies.  These include CAFE standards, renewable fuels standards, supporting alternatives to petroleum fuels, and other energy efficiency improvements.  Most of these past energy policies have significantly reduced U.S. fossil fuels consumption over the years.  Despite these improvements many believe the U.S. needs to more aggressively pursue reducing future fossil fuels demand.   Recently, Congress failed to approve cap-n-trade legislation, and similar global programs are struggling to achieve target carbon reductions.  Perhaps it’s time to directly address the primary advantage most fossil fuels have over renewable energy: cheaper costs.  Should the U.S. implement a significant carbon tax to better position renewable energy’s ability to displace substantial fossil fuels consumption in the future?

Recent U.S. Carbon Tax Proposals – Congress has recently explored different proposals for modest-to-significant carbon taxes.  The proposed Sanders/Boxer Climate Legislation is a good example.  What this and other developing legislative proposals have in common are carbon taxes of $10-$35/metric ton (MT), with some level of annual tax increases (2%-8% per year), and rebate programs to reduce financial impacts on the general Public.  The rebates are often intended to minimize voter opposition to obvious large increases in individual and family expenses.  Most the proposals envision diverting some of the carbon taxes to various programs such as green energy development & jobs, infrastructure projects, and possibly paying down the Federal debt.

Carbon Tax Impacts – Various carbon tax studies have determined different results as to the cost impacts on individual Households and the overall economy.  Recent studies such as the National Association of Manufacturers find that proposed carbon taxes could have substantial negative impacts on the economy.  Other carbon tax evaluations have found many potential positive benefits.  Opinions vary and the results of economic analyses are generally a function of the assumptions used. 

Most carbon tax proposals typically begin with tax levels of about $20/MT carbon dioxide.  Based on this carbon tax level, the direct impacts on each U.S. End-use Sector, and the overall average Household increased expenses, the following table was developed:

Image

Data Source: EIA MER Tables 12.2-12.6.  Total U.S. Households = 117 million.

The above table is based on the primary fossil fuels (coal, natural gas and petroleum) consumed directly in each End-use Sector.  One of the first debate issues when determining the level of carbon tax impacts on average Households is how much of the carbon taxes the Commercial, Industrial and Power Sectors are willing to absorb (reduced profit margins) and how much of the carbon taxes will be passed on (price markups) to average Household consumers.  Assuming Households are only subjected to carbon taxes for their home heating & power consumption and direct purchase of transportation fuels, the average Household’s annual carbon tax expense would be about $350/yr.  However, if Businesses pass-through all the carbon taxes with their goods & services prices provided to Households, the average Household carbon tax expenses could increase up to about $903/yr.  This level of carbon taxes represents ($903/$50K per year per Household=) 1.8% of average Household annual income.  Although this carbon tax is significant, but relatively modest, likely Household reaction to this increased expense depends on the tax transparency (or Household awareness) and normal market price volatilities.

To illustrate possible carbon tax transparency - Household electric power costs will be most affected by the proposed carbon taxes.  This is largely due to the coal consumed by the Electric Power Sector.  A data-cost table was developed as follows:

Image

Data Source: EIA MER Tables 7.6 and 9.8.

The above table shows that based on a $20/MT carbon tax the average Household would experience about an 11% increase (11.9 – 13.2 cents/KWH) in their electric power rates.  The total projected increased in direct average Household power costs is $157/yr.  If the Commercial and Industrial Sectors fully passed on their carbon taxes to all Residents-Households, this effectively doubles their annual power related carbon tax costs.  The $349 increased power cost impact makes up about ($349/$903=) 39% of total (direct+indirect) carbon taxes.  One factor that may attract Households’ attention is the 11% immediate increase in power rates per KWH.  This level of increase is twice the increase average Households experienced 2008-2012.

Other carbon tax impacts that should be fairly transparent to average Household consumers are their home heating and transportation fuel prices.  Refer to the following table:

Image

Data Source: Various EIA monthly/weekly volumetric, price and physical data bases.

Those who heat their homes with natural gas will experience the largest (10%) increase due to proposed carbon taxes.  Heating oil would increase by about half this rate.  An issue that might focus Households attention on the natural gas carbon tax impacts is the fact that over the past five years Residential costs per 1000 cubic feet (K cf) have actually decreased by over 20%.  In contrast, heating oil prices have increased by about 60% since 2008.  The carbon taxes on gasoline and (ultra low sulfur) diesel would also be increases by up to 5%, which is relatively insignificant compared to the 60%+ price increases consumers have experienced since 2008.

Effectiveness of Proposed Carbon Taxes – Increasing average Household fossil fuels energy expenses by up to ($903/365 days=) $2.47 per day should not overly burden those whose incomes average $50K per year.  The impact on the lower income Households, with annual incomes substantially less than $50K/yr. will experience more difficulty paying the carbon taxes and providing the basic necessities for themselves and their families.  This lower income group’s increased financial burden from new carbon taxes is proposed to be addressed by providing rebates to offset increased fossil fuels costs.

The problem with the proposed $20/MT carbon tax and the rebate process is the likely ineffectiveness of the proposed energy policy in actually reducing significant U.S. fossil fuels consumption and associated carbon emissions.  The problem statement is that the average Households, including Lower income groups, consume the majority of U.S. fossil fuels; directly + indirectly.  If a proposed carbon tax policy is going to be effective, the majority of the population’s fossil fuels consumption must be significantly reduced.  This is not likely to happen with a $20/MT carbon tax that only increases average Household fossil fuel costs by $2.47/day.  Likewise, if the below average income Household’s receive significant carbon tax rebates the net impact could also eliminate any motivation to significantly reduce their fossil fuels consumption.

How to Make a Carbon Tax Policy Reasonably Effective – If our voters and Legislators truly want to reduce U.S. fossil fuels consumption and associated carbon emissions substantially in the future, the level of proposed carbon taxes must be adjusted to levels that will significantly reduce average Household demand.  This would require rapidly increasing carbon tax to levels that would truly discourage current consumption levels.  Refer to the following table:

Image

Data Source: EIA MER Tables 12.2-12.6.  Note: the $100/MT carbon tax is about equivalent to the actual costs of reducing U.S. total carbon emissions by about 60% based on currently proven and available technologies.  

Increasing the carbon tax up to $100/MT would increase the direct + indirect average Household fossil fuels costs by up to about $4,514 per year (assuming all carbon taxes are passed-through to Residential customers).  This represents 9% of average Households’ annual income.  This level of increased fossil fuels expense should very significantly reduce the demand of nearly all average Households. 

Despite achieving the carbon tax policy primary objective, the impacts on the overall economy could be a significant concern.  If the predictions that carbon taxes and reduced fossil fuels consumption will help expand the economy based on a substantial expansion of renewable energy supplies, energy efficiency technology improvements, and expanded ‘green jobs’ is correct, then the $100/MT level of carbon taxes energy policy should effectively achieve most its claimed goals.  If the predictions that the carbon taxes and increased fossil fuels costs will be detrimental to the economy are correct, the U.S. could face another severe economic recession.  Since 1970 the U.S. has experienced 6 economic recessions.  Half of these recessions were caused largely by energy related issues.

Should the U.S. Implement a Carbon Tax? – If the proposed carbon tax is a consumption tax in disguise, and assuming voters and Congress supports this approach to increased tax revenues, the answer could be yes.  If the carbon tax is intended to be the ultimate solution to reducing carbon emissions, the answer depends on how the policy is designed to truly and substantially reduce fossil fuels consumption.

Over the past five years the U.S. has reduced its carbon emissions by a record 730 million MT/yr.  The largest contributing factors to this reduction in carbon emissions have been due to reduced fossil fuels consumption (54% - CAFE, other energy efficiency improvements, and the 2007-2009 economic recession).  The second largest reduced carbon emissions contributing factor was fuels switching to lower carbon natural gas (29%).  And, expanded renewables only accounted for 17% of the total reduction.

If a future carbon tax is supposed to substantially reduce future U.S. carbon emissions it probably needs to be linked to recent successful policies such as further improved energy efficiency and fuels switching to lower carbon technologies.  An effective carbon tax policy will also significantly raise the costs of fossil fuels and should not compromise this reduced energy demand strategy by including significant rebates.  Rebates are generally a form of income redistribution, which will compromise the overall policy’s performance.

It’s time to have an honest, adult conversation with the general Public.  Substantially reducing any countries’ carbon emissions is not going to be painless as some politicians advocate.  It’s going to require significant sacrifice from most the population.  Substantially reducing fossil fuels consumption and the associated carbon emissions probably means significant changes to current lifestyles and consumption behaviors.  It directionally requires most residents trade-in their large sedans/trucks/SUV’s for much smaller more efficient, hybrid/electric vehicles, significantly reduced ‘annual miles travelled’ overall, possibly moving into smaller more efficient homes and slowing down the speed of access and delivery for many goods & services enjoyed by current generations. 

One final problem statement to consider – after successfully reducing or replacing most of a nation’s fossil fuels, total world carbon emissions could still continue to increase significantly in the future.  This means we will all continue to experience the impacts of carbon related climate change; although at possibly somewhat lower impact levels.  What’s the next political solution after all Developed countries substantially reduce their carbon emissions at enormous expense, but total world carbon emissions continue to increase from Developing countries’ increasing fossil fuels consumption?