Solution: Carbon tax – July 5

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Properly designed carbon tax could help Canada battle global warming
Jon Kesselman, Vancouver Sun
Carbon tax proposals were first advanced by economists and later endorsed by environmentalists. In essence, such taxes would put a price on the greenhouse gas emissions from production and consumption activities. Some “green” advocates have promoted a major “tax shift” whereby taxes applied to environmentally damaging activities would be used to reduce taxes on productive activities.

Critical in evaluating carbon tax proposals is the design of the policy. Both how the tax would be applied and how its revenues would be distributed need to be considered.

One design would be to tax the carbon content of all energy produced in Canada regardless of whether the resources were destined for domestic use or export. Since energy prices are determined on world markets, that approach would put the full burden on the energy industry with devastating effects; it recalls the 1980 National Energy Program. Moreover, that approach would not raise the effective prices faced by domestic users of energy and thus would not stimulate ways of reducing greenhouse gas emissions.

An alternative policy design would apply the tax to the carbon content of only those energy resources used domestically. The Canadian energy industry would then continue to receive world prices on all of its energy exports as well as its domestic sales. With that form of tax, the prices faced by domestic users of various types of energy would rise in proportion to carbon content.

Coal would bear the highest tax per energy unit, followed by petroleum products, and then by natural gas; hydro and nuclear power and renewable energy sources would bear little tax.

The increased domestic prices of particular energy sources would cause households and businesses to reduce their use of the most carbon-intensive fuels and to switch to less carbon-intensive fuels. One of the most energy-intensive industries is the tar sands oil sector, which would also face these higher costs and be induced to develop extraction methods that are less carbon-energy intensive.

…An appropriately designed carbon tax could overcome the political perils that have thus far kept it off the policy agenda. That could enable Canada to reap the full economic and environmental potential of such an innovation and allow the country to make its proper contribution to halting climate change.

Jon Kesselman is a professor in the Graduate Public Policy Program at Simon Fraser University and holds the Canada Research Chair in Public Finance.
(3 July 2006)

The Big Idea: An Energy Tax
Charles Wheelan, Ph.D, Yahoo!News
I had lunch not long ago with a fund-raiser for a prospective presidential candidate. He admitted that his candidate is still looking for a “big idea.”

I won’t say who the candidate is, or even what party he or she belongs to, but I will offer a “big idea” for whoever wants to take it. Since this proposal isn’t inherently liberal or conservative (arguably it’s both), it would work for a Republican or a Democrat, provided he or she has the backbone for it.

So here’s the idea: Create a carbon tax — basically a tax on energy calculated based on its carbon content — and use the new revenue to provide offsetting cuts in the income tax, the payroll tax (the tax on wages used to fund Social Security), or both.

The whole package should be revenue neutral, meaning that it will not increase or decrease the total amount of revenue the government collects. The money will simply come from different sources.

Yes, I’m arguing that we should increase your taxes and cut your taxes at the same time. To understand why that makes sense, you must appreciate an often-overlooked feature of taxation: Taxing something does not merely raise revenue; it also changes behavior.
(5 July 2006)
Bio of author Wheelan

Green Taxes Are the Way to Change Our World
Chris Huhne, UK Independent via Common Dreams
In Finland, CO2 emissions would have been 7 per cent higher if the taxes had not been introduced.
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This has been a week for the optimists about our capacity to tackle climate change. The International Energy Agency pointed out how much carbon could be saved just through low-energy light bulbs, while the most thorough review shows green taxes can be highly effective. Weighing in at 295 pages, the Nordic council report concludes that active environmental policy – using taxes and other market-friendly instruments to change behavior – clearly works.

The researchers at the National Environmental Research Institute in Denmark say: “The Nordic countries pioneered the introduction of carbon and energy taxes … such taxes have made an important difference to emission levels. In Finland, CO2 emissions would have been 7 per cent higher at the end of the Nineties if the taxes had not been introduced, while in Denmark the tax-subsidy scheme on industrial emissions caused emissions to decline by 23 per cent in just seven years.”

There is even a “double dividend” with positive environmental effects and benefits for employment and competitiveness. “Sweden is undertaking an overall tax shift replacing taxes on income with taxes on energy, transport, and pollution amounting to several billion Swedish kronor. Estonia, in 2005, decided to lower income taxes by 6 per cent and substitute them in part with new environmental taxes.”

It is precisely this green tax switch – from taxes on income from work on to taxes on carbon emissions and other pollutants – that Britain needs today. There is no other policy on offer that can realistically deliver the deep change in behavior needed to make our own activity sustainable and set a lead for others. Thanks to a curmudgeonly Treasury, we are muddling along with no clear strategy.
(5 July 2006)

Fuel tax magic
Charles Komanoff, Gristmill via Energy Bulletin
…I offer two answers. Combined, they just might hold a solution to our era’s twin overriding crises: the oil-dependence crisis and the climate crisis.

The first answer is that as we extend our time horizon, gasoline’s price-elasticity, or price sensitivity to break free of the jargon, gets larger — a lot larger. Going out several years or more, individuals have greater scope to take actions that economize on gasoline. They can junk the gas-guzzler, or at least not replace it with another one when the old one gives out. They might calculate the dollar tradeoffs between density (high rents but less need to drive) and sprawl (the reverse) and pick up stakes for a less car-dependent area. They may gravitate toward job opportunities closer to home. And they can make more durable commitments to behavioral changes that reduce the need to drive, like forming a carpool or buying a roadworthy bicycle or selling the far-away vacation home.

The consensus of economists who have studied gasoline use is that the “long-term” price elasticity — the effect on demand eight or ten years hence — is between 50% and 70%, or roughly triple the 20% “short-term” elasticity I’m seeing in my spreadsheet. That is, over the long haul, rises in the price of gas are likely to dampen demand several times as much as the modest changes we’ve seen in the past year or two.

The second reason price-elasticity matters is that prices of gasoline and other fuels will probably climb in the future. Or, to be candid, fuel prices need to climb far and fast if America is to ever get off the oil spike and the world as a whole is to avoid disastrous climate change.

For all the promising antidotes to oil dependence, from ethanol and hybrid cars to rearranging living patterns so people and goods don’t have to move as much, there’s a growing awareness that the only surefire way to advance on all fronts is to create an irresistible and universal market pull by pricing gasoline at a very high level — perhaps in the $10 a gallon range. And now that the climate crisis is overtaking oil dependence as the ultimate energy nightmare, people are starting to face the fact that only vastly higher prices for all fossil fuels can reduce CO2 emissions across the board, through conservation, not just of gasoline but of all petroleum products as well as natural gas and coal.

Yes, I’m talking about a carbon tax — the only mechanism powerful and direct enough for the daunting task of phasing out fossil fuels.
(24 June 2006)
A guest essay appearing on Gristmill from Charles Komanoff, an economist and environmental activist in New York City. For more on taxing carbon fuels, go to http://www.komanoff.net/fossil/.

Originals: Part one / Part two.