Carbon Taxes?

Well, Tim, I would agree that a national carbon tax would be a good addition to our set of climate policy tools, but let’s be realistic about what it will accomplish.  A carbon tax of $50 per ton CO2 amounts to about $0.45 per gallon of gasoline.  That’s a sizable increase in the price of gasoline, but gasoline demand is really inelastic, especially in the short run, meaning that there will not be a large shift in behavior right away.  Over time, we would expect to see people slowly substitute towards more fuel efficient cars, electric cars, and possibly public transportation.  But unless we get to really high carbon taxes, perhaps $500-$600 per ton CO2, we won’t see major changes for some time.

And it’s a pure increase in home heating costs for anyone using natural gas.  A $50 per ton carbon tax amounts to an increase of about $0.27 per ccf (hundred cubic feet), which would basically increase your home heating bill by about 50% at current prices.  These increases in costs may not be all that big of a deal for most middle class folks since the middle class spends an increasingly small share of their income directly on energy consumption.  The biggest impact of higher energy prices likely will affect people indirectly through the things they purchase, including household items and vacations.

The question though is whether carbon taxes will really curtail carbon emissions.  They probably have to get really high really quickly to have an impact. The Europeans have really high gasoline taxes, and great public transportation, but they still have relatively high carbon emissions from the transportation sector.

The reality of greenhouse gas mitigation is that it is really expensive.  This is why taxes are fine, but unless they are really high and imposed universally throughout the world, they won’t reduce greenhouse gas emissions enough to avoid more than 2 degrees C of warming.  This it not to say we shouldn’t use them, but it’s useful to be realistic about what we can achieve with them.