from Energy, Security, and Climate and Energy Security and Climate Change Program

A Gas Tax And A Carbon Tax Are Two Different Things

March 03, 2011

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Fossil Fuels

I thought I’d filed this one away under “things that some people once believed but now realize are wrong”, but the usually astute Economist, in a largely estimable cover package, wakes me from my slumber:

There is a silver lining [in the current situation]: the rest of the world could at long last deal with its vulnerability to oil and the Middle East. The to-do list is well-known, from investing in the infrastructure for electric vehicles to pricing carbon.

No, no, no. A carbon tax that rose over a couple decades to $100/ton would push the limits of the economically acceptable. It would, in the process, revolutionize the power sector. It would make coal badly uncompetitive with gas, would almost certainly lead to a large nuclear expansion and to a boost for wind power, and could even (along with RD&D) make carbon capture and storage economically viable.

And it would add a measly dollar to the price of a gallon of gasoline a long time from now. Anyone who thinks that that would be transformative enough to “deal with” U.S. oil exposure is kidding himself. The new post-2008 normal for gasoline prices is already more than a dollar higher than people thought it would be a few years ago. But there’s been no radical change. The prospect of paying another buck a gallon in 2030 wouldn’t be much additional incentive.

Yes, in theory, one could add a few dollars to the price of a gallon of gasoline by cranking a carbon tax up to a few hundred dollars a ton. But the risk to the broader economy would be immense. (There is also precisely zero chance that it would be politically acceptable.) On top of that, the European experience with petrol taxes suggests that even that might not be enough.

Bottom line: If you want to change oil consumption through tax policy, you need to tax oil consumption. If you want to change carbon emissions through tax policy, you need to tax carbon emissions. That’s it.

P.S.: The other “well-known” move – “investing in the infrastructure for electric vehicles” – probably isn’t so wise either. The appeal of electric vehicles is that we already have the key bit of infrastructure that we need to get started: the electric grid. The main chokepoint right now is cost, not capacity, and that’s where policy should focus.