ยป How Much Carbon Tax?
The big advantage cap&trade has over a carbon tax is that a cap is easy to set compared to a taxation rate. That’s because international agreements are always negotiated in terms of emissions amounts. We’ll just assume that the negotiators are using climate models to determine what amounts to negotiate for.
Elasticity is the measure of how price-sensitive a good is relative to cost. The elasticity of demand is how much consumers will adjust their consumption if the cost goes up or down. Economists are aware that there are different elasticities based on time period: for example, it takes time to purchase a more fuel-efficient car.
With a carbon tax you need to know the elasticity of demand for fuel to figure out how much emissions will drop for a given taxation rate. I am having a very hard time finding estimates of a reasonable rate to achieve various emissions targets. Maybe this is why the public is lukewarm on carbon tax – would you vote yes to be taxed a completely unspecified amount?
Using a economic model I found on CarbonTax.org and the Canadian Ministry of Finance’s stats on elasticity of demand for air travel I calculated that the carbon tax would have to be $325/Imperial ton to cut airplane emissions to 50% of 2009 levels. Air travel has a much higher elasticity than gasoline*: CarbonTax.org estimates a tax rate of $370/ton would decrease emissions by a third.
In BC, a $325/ton tax would produce enough revenue to set corporate and income taxes to 0 and then produce a $5 billion surplus (which could be used as a $1250/person dividend, or something completely different).
* I’ll explain why I chose to model the relatively-insignificant air travel sector in a future post.
Everything addictive has maximum (almost perfect) elasticity: oil/energy, tobacco, food, water, etc.
Jack
22 Jan 10 at 6:41 pm
Cap & trade is favored by the enviro-right because it creates a new market, and tries something people have been talking about theoretically — incentivizing the invisible hand towards environmentally correct actions. Markets are the most powerful organizing force in social dynamics we’ve yet invented, but then again when the only tool you have is a hammer every problem looks like a nail.
The carbon tax is a more lefty/big government idea.
Jack
22 Jan 10 at 6:46 pm
I think a big reason the enviro-right supports the cap and trade is that it allows present, high-capital/power organizations to continue to consume, (paying a premium short term) while they shift their products to reflect a less carbon intensive model (long term shift). A carbon tax (if it was flatly applied), would effectively destroy existing organizations that are carbon intensive, while heavily subsidizing innovative newcomers with products that are already carbon-minimum. If change has to happen (and it does!!), then old-capitalist model organizations would also like to be in charge of a new economy.
A (Canadian) example: the tar sands would be forced to close almost immediately due to a loss of profit margin/tax burden, and the wind/solar/renewable industry would get a huge boost. Who do you think contributes more to our governing parties, and who do you think has the government’s ear?
At an individual level, the wealthiest members of our society are those that tend to have the most carbon intensive lifestyle (a number of studies have shown this, surprise surprise!). The poorer members of our society tend to use less carbon. Thus, in effect, a carbon tax based on consumption would become a wealth-tax/income re-distributor. Again, which of these groups do you think has more influence on policy decisions?
I would love to see a carbon tax, but that is just because I would be getting a few cheques in the mail, just for taking the bus.
stewartworks
26 Jan 10 at 6:18 pm
If cap&trade is done properly, I believe it would have exactly the same outcome as a carbon tax. The issue I have with cap&trade is that it’s more complicated to implement than carbon tax (but perhaps simpler to administer?).
I should have written the post neutral with regards to a carbon-pricing mechanic. $325/ton will be the market price of carbon in a cap&trade system with a cap designed to halve emissions.
Jared
26 Jan 10 at 6:35 pm
[...] every other area to pay for our flight addiction, we must force people to stop flying. This can be achieved with carbon pricing. We will return to a period when “air travel is too expensive to waste on your wife”, [...]
MentalPolyphonics » Last of the Jetset
26 Mar 10 at 8:04 am
[...] The other climate change story is that BC is almost certainly not implementing cap & trade in 2012. North American cap & trade fell apart when Canada’s federal government said they’d do whatever the US federal government did and then Obama (who hates Mother Earth) failed to do anything at all. This interjurisdictional chicken & egg is one of the reasons why cap & trade is such a lousy alternative to a carbon tax. [...]
BC Should Tax Carbon More at MentalPolyphonics
5 Jan 11 at 6:21 pm