On Streetsblog, Charles Komanoff makes a number of great points about the low price of gasoline driving more C02 emissions, and endorses Congressional proposals for a carbon tax on the order of $100/ton, which would raise gasoline prices by about $1.00/gallon.
Elsewhere Komanoff says, “the climate problem cannot be solved without carbon emission fees,” by which I think he would include a tax on the purchase of carbon or of any carbon-based fuel. It’s a relief to see this candor, and I wish it would percolate into our political discussions, both in California and in other states. (This has to start at the state level, for all the obvious reasons).
But I would disagree with Komanoff’s approach, at least as he’s expressing it here. A carbon tax that triggers a one-shot increase in gas prices by $1.00/gallon will reduce demand for gas modestly at most. Moreover, it doesn’t seem to acknowledge that declining wholesale prices that could more than offset the price hike from a tax. Somehow when gas is $1.95 a gallon, as it is now, going to $2.95 doesn’t seem like such a big deal, even if you’re buying that new Ford F-Series truck.
The entire discussion on carbon emissions in the transportation sector has the fatal flaw of thinking in terms of marginal analysis. The otherwise thoughtful Komanofff has an extended takedown of opposition to carbon taxes that—while on-target on the whole—fatally relies on marginal elasticity estimates to model the effects of large changes in prices and demand. Sorry, Finn, but the Force doesn’t work that way.
As Bill Gates has pointed out, the right carbon emissions target is not slower growth, or no growth, or even a 28% reduction below 2005 levels. No, the right carbon emissions target is Zero.
To get to this target, or even close, the policy goal should not be a gas tax or a carbon tax, but a minimum price on gas (or carbon). Set the tax at whatever level it needs to be to keep the price above some threshold. Even better, if the threshold rises gradually over time, it gives everyone the time and predictability they need to adjust, and reduces strain on the economy. I would suggest starting with a gasoline floor price of $2.00/gallon, rising by 20 cents a year for the next 20-50 years, but obviously other possibilities would work, including a rising floor price on carbon. The main point is to pre-commit to something that prevents the price of carbon emissions from going down, no matter what happens in the market.
In transportation, it is essential to keep gas prices high enough so that as electric travel becomes cheaper, it isn’t chasing gasoline prices downhill, in a perpetually losing competitive battle. The higher the floor price on gasoline, the sooner it will become obvious that electricity is the new standard transportation fuel.
Hmm… isn’t a carbon tax effectively a floor price on gasoline? The price of gas can never fall below the tax on the associated carbon.
Using the numbers here, a $100/ton carbon tax creates a floor price on gasoline of $1/gal (if the pre-tax price of gas went to zero).
Is the author just saying we need a higher carbon tax than $100/ton?
Yes, that’s true — any excise tax is a floor price. But the typical tax that is a set amount per gallon isn’t a good way to get to a floor price. If the tax is high enough to make for a meaningful floor price when the market equilibrium price is low, then it is far too high when the market equilibrium price is high. In the energy market, there are enormous swings in the market price, so a tax that is too high in one month can be too low 6 months later, even if it is exactly the same tax per gallon.
Moreover a variable tax that creates a floor price reduces the variability of prices, which is a good thing.
I think you don’t want a policy that sets taxes to put gas prices at a firm floor. If you do that, then you just incentivize all the retailers to just set their price at that level and collect all the profits, with zero tax revenue.
A better policy might have a smoother phase out. As an example, if you want to set a floor at $2.00, then say that the tax is always equal to half of the difference in price between the base price and $4.00. That way retailers really do have some amount of elasticity to their pricing, and some reason to follow the market. And as long as market prices stay below $4.00, you still get actual tax revenue to the government.