Tuesday, August 10, 2010

Carbon taxes will not increase the price of gas by more than a dollar

Megan McArdle addresses the debate on whether a carbon tax will spur innovation. I'll save my commentary on this topic for a later, more comprehensive treatment; for now, I just want to reiterate that oil consumption in transportation is not a key area in limiting carbon emissions. Virtually all the low-hanging fruit is elsewhere, and although they may be valuable for other reasons, grand debates about the future of American transportation are mostly peripheral to the question of carbon.

Allow me to repeat some arithmetic I've done in the past. Consider a tax on carbon dioxide of $100 per ton. From the carbon intensity of coal, I calculate that this would increase the price of coal electricity by 10.5 cents per kilowatt hour—an enormous increase that would make it uneconomical compared with combined-cycle natural gas, and probably solar thermal (given more investment), wind, and nuclear power as well. Such a tax would be more than five times the current spot price on the European Climate Exchange, and it would massively alter energy consumption in the United States. In other words, $100 per ton of carbon dioxide is essentially a dream scenario for those of us who are concerned about climate change.

What would this mean for gas prices? Using the carbon intensity of gasoline, we can calculate an answer: 97 cents per gallon. This isn't nothing, but it's far less than the gas taxes we see in Europe, and it's even smaller than fluctuations in gas prices that we've experienced in the last half-decade. The large shifts in energy consumption that will make the most difference in our carbon output will happen elsewhere.

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