Thursday, November 20, 2014

The problem with Carbon Tax

$30 / tonne may translate to more or less than 2% at the point of consumption - the concept holds true.

The problem with Carbon Taxes is that they are implemented with a critical misperception – that, as in British Columbia’s case, a 2% Carbon Tax will deter fossil fuel use. When attempting to deter use of fossil fuel by increasing price, a large percentage - like 20% - will deter use, but only to a point because very soon demand for fossil fuel hardens or becomes “inelastic”; there is really a very small amount of discretionary fossil fuel consumption in society as a whole. We know this is true because there is a hundred years of price sensitivity data that shows it to be true. British Petroleum did extensive price sensitive analysis in England, drawing on data from the energy crisis era. In a country, that at the time had food costs at nearly 40% of disposable income, gas prices doubled and demand only for gas degraded slightly, but in the main held steady. Carbon Tax is a very weak deterrent to consumption and to be used as a deterrent to consumption would require economy slaying prices to work.

If Carbon Tax is being implemented as a means to manage the negative externalities that flow from fossil fuel use, the Carbon Tax is a means to garner funds, in the same way that we tax liquor to manage negative externalities flowing to society from its use. If the Carbon Tax is a means to finance transition from a Fossil Fuel regime to another energy regime, then it works. The important point here is that Carbon Tax is just another way to get money, linking the funds collection for Carbon mitigation activities to fossil fuel use really has no rational basis, given that the tax has very little affect on consumption.    
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