Sunday, March 6, 2016

Carbon Tax V Cap & Trade

If you’re bent on pricing carbon, think about this.

In designing public policy the first objective should be “do no harm”, the second objective should be enhance human existence. In managing Carbon and the negative externalities that flow from fossil fuel use there is opportunity to; maintain a healthy economy, facilitate the transition to other fuels, develop the safe use of fossil fuels and to seed new or other industry.

We want to create a circumstance where people can readily respond to opportunities that flow from carbon credits. By way of example, an Oilsands company exceeds its carbon cap, posts a number of tons on a trading platform, then a business person elsewhere accesses the dollar value in that tonnage to plant an appropriate number of trees OR, a homeowner converts to solar or super insulates their home and accesses the value in that tonnage to offset the cost. The challenge in many of the conservation measures related to reducing fossil fuel use is that the economics fail to justify action - the time it takes to recoup capital costs associated with conversion to other energy sources results in the accumulated benefit of the “improvement” being unwarranted – when judged from an opportunity cost perspective and or on a partial budget perspective. So any policy that assists in enhancing the economic benefit in conversion is a wise choice. Cap & Trade provides opportunity for these sorts of “GDP neutral exchanges” to take place, that is to say, that Cap & Trade done properly can result in little or no net reduction in economic activity.

The assertion that Cap & Trade unduly burdens the industrial sector is errant, the system can be designed to cap consumer use of fossil fuels as well. There can be carbon caps on personal transportation associated with vehicle classification, certain vehicles would exceed the cap and incur carbon cost, that cost could be offset by some other conservation action by the vehicle owner or another actor OR by directing carbon credits to an electric car user for example.

In the age of the internet, trading platforms are readily accessible to all people and easy to use, so the process of posting excess use of carbon and people accessing the value associated with it is simple to do.    

The problem with Carbon Taxes is that they are implemented with a critical misconception – 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 has done extensive price sensitivity 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 for gas degraded just 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 percentages to work.

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

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, THEN carbon tax may have some merit. If the Carbon Tax is a means to finance transition from a Fossil Fuel regime to another energy regime, then it may have some merit - BUT only if the funds are earmarked and directed to transition AND the tax is NOT revenue neutral. 

The important point here is that Carbon Tax is just another way to get money, linking the funds collected for carbon mitigation activities to the degree of fuel use really has no rational basis as a claim, given that the smaller increments in price have very little affect on consumption. There is no basis to assert for example, that the 2% Carbon Tax in British Columbia has decreased fossil fuel use, any declines in fossil fuel use can be attributed to the long-running trend starting in approximately 1980, where GNP and fossil fuel decoupled, with fossil fuel use relative to GDP falling. This is due to the expansion of non-industrial components in the economy. To support this point I have provided two graphs below, barrels per day oil consumption and the historical price of oil in current dollars - you'll see there is little or no correlation between oil price and oil consumption. 


More Thinking on the Subject

Oilsands Moratorium Wrong Wrong & Wrong

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