Home > Economics - General, Environment > Carbon taxes and fuel prices

Carbon taxes and fuel prices

May 29th, 2008

This is an appeal to my many numerate and well-informed readers to check my calculations. I’ve been asked to do a quick estimate of the implications of including motor transport (particularly petrol) in a carbon tax/emissions trading scheme. Since it’s easier to model, I’ve decided to look at carbon taxes at rates of $20. $50 and $100 per ton of CO2.

Since a litre of petrol produces 2.3 kg of CO2 when burned, the taxes correspond to 4.6, 11.5 and 23.0 cents/litre, and I’m going to assume that the addition of margins yields final increases of 5, 12.5 and 25 cents/litre.

Given annual consumption of around 30 billion litres (this is petrol + diesel, but I’m going to treat it all as petrol), the revenue generated is $1.5, $3.75 and $7.5 billion, ignoring demand responses (of course, we want demand responses, but I’ll leave this for alter I think).

Coming to a very rough assessment of compensation, if the proceeds were divided equally amoung households in the bottom half of the income distribution (about 5 million of them), the payment would be around $300, $750 and $1500 respectively.

If anyone can see any big holes in my calculations, I’d be very grateful to have them pointed out. More generally, any constructive comments appreciated.

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  1. charles
    May 29th, 2008 at 21:11 | #1

    Making it all petrol is a little rough.


    If sanity prevails and we don’t see tax cuts on fuel then direct household consumption should fall before the tax is introduced, people will start buying smaller cars. Ford are going to build the focus in Australia, now I wonder why?

    Also assuming sanity prevails the percentage of CNG should increase, the real question will be how will the government protect their revenue. Filling up from the gas stove will be an option. Holden have stated their cars will run on CNG from 2010.

    In short, things are in flux, don’t assume 2010 will be like 2008.

    A more interesting question is, what level of carbon tax would be revenue neutral if at the same time the excise on petroleum products was ditched.

  2. Hermit
    May 29th, 2008 at 21:14 | #2

    For ‘first round’ effects you need to factor in price elasticity both of world prices and local administrative imposts. If the pre carbon tax world price stabilises at $1.60 and the price elasticity is -1.5 then a 5c impost reduces demand to about 29 billion litres (check my calcs). Of course the ‘world price’ might be $1.90 in which case un-carbon taxed demand would be less than 30 gl and the 5c impost has a lesser effect if elasticity is the same.

    Of course price elasticity may not be even roughly constant across a critical range particularly when household discretionary spending has shrunk ie the next price rise hurts harder. When the revenue is handed back there could be a second round effect. The household gets the $300 and what do they spent it on? Petrol of course which is why a strict carbon cap may be better than a proportional tax as it prevents this rebound. Some late nights ahead for modellers.

  3. jquiggin
    May 29th, 2008 at 21:34 | #3

    “The household gets the $300 and what do they spent it on? Petrol of course which is why a strict carbon cap may be better than a proportional tax as it prevents this rebound.”

    There’s no reason to suppose this. Petrol makes up something like 4 per cent of household expenditure (directly and indirectly) so you’d expect a rebound of $12. If governments are really worried that people will devote the $300 to a “mental account” for petrol, they’ll just have to forgo the political advantages of packaging it as compensation and hand it out as general “help for working families”.

  4. observa
    May 29th, 2008 at 21:51 | #4

    ‘the payment would be around $300, $750 and $1500 respectively.’
    Is that a once off compensation payment for immediate cap and trade price rises John?

  5. Alexander McLeay
    May 29th, 2008 at 22:06 | #5

    Any money from a carbon tax on petrol should go directly to allowing additional routes to be taken without cars to compensate for the additional cost. In other words : it should be spent on new public transport. And real stuff, not buses. It should not substitute for current state government spending on p.t. Anything left over should be spent on incentives to cheaper, higher density housing. Giving it back to people is not going to be nearly at reducing demand as providing effective alternatives, both at peak hour and off peak.

  6. May 29th, 2008 at 22:47 | #6

    At 38 cents a litre, and 30 billion litres annually, that’s $11.4 billion (there are issues here, but it’s roughly right I believe – check the budget papers if you’re being pedantic).

    Australia’s total emissions were about 560 million tonnes in 2005, according to the AGEIS system.

    If you’re going to completely eliminate the excise entirely, and use every cent of revenue from it to do so, that comes to pretty close to $20 per tonne.

    By the way, John, your figures are roughly correct, assuming there’s no big shift to LPG or CNG, or massive demand destruction, as Charlie is suggesting.

  7. Socrates
    May 29th, 2008 at 23:06 | #7


    I think your figures are roughly correct too. I agree with Hemit that you need to consider price elasticity of demand. But it won’t change much.

    In the short run the price elasticity of travel demand is actually very small: about -0.1 for cars and higher for trucks; say -0.2 overall, with fuel only representing about half the cost of travel. So 5 cents a litre is a motoring cost increase of only 2.5%, leading to a demand reduction of maybe 0.5% for $20; 1.25% for $50 and $2.5% for $100.

    In the long term (3 to 4 years plus) the demand elasticity gets higher, but never above -0.5, so max long term demand diversion from price might be 1.25% for $20, 3.75% for $50 and 7.5% for $100. Now you know why nobody thinks a carbon tax alone will be sufficient to reduce car travel much, and why banks are still funding toll roads!

  8. May 29th, 2008 at 23:33 | #8

    Charles, where have Holden said that they will sell cars running on CNG in 2010?

    Alex, the point of attacking carbon emissions with a carbon tax is to not prejudge solutions like public transport and higher density housing — perhaps people will telecommute, or buy electric cars — or perhaps the demand for producing carbon is much more elastic somewhere totally different, e.g. power generation, and car use won’t fall much at all…

  9. Pete
    May 30th, 2008 at 00:14 | #9

    The NRMA Blog you linked to to calculate the CO2 output from petrol/diesel links here:

    And it would appear from that website that petrol produces 2.4kg/litre and diesel 2.7kg/litre.

  10. Ian Gould
    May 30th, 2008 at 01:11 | #10

    From vague memories of some research I did for the Queensland EPA the better part of a decade ago I suspect your “margin” figuresw are too low John.

    Given the current economic climate, I’m tempted to suggest that rather than hiking prices even higher we look at hypothecating some of the current excise (and possibly also the GST)and spending it on projects to reduce fossil fuel demand.

    More public transport is an obvious starting point.

    A bounty on ethanol (preferable from sugar) in addition to maintaining the excise exemption is another option.

    I agree with the idea mentioned elsewhere of reducing or eliminating the import duty on hybrids and other highly fuel-efficient vehicles.

    Then I’d look at a policy to encourage the production of such vehicles locally – the US offered a tax concession for the first 100,000 hybrids from a manufacturer IIRC.

  11. BilB
    May 30th, 2008 at 05:29 | #11

    For the bio fuel skeptics, this is the territory where ehtanol and bio diesel start to help. Don’t forget to factor in ethanol at the mandatory 2%, the realistic 10%, the preferred 30% and the ideal 85% (E85).

    It is the primary purpose of a carbon tax to provide the incentive to reduce and ultimately eliminate the use of fossil (pre sequestered) carbon. It is the secondary purpose to provide the investment monies to promote the mass production of solar direct alternative energy sources.

  12. BilB
    May 30th, 2008 at 06:22 | #12

    An afterthought.

    For anyone who has missed the relevence, bio fuels are

    not fossil fuels having been extracted from atmospheric CO2 (releasing oxygen) generally in the year of their consumption.

    are at present cheaper to produce than petrol and that advantage will increase as oil flow slows

    are at present exempt from road tax

    will be exempt from carbon tax as they are not a fossil fuel.

    So the long and short of it is that the more biofuel you are able to use then the cheaper your motoring will be.

    Filling the car from the stove outlet will not achieve anything as your house gas supply will also carry the carbon tax, as will the non solar component of your electricity (buy green power to avoid this).

  13. conrad
    May 30th, 2008 at 08:27 | #13

    You might want to check out what the carbon distribution use income spectrum looks like. In all the big cities in Aus, poorer people tend to live further away from the city (work) and have older cars (which are possibly bigger and usually older also), so they might well use more fuel. However, I imagine that trades off with less holidays also, but its not clear to me what the overall numbers would be.

  14. Socrates
    May 30th, 2008 at 08:56 | #14


    I respect that we are all trying to find a solution here but I must question yoru comments on biofuels. Currently there are several biofuel plants in Australia mothballed (not in production) because the price of feed inputs has risen to the point they are uneconomic.

    Further, we will never achieve 85% biofuel at any price. At best, if all the crop land in Austrlaia were converted to biofuel production (including the 80% exports) we might produce enough biofuel to generate 30% of our current fuel consumption. And we will have no food…

    I am aware that people are looking at using algae in ponds to grow lipids for biofuel but it is still uneconomic (by a factor of more than ten) so I challenge anyone to say how we can produce 85% biofuel. Biofuels are just a sop to farmers, adn they are doing serious damage to the equity of the world’s food markets. If my statements are incorrect please provide evdence to the contrary, but otherwise I remain strongly opposed to biofuel as “the answer”.

  15. charles
    May 30th, 2008 at 09:00 | #15


    I agree, and that is the point I was trying to make, the government has to protect it’s revenue source. If the carbon tax applies to all gas then you will not be able to avoid the tax by filling up at the stove.

    If the excise went when the carbon tax came in the whole thing would be easier to sell and you would not have to go down the compensation track.

    As you point out you can get out of it using solar power, but I don’t think that is a short term risk.

    Tom Davies, this is the article I read.


  16. charles
    May 30th, 2008 at 09:14 | #16

    To put it another way, think of the excise on oil as a narrow based carbon tax, widen the base, reduce the tax rate if you want it to be revenue neutral.

  17. May 30th, 2008 at 09:30 | #17

    Ian Gould: there already is such a policy – the Green Vehicle fund.

    Frankly, we’d be much better off sending the Chinese more iron ore and letting them send back hybrids, rather than waste money subsidizing a cottage factory churning out a few thousand bespoke hybrids a year.

  18. wizofaus
    May 30th, 2008 at 09:36 | #18

    charles, I have some sympathy for that idea – provided that oil prices stay high. If they drop low again, then there really will need to be an additional carbon tax on top of the existing excise and GST charges, or people will inevitable return to old habits of assuming petrol will be cheap and readily available forever. However I would be highly surprised if oil was cheaper than it is today by the time carbon pricing is introduced.
    Also I assume the fuel excise is to cover costs associated with petrol usage that aren’t associated with coal or gas usage.

  19. Iain
    May 30th, 2008 at 09:39 | #19

    The reference for the tCo2-e per kL for petrol or diesel should be the National Greenhouse Accounts (NGA) factors.

    The scope 1 conversion figure for petrol is correct at 2.3 tCO2-e / kL. Diesel is 2.7. Scope 3 (indirect emission factors – eg emissions associated with extraction) for both petrol and diesel or an additional 0.2. Scope 3 emissions are unlikely to be included in any short term carbon trading scheme (if ever).

  20. wizofaus
    May 30th, 2008 at 09:47 | #20

    Robert, sure, except that a part of the reason China can do it more cheaply is because their industries are far more polluting, both in CO2, and otherwise.
    There surely needs to be a carbon price applied to any goods manufactured in China until China itself applies carbon pricing.
    I do tend to agree though that there’s not a lot of logic in a country like Australia building general-purpose cars.

  21. domino
    May 30th, 2008 at 10:04 | #21


    Is the redistribution pattern part of your brief? If not, I don’t see why redistribution should be restricted to equality in the bottom half of the income distribution.

    Firstly, this creates pervese incentives.

    Secondly, not all government transfers need to be progressive.

    The second point may need some elaboration: if we have many different progressive taxation/transfer policies, the total redistribution becomes unclear. A more efficient and transparently equitable way of doing it would be to use the rebate portion of government carbon tax revenue to fund tax cuts. This way we can see easily how each income group is affected and see if we think the overall impact is still fair.

    I’m starting to get sick of this business of means testing everything, and I’m on $33,000 per year.

  22. BilB
    May 30th, 2008 at 10:09 | #22


    All that I can suggest is that you do your battle with

    They have all of the information backed up up to the minute production data.

    But in the simplest form to produce 30 billion litres of fuel at the yields that are achieved from Australai’s cane production would take a nominal 2.4 million hectares. with the Dedini celluolose process this might be reduced to 1.8 million hectares. That is if you were trying to replace all of the fuel. For 30 percent of the fuel 720,000 hectares is required with out the cellulose process, 480,000 hectares is required with the cellulose component. This is just a little bit more than the area already under cultivation for sugar cane.

    A number of commentators have pointed out that transport fuel accounts for only 17% of Australia’s CO2 emissions, so there is less to be gained with biofuels as against investing in renewable electricity infrastructure. And I would agree. But the other vector here if you care to believe in the flood of doom from “The Oil Drum” is that oil will soon become scarce. So I would suggest that this is the most pressing reason to develop the biofuel sector at this time.

    Personally, as a designer, I see more solutions than problems. You on the other hand obviously see more problems than solutions. What do you do for a living?

    The principle limiting factor in solving both global warming and fuel availability is political will. I f our elected politicians refuse to do the job that we elected them to do then there is no hope. If there are too many Rudds in the road ahead then the only course of action will be to dig a deep cellar for your house, stockpile water and food, and tighten the spokes on your push bike.

    For interest sake following is a Pakistani’s outlook at the prospect of zero fuel affordability. I found it interesting.

    Pakistan has quietly shifted to natural gas (cng, lpg etc) as transportation fuel. Effectively oil as vehicle fuel passed the purchasing power of average pakistanis in 5 years ago. We give to govt and state oil company 1.5 times the price of oil cost, making it 2.5 times so our tipping point came long ago. Pakistan has huge deposits of natural gas of its own therefore we not import it from anybody and can rely on it for few more years. When we run out of our reserves of natural gas in next 5 years or so we will hopefully be buying it from neighbouring iran who has huge almost unused deposits of natural gas. Work on these projects have already started. Then there is the central asian pipeline project.
    Electricity is produced in pakistan almost entirely from hydro by our two major dams though some of it is also produced by thermal (oil, gas) plants in karachi.
    We have the advantage of being very close to the oil producing region and they being our friends we not have much to worry. Our real power lies in the fact that we are not industralized. Our 62.5% population still living at village and 50% of pakistanis are farmers. At the farming side, our productivity only increased 2 times to 1600 kg grains/acre/year than 800 kg grains/acre/year we were getting since past 9,000 years (starting at mehrgarh, 7000 bc). So we have to only learn to live at 1/2 of our traditional productions.
    In contrast europe is 90% industrial which all have to fall back to 10% agriculture. Traditional production of grains in europe was just 100 kg grains/acre/year because of the typical weather, rain pattern etc. Today it is 6400 kg grain/acre/year so they have to learn to live at 1/64 of their current production.
    In Pakistan we also have the facility of using 125 million acres of highly depopulated afghanistan once peace comes there after inevitable defeat of americans and british.
    We have the recently discovered 200 billion tons of high quality coal (20% of world’s reserves) and more can be find if we discover more (we have put very little effort in discovering).
    Since we consume very less, about 50 times less resources than americans and since our population is half than that of america our net usage is 100 times less than americans. We not waste money in keeping army in more than 120 countries in world and certainly not in “conquering” deserts of other planets by destroying our own through over-consumption and pollution.
    We have an enemy in our east but a bigger friend in its north that more than balance it. Even with this enemy we be living in peace since 37 years, since we last had a war in 1971.

  23. jquiggin
    May 30th, 2008 at 10:12 | #23

    Domino, the main reason for wanting something progressive in this case is that the impact of the tax is likely to be regressive. But I was just asked to run up some numbers quickly. If you’d prefer an equal payment for all households, just halve the numbers given above.

  24. Ian Gould
    May 30th, 2008 at 10:32 | #24

    “Frankly, we’d be much better off sending the Chinese more iron ore and letting them send back hybrids, rather than waste money subsidizing a cottage factory churning out a few thousand bespoke hybrids a year.”

    Robert, as you probably know, Holden Motorworks is one of the global centres of engine manufacture for GM. The Family II engines are exported to other GM subsidiaries world wide.

    If Australia wants to have a car manufacturing industry (with the spin-offs in terms of a manufacturing, engineering and design base), then we need to shift from the cars currently being made here to more efficient models.

    Otherwise in ten years we’ll have a few thousand people in Melbourne slapping Holden badges on fully-imported locally-assembled vehicles.

  25. Socrates
    May 30th, 2008 at 11:52 | #25


    As a matter of fact I am an engineer-economist who works in transport planning for a living. I have tried to suggest solutions to this problem.

    But putting aside any debates over my knowledge, I can think of several sources which would dispute the Bio Fuels associations claims. George Monbiot would immediately come to mind. Recently I was at lectures at Adelaide University where Dr Peter Ashman and Dr David Lewis vgave a realistic assessment of biofuels. see
    Note in particular slide 7 of their presentation, which lists the six Australian biofuel plants now NOT in production.

  26. Peter Wood
    May 30th, 2008 at 12:24 | #26

    What compensation would there be for an ETS/carbon tax altogether? If there was a carbon price on emissions from energy, transport, fugitive emissions and industrial processes, and 80% of each of these sectors was covered, then this would cover up to 336.4 Mt CO2-e of emissions for 2005 AGO figures. The cap of course would need to be less than the level of emissions. Suppose only 50% of the carbon price was used for compensating the 5 million lower income households. I estimate that price of $20/tonne would be $670 per household, $50/tonne would be $1680 per household, and $100/tonne would be $3360 per household. If all of the money raised was used to compensate households then double those figures.

    In 2005, Australia’s residential sector emissions, including emissions using transport and indirect emissions from electricity use, were
    104.4 Mt CO2e, 18.7% of emissions. Sufficiently high levels of compensation for households effectively lead to transfers of funds from emissions intensive industries to households, which could lead to demands from households for deeper cuts in emissions.

  27. JoelP
    May 30th, 2008 at 12:44 | #27


    I fuel expenses act anything like household energy use, where lower income households use half as much energy than higher income households yet the cost represents twice as much of their income, then the need to compensate lower income households directly becomes very clear.

    Of course some of this compensation should be directed to demand abatement (assisted use of public transport, energy efficient vehicles) also.

    And because of the in-elasticity of petrol (and energy) use in low income households, then the impact of income and transfer effects are limited.

  28. Steve
    May 30th, 2008 at 12:51 | #28

    A more authoritative source for you to use for motor vehicle petrol emissions is the latest publication of the National Greenhouse Factors:


    which puts full fuel cycle greenhouse emissions from motor vehicle petrol combustion at

    2.5 kg of CO2-e per litre.

  29. May 30th, 2008 at 16:10 | #29

    Socrates, its pointless arguing with (Bio)BilB about biofuels. He’s utterly convinced biofuels are the way forward and no amount of sane and reasoned argument will change his mind.

    I came to this conclusion recently when he said it was perfectly ok to replace the world’s tropical forests with palm oil and sugarcane plantations because they were going to burn anyway (due to climate change)

    You can’t argue with that.

    Frankly, we’d be much better off sending the Chinese more iron ore and letting them send back hybrids, rather than waste money subsidizing a cottage factory churning out a few thousand bespoke hybrids a year.

    “bespoke hybrids” had me laughing out loud.

    The reality is we’re not going to manufacture anything in this country very soon the way the AUD is going. That’s the inconvenient truth, and there’s nothing anyone can do about it. Australia is destined to become a resources-only economy.

  30. Bruce Bradbury
    May 30th, 2008 at 17:42 | #30

    Should a carbon tax on petrol be used to reduce the petrol excise? I can see arguments for and against.
    – Why should one form of energy have a higher tax rate than others?
    – Recent oil price increases are imposing large adjustment costs. There may be benefits in smoothing these out – certainly political benefits!
    – The current purpose of the petrol excise is to cover other non-CO2 externalities (conjestion costs, health costs, roads etc).

    How strong is the evidence for the externality story?

  31. BilB
    May 30th, 2008 at 18:11 | #31


    I cannot see how that power point presentation in any way reflects on what I was saying. I don’t know which ethanol plants are not in production at present. I imagine that they will be southern ones and smaller plants that were built to cash in on the strong wheat harvest some time ago. They picked the wrong source crop and paid for their poor judgement because of the drought. That doesn’t in any way mean that ethanol is unworkable. There are inactive coal mines all over Australia, does that mean that coal is ineffective as a fuel? The reality is that cane farmers who produce cane for ethanol earn nearly twice that of the farmers who produce cane for sugar production. This is the market talking, as this information from the cane growers themselves through the Friends of Ethanol which I believe has now become the BAA. Not an academic who built an argument down at the library from publications of past reports. So your argument is with the farmers not me. You should take it up with them if you think that they are wasting their time.

    My comment in this post is to JQ, that he should adjust the carbon CT/ETS calculation to reflect that in 2 (possibly 3) states 2 percent ethanol content is now mandated and this will affect the outcome. Furthermore ethanol content can be used to reduce the impact of the carbon CT/ETS. And CS’s opinion will have no bearing on the maths at all. Further I think that money that might be spent offsetting the CT/ETS should be spent on biofuel development as this will have the best chance of avoiding the inevitable long term fuel price escallation.

  32. May 30th, 2008 at 19:31 | #32

    Bruce, it’s pretty compelling. Leaving aside congestion and road funding for a moment, the costs of non-CO2 pollution from motor vehicles are extremely large. Quantifying it exactly is difficult, but across Australia’s urban areas it appears to be a multi-billion annual cost.

    Not to mention health costs from road accidents.

  33. Ian Gould
    May 30th, 2008 at 19:58 | #33

    what exactly is the putative carbon tax intended to achieve>

    Petrol is relatively price inelastic in the short term and moderately elastic in the longer term.

    We’ve seen that the response to the increases of the past several years (which are well in excess of the maximum 25 cents per litre John is talking about) was minimal at first and only now are we seeing big increases in public transport patronage and increasing demand for fuel-efficient vehicles).

    If prices remain around current levels (or higher) we will see that response continue.

    If we were to abruptly impose another large price increase, we would if anything risk slowing the rate of change since fewer people would be able to afford new cars.

    Oh and the government, which is still despite the world financial situation in a pretty sound fiscal situation, hardly needs the money. For that matter, every rise in the market price of oil feeds through into higher GST revenue anyway.

    If other major carbon emitters are being hit with a carbon tax, there’s a certain amount of economic logic in imposing a tax on petrol and diesel as well.

    But I’d argue that in doing so, the total tax take need not be increased. You could cut the excise by 10 cents and impose a 10 cent climate levy which biodiesel and ethanol would obviously be exempt from.

    To return to a point I made earlier, the best rationale for a carbon tax is to fund projects to reduce carbon emissions.

  34. charles
    May 30th, 2008 at 20:05 | #34

    I think the strongest argument against reducing the excise on oil is the funding of roads.

    (The direct health system costs, killings and maiming, are mostly covered by third party insurance)

    The actual problem is fuel purchase is used to pay for road use. This creates distortion in itself, fuel that is used for off road use ( tilling the paddocks) still pays.

    And this brings us full circle, if the fuel sources for transport become varied using fuel as a measure of road usage is going to become more difficult.

  35. Ian Gould
    May 30th, 2008 at 20:17 | #35

    Other than general revenue collection (which is hardly a burning issue currently) is there any other reason to set the carbon tax higher than the marginal cost of carbon abatement?

    Australia currently produces around 560 million tonnes of GHGs in CO2-e terms per year.

    The current European market price for carbon credits is around 26 euros per tonne.

    Converting Euros to Australian dates at roughly A$1 = 60 Eurocents, the current cost of buying 560 million tonnes of credits per year would be ca. $25 billion.

    In other words we could buy credits to cover 80% of our emissions without raising taxes and without even going into deficit.

    We can then start thinking about how and by whom that cost should be borne.

  36. wizofaus
    May 30th, 2008 at 20:57 | #36

    BTW, I keep reading that petrol demand is inelastic. Historically it might be the case, but I’m far from convinced it need be true. If a government was sufficiently determined to convince citizens to reduce their usage, I’ve no doubt it could do a decent job.
    Presumably it was thought demand for water was pretty inelastic before the urgent issue with supply shortages became an issue.

  37. Ian Gould
    May 31st, 2008 at 01:40 | #37


    The IEA has revised down its estimate of demand growth for the second month in a row.

    Unfortunately this story doesn’t give figures for the developed world so it’s difficult to see what effect higher prices are having there.

  38. Ian Gould
    May 31st, 2008 at 02:52 | #38

    Another straw in the wind – US SUV sales are dropping rapidly.


    ” Traditional, truck-based SUVs accounted for just 3.8% of U.S. retail automotive sales – not including sales to fleet customers such as rental agencies and government customers – in the first three weeks of May, according to George Pipas, sales analysis manager at Ford. In April, the market share for the same group was 5.2% and in February it was 6.8%

    And sales are down dramatically compared with historic highs. For example, Ford sold more than 445,000 Explorers at the height of the SUV boom in 2000, making it one of the top-selling vehicles in the country. In 2007, Ford sold 137,817 Explorers and, through the first four months of 2008, Explorer sales were down 25% from a year earlier at just under 35,000 units.”

  39. BilB
    May 31st, 2008 at 06:28 | #39

    Ian G,

    Comparing carbon tax levels from one country to the next should be done in the presence of the per capita CO2 emissions. Europe, I guess, has around half the per capita CO2 emissions of Australia, and its strategies to reduce further will have very different cost structure to ours. Which when you think about it highlights the nonsense of credits and trading. In Europe, at the present time the notion of personal tradeable emissions credits is being floated. The idea here I suppose is to provide a vehicle to encourage individuals to be responsible for their energy consumption consequences. The simplistic view here is that a rich person who wants to run a motor launch will be able to negotiate cheaper credits from an elderly couple who use no energy at all. A broader view would see the miriad of personal circumstances where heavier energy consumption was necessary rather than optional which seen in conjunction with the matrix of incomes will present a very different picture.

    I am all for relieving hardship pressure from those in difficulty as a result of a carbon tax, but that is not the primary use to which carbon funds should be put.

    The best method for making a progressive carbon tax is to apply it progressively. This has to be done over a period of years to allow the economy time to adjust, and find a new balance. The collected monies should ALL be put to solving the underlying greenhouse problem rather than to solving politicians problems with their voters. A softer carbon tax should be applied immediately, then pregressively increased, rather than procrastinate for ten years and then have to apply a huge tax with its unimaginably messy exceptions structure.

  40. Sinclair Davidson
    June 1st, 2008 at 11:53 | #40

    Since a litre of petrol produces 2.3 kg of CO2 when burned

    This number seems high. According to the wikipedia the weight-density of petrol is 737.22kg/cu.m (water is 1000kg/cu.m) so petrol weighs less than water. So .737kg of petrol generates 2.3kg of CO2 when burned? Or is that number including CO2 generated during production of petrol as well?

  41. Ian Gould
    June 1st, 2008 at 13:29 | #41

    “So .737kg of petrol generates 2.3kg of CO2 when burned?”

    Well carbon dioxide consists of two atoms of oxygen from the atmosphere as well as one of carbon from the fuel and oxygen has a larger mass than carbon so that sounds about right.

  42. Sinclair Davidson
    June 1st, 2008 at 14:02 | #42

    Thanks for that. Found this at the Departmnt of Climate Change.

    It might seem odd that a greater weight of emissions is produced than the weight of a litre of fuel, but this is because of the addition of oxygen from the atmosphere to the fuel during combustion to form CO2.

  43. SJ
    June 1st, 2008 at 16:56 | #43

    Here’s a worked example.

    Petrol is a mix of various hydrocarbons, like pentane, octane, benzene and so on, having between about 5 and 10 carbon atoms. For simplicity, we’ll assume it’s all hexane with 6 carbon atoms.

    A single molecule of hexane has 6 carbon atoms and 14 hydrogen atoms. Carbon atoms have an atomic mass of about 12, and hydrogen about 1. So our hexane molecule weighs 6 x 12 + 14 x 1 = 86 atomic mass units (amu).

    When we burn the hexane, we get 6 molecules of carbon dioxide and 7 molecules of water. The carbon dioxide molucules weigh 12 + 2 x 16 = 44 amu each, for a total of 6 x 44 = 264 amu.

    We compare the weight of the carbon dioxide with the hexane, and we see that 264 / 86 = 3.1, i.e. the carbon dioxide is about 3.1 times heavier than the hexane we started with.

    Sinclair’s comparison was 2.3 kg of carbon dioxide and 0.737 kg of petrol. Now, 2.3 / 0.737 = 3.1, which is just as our example would suggest.

    You get the ratio of 3.1 for any alkane from pentane upwards, i.e. anything more that 5 carbon atoms, which means any liquid alkane, because the ones that have 4 or fewer carbon atoms are all gases at room temperature, i.e., methane, ethane, propane and butane.

    For alkenes like octene or benzine, the ratio is 3.1 (3 1/7, actually) regardless of the number of carbon atoms.

  44. Ikonoclast
    June 1st, 2008 at 17:35 | #44

    A carbon tax on fossil fuels is the only way to go. Any system of tradeable pollution permits – particularly when lots of freebies are handed out up front to big polluters – is just inviting delay and corruption.

    The best principle for a carbon tax is simple. Just set a tax on each kilo of carbon in the fuel. Calculating the proper rate will take some work. I would suggest all other taxes and subsidies be removed from fuel except GST. There is no need for a petrol excise when a carbon tax comes in. Set the carbon tax at a rate which subsumes the excise and adds a further impost for the cost of the negative externality.

    Under such a set-up coal would take a very heavy hit. It might have to be phased in but very quickly, say a 5 year timeline beginning now.

    Rudd’s first budget should have contained a carbon tax…. Oh dear, what am I rabbiting on about? It’s all way too late now anyway.

  45. Sinclair Davidson
    June 1st, 2008 at 19:50 | #45

    Thanks SJ – I understand how that works now.

  46. Ian Gould
    June 1st, 2008 at 20:26 | #46

    Ikonoclast why do you assume emissions trading is any more prone to delay and corruption than your proposal for a phased-in carbon tax?

  47. Ian Gould
    June 1st, 2008 at 20:49 | #47

    If anyone is interested, I’ve written at length about emissions trading here:


  48. June 1st, 2008 at 21:07 | #48

    Are Australian and European trading schemes set up to tax tonnes of carbon or tonnes of CO2?

    As a geologist, I’m used to working in carbon- the mass of which is 3.66 times smaller than the equivalent moles of CO2.

    Carbon cycle research is usually conducted in gigatonnes of carbon, although I’ve seen pentamoles also used.

    So a CO2 tax of $100/tonne is the same as a carbon tax of $366 / tonne.

    The calculations for carbon taxes, and comparisons to US fuel taxes (based on carbon, and done in liters and gallons for yanks) are here:

    >The actual problem is fuel purchase is used to pay for road use. This creates distortion in itself, fuel that is used for off road use ( tilling the paddocks) still pays.

    Industrial/rural-use diesel is generally tax-reduced or tax free. In some instances it may even be subsidized- it costs about half the retail price.

  49. Ian Gould
    June 1st, 2008 at 21:50 | #49

    LL, typically it’s based on the somewhat esoteric unit of “tonnes of carbon dioxide equivalent” (CO2-e in the jargon).

    See, there are different anthropogenic greenhouse gases besides carbon dioxide – such as methane and nitrous oxide.

    Because each has a different warming effect, they’re all expressed in relative terms with carbon dioxide being one. So a tonne of methane is, from memory, equivalent to around 60 tones of carbon dioxide in terms of its warming effect.

    So a tonne of methane is describes as 60 tonnes of CO2-e.

    Sometimes people use tonnes of carbon in terms of tonnes of carbon dioxide or tonnes of CO2-e and keeping these units straight in your head is one of the first things you need to learn if you’re working on greenhouse accounting.

  50. TerjeP (say tay-a)
    June 2nd, 2008 at 08:10 | #50

    John – so how high could we make the tax free threshold on income tax.

  51. BilB
    June 2nd, 2008 at 08:25 | #51

    Ian G,

    Methane gas, I am told, breaks down fairly quickly into CO2 and water when it reacts with ozone. So its cost ratio should not be based on its short term effect.

  52. wizofaus
    June 2nd, 2008 at 09:26 | #52

    Terje, are you asking “if we had a carbon tax, how much could we do to reduce the tax burden on the lowest income earners?”. I would think with a carbon tax, and perhaps along with various other Pigovian-style taxes (e.g. taxes on currently illegal drugs), we could go someway towards income tax being something that as little as half the population are required to pay.
    Somehow I don’t expect to see it happening any time soon.

  53. Ian Gould
    June 2nd, 2008 at 09:28 | #53

    BilB, that depends on your definition of “fairly quickly”. My understanding is that methane lasts decades whereas carbon dioxide sticks around for centuries.

    But the equivalent figures take into account the total amount of warming likely to be caused.

    That’s why perflurocarbons which only last something like 8-10 years can have a warming factor of several hundred. While they’re there they’re very effective at absorbing heat.

  54. charles
    June 2nd, 2008 at 22:04 | #54

    Lab Lemming Says:

    “Industrial/rural-use diesel is generally tax-reduced or tax free. In some instances it may even be subsidized- it costs about half the retail price.”

    The current retail price is around 1.70, the rebate is in the order of 30cents ( excise and import duties).

    I use about 1000 liters a year off road, $300.00 rebate, not been worth installing a separate off road tank, but it is getting there, the question is, will the rebate remain?

  55. Peter Wood
    June 2nd, 2008 at 23:50 | #55

    Different greenhouse gases have different impacts on ‘radiative forcing’ and different lifetimes in the atmosphere. So we give each gas a global warming potential (GWP) which measures how strong the gas is compared to CO2 and is both a function of the gas and of size of the time period. Methane, which has a short lifetime, has a 20 year GWP of 72, and a 100 year GWP of 25. These figures are based on the IPCC Fourth Assessment Report. In the Third Assessment Report (on which Kyoto accounting is based) they were 62 and 23.

  56. Ian Gould
    June 4th, 2008 at 10:43 | #56

    Here’s pretty good evidence of mid-term elasticity in petrol usage.

    GM is closing four plants that make SUVs and light trucks and plans to replace them with new highly efficient compacts.


  57. TerjeP (say tay-a)
    June 4th, 2008 at 18:03 | #57

    Peter – you have neglected to provide units of methane and unit of CO2 in your comparison. Are we talking grams or moles or litres?

  58. Peter Wood
    June 4th, 2008 at 20:03 | #58

    Terje: The global warming potential of a gas measures the amount of global warming from a given mass of the gas divided by the amount of global warming from the same mass of CO2. So GWP is a unitless quantity, but the units of the gas that is compared to the units of CO2 are units of mass, be it grams, tonnes, or whatever.

  59. Michael D
    June 6th, 2008 at 16:46 | #59

    It’s worth pointing out that the caps initially set for the ETS are likely to be in line with our Kyoto commitments. ie. 108% of 1990 by 2012.

    As we are going to make that fairly comfortably then the price of carbon in this ‘first phase’ is likely to be relatively low – say $20 or so.

    It then gives the economy a chance to adjust and from 2012 onwards you’ll see real caps, perhaps influenced by whatever happens in Copenhagen. then price will likely climb towards $30 and higher if we are either too slow or actually implement strong caps.

    Also, Garnaut came out today suggesting essentially a tax in the first two years before revenues are auctioned. Or in other words you set a fixed price for carbon permits. again something not too strenous to ease us all in.

    Min. Wong also indicated that she is not keen on compensation for generators (as it raises costs for other businesses) and she is keen for broadest coverage possible (reduces costs for others.)

    Also expect a big Climate change budget next year post-garnaut and with ETS bill in parliament (and will tax review finish by then?) – particularly for low-income households and adversely impacted industries/businesses.

  60. El Mono
    June 6th, 2008 at 17:50 | #60

    What is the penalty for producing carbon without a permit

  61. June 7th, 2008 at 21:18 | #61

    El Mono: that hasn’t been decided yet. Garnaut’s discussion papers make the obvious point that it needs to be high enough to strongly discourage such behaviour, but it doesn’t nominate a specific number I believe.

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