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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. BilB
    June 2nd, 2008 at 08:25 | #1

    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.

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

    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.

  3. Ian Gould
    June 2nd, 2008 at 09:28 | #3

    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.

  4. charles
    June 2nd, 2008 at 22:04 | #4

    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?

  5. Peter Wood
    June 2nd, 2008 at 23:50 | #5

    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.

  6. Ian Gould
    June 4th, 2008 at 10:43 | #6

    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.


  7. TerjeP (say tay-a)
    June 4th, 2008 at 18:03 | #7

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

  8. Peter Wood
    June 4th, 2008 at 20:03 | #8

    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.

  9. Michael D
    June 6th, 2008 at 16:46 | #9

    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.

  10. El Mono
    June 6th, 2008 at 17:50 | #10

    What is the penalty for producing carbon without a permit

  11. June 7th, 2008 at 21:18 | #11

    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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