Why Carbon Taxes Would Be the Ultimate Energy Game-Changer

Yves here. The Financial Times wrote approvingly of carbon taxes in 2007:

Climate change poses a classic spill-over problem: individuals do not suffer the full burden of producing carbon dioxide, but society does. To equate the private cost to the higher social cost, governments can create markets for carbon, by using tradeable permits, or impose a tax.

So far, the preferred method has been tradeable permits. Creating markets for carbon has political advantages. They are easy to sign into law and even easier to execute. Instead of the optimal method of auctioning permits, governments have given them away. It is no wonder that energy producers are keen to participate in these schemes.

While short-term politics favour markets, taxes would be better in the long term, because industry needs certainty for investments years hence. A government committing to painful taxes signals the seriousness of its intentions.

Carbon taxes, offset by cuts in other taxes, are more difficult to eliminate than artificial markets.

Carbon markets have other problems. Above all, they fix the amount of carbon abated, not its price…

Both carbon taxes and markets put undue burden on the poor. Governments should counter such regressive carbon taxes by lowering taxes on labour.

This post gives an update on this idea, and also focuses on the extensive, and not well recognized, subsidies to fossil fuels.

By Henry Hewitt an investment strategist and portfolio manager with 36 years of experience in renewable energy. Originally published at OilPrice

Last on the list of investment imperatives, and usually least on investors’ minds, is the question of unpleasant side-effects, which Adam Smith called externalities. If you dump garbage on your neighbor’s yard, are you not liable for the cost to clean it up?

At the very least it is bad manners. Sometimes it is worse. Does it matter if nearly everyone else is doing it, or at least playing along? The only reason many fossil fuel operations are ‘cost-effective’ is that their side-effects are socialized, i.e. the neighbors have to pay for cleaning up the garbage that comes their way.

Who in law is “my neighbor?” In the Book of Luke (10:27) Jesus says that we should love our neighbor. So, a lawyer asked him: “And who is my neighbor”? (10:29.) The story of the Good Samaritan follows. Closer to the present day, the English high court pondered this question in the great case of Donoghue v. Stevenson (1932). Lord Atkin wrote:

“The rule that you are to love your neighbour becomes in law, you must not injure your neighbour; and the lawyer’s question, Who is my neighbour? receives a restricted reply. You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour. Who, then, in law is my neighbour? The answer seems to be – persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question.”

The greatest subsidy of all for fossil fuels is the emission of CO2 without having to pay for it. It is, therefore, arguable that the single greatest weapon in the battle to mitigate climate change would be to put a price on carbon.

The IEA reckons the annual value of direct subsidies to the fossil fuel industry runs over $500 billion. An IMF working paper released this month (How Large Are Global Energy Subsidies?) figures that the “Post-tax energy subsidies are dramatically higher than previously estimated—$4.9 trillion (6.5 percent of global GDP) in 2013, and projected to reach $5.3 trillion (6.5 percent of global GDP) in 2015.”

“The fiscal, environmental, and welfare impacts of energy subsidy reform are potentially enormous. Eliminating post-tax subsidies in 2015 could raise government revenue by $2.9 trillion (3.6 percent of

global GDP), cut global CO2 emissions by more than 20 percent, and cut premature air pollution deaths by more than half. After allowing for the higher energy costs faced by consumers, this action would raise global economic welfare by $1.8 trillion (2.2 percent of global GDP).”


Critics of renewable energy, seemingly blind to the massive subsidies devoted to fossil fuels and nuclear energy, complain that solar and wind energy depend upon subsidies. It is true that they have, in the past; it is also true that subsidies are no longer necessary. Consider these two recent projects tied to power purchase agreements: At the end of 2014, Saudi based ACWA Power bid 5.98 cents per kWh, for a project in Dubai, below the cost of natural gas in the region (which is 9 cents per kWh), without any subsidies, expecting double digit returns. Michael Liebreich, the founder of Bloomberg New Energy Finance says “This is the shot that will be heard around the world.

On July 7, Bloomberg reported that Buffett Scores Cheapest Electricity Rate With Nevada Solar Farms:

“Berkshire Hathaway Inc.’s NV Energy agreed to pay 3.87 cents a kilowatt-hour for power from a 100-megawatt project that First Solar Inc. is developing, according to a filing with regulators. That’s a bargain. Last year the utility was paying 13.77 cents a kilowatt-hour for renewable energy. The rapid decline is a sign that solar energy is becoming a mainstream technology with fewer perceived risks. It’s also related to the 70 percent plunge in the price of panels since 2010, and the fact that the project will be built in Nevada, the third-sunniest state.”

Not a bad piece of business for a niche, i.e. thin film technology.

To put that figure (3.87 cents per kWh) in perspective, if a carbon tax were initiated at $30 per tonne (At that price, the world’s annual CO2 output would be priced at $1 trillion – approximately 35 billion tonnes x $30 — and it is hard to see how Wall Street could resist getting in on the action), a coal power plant, which emits almost 1 metric ton of CO2 per megawatt-hour, would have the same cost just for carbon as the entire “all-in” cost for PV. The coal plant also has to constantly pay for fuel. (Though, to be fair, the NV Energy price takes advantage of the 30 percent Investment Tax Credit (ITC). The ACWA project in Dubai, as mentioned, does not).

Maybe this is at the root of last year’s oil price collapse. Instead of thinking that high fossil fuel prices will someday drive customers to seek renewables as an alternative, it may be time to admit that low cost renewables, now scaling rapidly, are going to eat fossil fuels’ lunch. Yamani was right: the oil age will not end because we have run out of oil. It is probably premature to lobby for a solar depletion allowance, and it is probably past the time to justify one for oil depletion

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