Wednesday, December 06, 2006

The Carbon Tax

My wife did a bang up job on her Carbon Tax paper. She even got an 'A' on it. She was pleased. I am going to just write a quick commentary. I have to say that I find it an interesting, but flawed idea and so does my wife) after we played with the numbers. The basic flaws are the fact that the economy is not static and the demographics are changing underneath it.

In writing her paper, she made the assumption that based on Gore's September 2006 speech at NYU, that if it came out of your paycheck, it was going to be shifted over to the carbon tax. The basic idea is that you tax the sources of carbon into the atmosphere based on how much they put into it. This ought to shift investment away from the carbon exhaling industries to cleaner ones. it ought to put more money in the pockets of consumers. It ought to allow employers to hire more people. Ok, some quick critiques.

The first problem is that this proposal is incomplete. You would need to have a carbon tariff to go along with the tax or risk kneecaping your own industries and economy. That will produce an additional windfall. However, it will be needed.

The reason is that the basic idea behind the carbon tax has a fundamental flaw: the tax will strongly encourage investment to shift from carbon polluting industries to nonpolluting ones. From coal power to nuclear power, for example. As the shift happens, the eventually the carbon producing industries go away. That means your source of income goes away too. That means either your greatly increase the tax on the remaining industries or be forced to seek the revenue from another source...like reinstating the payroll taxes.

To make matters worse, and you are cynical enough to assume that the carbon tax isn't meant to drive investment away from certain industries and the tax will collect enough perpetually, you're still going to have to hike the tax (and cause knock-on inflationary effects). A big part of this is that Gore did this for Social Security too. That means that all that money to pay for the python swallowed by a pig is going to come out of the carbon tax/tariff combo. That means that you're going to have to hike the tax and tariff even more to cover your expenses here.

The third issue is problem with the balance of who gets what and who gets screwed by the costs: will the salary taxes now kept by the employees offset the increases associated with inflationary costs caused by rising energy and transportation caused by the carbon tax. There will be a couple tables below for you guys to chew on. However, my wife didn't calculate the 'break even' point for what you have to make to get ahead. I'm guestimating it's about $35 - 40k. Anyone who makes more than that gets permanent salary rasise. Anyone less than that gets screwed. People who really need less inflation are at the lower end. Really, REALLY need less. So politically, without some doctoring, this isn't going to fly.

GDP = C + I + G + (X - M)

That little equation seems to love dominating my wife's econ class. Anyways, in theory, Gore's proposal keeps G a constant; increases C, but what does it do to I? Any economist types care to comment? I suspect that it actually does a net move away from I since that money for C has to come from somewhere.

So, here are the tables:
Carbon Tax Imposed per Unit Fuel

Fuel

Unit

CO2 Produced (lbs)

Tax Per Unit

Aviation Gasoline

gallon

18.355

$1.20

Diesel Fuel

gallon

22.384

$1.46

Jet Fuel

gallon

21.095

$1.38

Kerosene

gallon

21.537

$1.41

Liquefied Petroleum Gases

gallon

12.805

$0.84

Gasoline

gallon

19.564

$1.28

Methane/Natural Gas

1000 ft3

116.376

$7.60

Coal, Anthracite

ton

3852.16

$251.72

Coal, Bituminous

ton

4931.3

$322.24

Coal, Subituminous

ton

3715.9

$242.82

Coal, Lignite

ton

2791.6

$182.42


Electricity Rate Increases by Fuel per Kilowatt-Hour.

Fuel

Units

Electricity Per Unit (KW-h)

Rate Increase per KW-H

Coal, Anthracite

ton

2500

$0.10069

Coal, Bituminous

ton

2500

$0.12890

Coal, Subituminous

ton

2500

$0.09713

Coal, Lignite

ton

2500

$0.07297

Methane (natural gas)

1000 ft3

4446

$0.00171


When all boiled down the carbon tax is a half thought out idea. Seems very cool at first, but isn't that good an idea. Perhaps the carbon tariff would make up for the short falls, but I am skeptical. Perhaps a better thought out version of this could be done, but at the moment this is clearly ready for prime time. Alas.

At any rate, my wife's paper is more indepth. She did a couple strawman study cases - a software company and a bakery - and I am sure that you guys can guess which one came out well and which did not. She did more commentary and cites. It was her first research paper. I'm very proud of her.

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