Carbon Tax Calculations

Turn to page 86 in your handy IRS instruction book (1040 instructions for 2007) and you will find a chart in the upper left stating that personal income taxes accounted for 39% of the total budget. The total budget was $2.655 trillion so

.39 * $2.655 trillion = $1.035 trillion

Let's round this down to a cool trillion dollars. Budgets and energy consumption figures fluctuate year to year. Carrying around too many significant figures would be an exercise in self-deception. Since budgets tend to keep going up, and it would be nice to reduce the deficit, it might make better sense to round up to 1.1 or even 1.2 trillion dollars of required revenue. Nonetheless, I rounded down because:

1 trillion dollars is a nice round number.
A carbon tax would be so much simpler than the personal income tax that we could save money on bureaucrats.
A carbon tax would eliminate the need for myriad government subsidies related to energy (such as the ethanol subsidy) saving yet more money.
A carbon tax would eliminate the need for U.S. forces to patrol the Persian Gulf area, which would save hundreds of billions per year compared to our current level of effort.

Next, we need a figure on how much carbon we currently burn per year. According to the Energy Awareness Administration, in 2006 the U.S. emitted 5,934.4 million metric tons of CO₂. . Call it 6 trillion kg. Carbon has an atomic weight of 12 while oxygen has an atomic weight of 16 so:

6 trillion kg CO₂ * (12/(12 + 16 + 16)) = 6 trillion kg * 12 / 44 = 1.6 trillion kg C

Call it 1.5 trillion kg. With a carbon tax in place people will start conserving immediately so it behooves us to round down. Divide the first figure by the second to get our required carbon tax:

$1 trillion / 1.5 trillion kg = $(2/3)/kg = $.67/kg

So, next time you go to the store to pick up a kilo of carbon, you’ll have to pay an extra 67 cents. In return, you can stop filing income tax. Not a bad deal...

What? You say you don't shop at Carbon Cubes 'R Us? I guess it's time to ask just

What is a Carbon Tax?

I define carbon tax as a set of excise taxes and tariffs on fossil fuels based on the carbon emissions when those fuels are burned. (Perhaps I should say carbon taxes...) Coal, oil and natural gas would have different rates based on the carbon content of these raw fuels.

The further up the chain we collect the tax, the more accurate the tax. For instance, if crude oil is burned to pump itself (Is it? I don't know), then we should count that amount as well as the oil delivered to the refinery.

However, for simplicity's sake I am going to assume the tax is collected at the points of raw fuel delivery: oil refineries, steel mills, power plants, major pipelines, etc. This limits the number of tax collectors required. It also makes the calculations on this page tractable.

Of course, the average person does not buy crude oil or coal either. So we have some calculating to do to figure out the consumer impact of using carbon taxes to replace other sources of government revenue.

Carbon Tax Effect on Gasoline Prices

The Energy Information Administration provides a chart showing the number of pounds of CO₂ for various fuels . They list gasoline as 19.564 pounds per gallon. To translate this into kg of carbon:

19.6 * (1kg / 2.2lb) * (12 C/44 CO₂) = 2.4 kg C/gallon

Now the question is: is this the amount in gasoline or the amount used to create the gasoline? Oil refining is not 100% efficient, especially in these days of heavy oils and catalytic cracking.

When I first did this chapter back in 2004, I used the 2001 edition of Emissions of Greenhouse Gases in the United States. On page B-9 of that report they said gasoline was 86.6% carbon and that gasoline has a density of 59.6 API gravity. On page B-6 they defined API gravity as:

API Gravity = (141.5/Specific gravity) - 131.5

(Aren't engineers cute? Why can't they just use specific gravity???)

Rearranging:

(141.5/Specific Gravity) = API Gravity + 131.5

Specific Gravity = 141.5 / (API Gravity + 131.5)

This gives a specific gravity of gasoline of about .75 (rounding up slightly). That is, gasoline is 75% the density of water. There is one kg of water per liter by definition. There are about 3.8 liters per gallon, so one gallon of gasoline = .75 * 3.8 = 2.85 kg. Take 86% of this and you have about 2.5 kg/gallon of gasoline. I rounded up slightly.

So, it appears that the 2.4 kg/gallon figure is the amount in gasoline. Let's round that figure up to 3 kg/gallon to take into account the energy wasted to get the gasoline out of the crude oil. (I wish I had a more accurate way to make this estimate, but have been unable to find a reference. I'd appreciate an email from someone who understands the refining industry.)

If we take the 3 kg/gallon figure as correct, we are looking at something on the order of $2/gallon extra for a gallon of gasoline.

Carbon Tax Effect on Electricity Prices

Determining the effect of a carbon tax on electricity prices is trickier. Electricity comes from multiple sources—coal, natural gas, hydro power, nuclear, etc.—and which source depends on location. So consider the following calculations to be a bit crude.

According to our friends at the Energy Information Administration, the spot price of coal ranged from $10-$60 per ton in late 2007 . The wide variation is due to the fact that different types of coal have different prices: BTU/ton, sulfur content and location of coal all affect the price. In 2006, the delivered price of coal ranged from roughly $18 to $68 per ton.

1 ton * (2000 lbs / ton) * (1 kg / 2.2 lbs) = 900 kg / ton

900 kg * $(2/3) = $600/ton

Are we are looking at a factor of 10 or more in the price of coal? That's scary! Actually, I assumed above that coal is 100% carbon; this is an over estimate. The EIA gives figures ranging from 346-705 kg carbon per ton. This translates to a carbon tax between $230 and $470 per ton. So we're really looking at somewhere around a factor of 7—which is still scary.

Fortunately, we are not looking at anything even close to a factor of 7 in residential electricity prices. The price of coal is but one factor. Power plant operation and distribution are also significant costs. Also, over a quarter of electricity is already generated by means other than fossil fuels (nuclear, hydroelectric, etc.).

The EIA has a flowchart showing sources and uses that lead to CO₂ emissions. Power sector conversion to electricity resulted in 2.34 trillion kg of CO₂.

2.34 trillion kg CO₂ * (12kg C/ 44kg CO₂) = 640 billion kg C

Meanwhile, close to 4 trillion killowatt hours of electricity were generated in 2006 . (That's by all sources, including non-fossil fuel sources.) If we spread the cost of the carbon tax to all electricity we get:

.64 trillion kg * $(2/3)/kg / 4 trillion kw-hr = 10.6 cents/kw-hr

According to my latest electric bill, I am paying roughly 9.5 cents/kw-hr after taxes. So, a carbon tax as a replacement for the income tax would slightly more than double my electric bill. Different regions will experience different impacts, however, since some areas get more hydro and nuclear than others.

The impact on commercial and industrial users would be much greater. Residential rates reflect the high cost of running wires to individual houses. Industrial users pay closer to wholesale since they require less wiring per amount of energy consumed.

A Good Deal?

I just looked at a recent pay stub and my electricity bill. If we replaced the income tax with a carbon tax, and the above calculations are correct, my tax bill would go down significantly. Furthermore, I wouldn't have to file. Whee!

But my results may be atypical. I don't drive to work; I telecommute. Here in the mountains of NC, summers are mild. I generally need to run the air conditioner for only about a month out of the year. (I wear shorts.) On the other hand, I do crank the heat up in the winter more than some, since my fingers get slow when my hands get cold. But even in winter, a doubling of my energy bills would be less than my income tax bills.

Your results may differ. Look at your energy bills and decide if a carbon tax would be a fair tradeoff.

But before you get too happy, keep in mind that the calculations above are wrong. And I am not referring to the roundoff errors. I made a simplistic assumption above, the same simplistic assumption many liberals make when calling for increased taxes on the rich. I ignored the Laffer Curve. And there are other difficulties with a carbon tax that I ignored above.

Replacing the personal income tax with a carbon tax may still be possible, but it will be challenging. On the next page we shall look at the challenges of going from a personal income tax to a carbon tax .

Next: Carbon Tax vs. Personal Income Tax

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