Carbon Tax as Revenue Source

A carbon tax is by far the quickest and least intrusive means to harness the efforts of millions of people to reduce their carbon dioxide emissions. This should excite all who wish to stop global warming. However, a good many people care little about climate change; they think it’s a hoax, or at least exaggerated hype. You won’t get those people on board by listing environmental benefits, and by the time they change their attitudes it will likely be too late.

A better approach is to sell a carbon tax as a revenue source for the federal government. Given the enormous deficits of late, we can safely say the government needs the dough. And even if by some miracle a hundred Libertarians get elected to Congress and/or the Republicans actually follow through on their smaller government rhetoric so we eliminate the deficit by spending cuts alone, we still might want to use a carbon tax to replace one of the existing taxes. A carbon tax would be considerably simpler than the income tax, and even easier to collect than payroll taxes.

That is, a carbon tax would be an interesting option to cut the deficit and/or replace an existing tax if we could raise real revenue with such a tax without destroying the economy. Can we? Let’s crunch some numbers.

Carbon Tax Calculations

A billion dollars to the federal government is what a hundred dollars is to yours truly: nice to receive but not enough to really impact the budget. Today, anything less than a trillion dollars, or sizeable fraction thereof, is barely worthy of consideration. So let’s ask: what would be the impact of raising a trillion dollars using a carbon tax? If the results are outrageous, then we won’t have a good argument for using a carbon tax as a revenue source. It’ll be back to selling science and fear. If the results are reasonable or nearly so, we can simply scale our tax to meet our revenue goals.

We first 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 * (12/(12 + 16 + 16)) = 6 trillion kg * 12 / 44 = 1.6 trillion kg

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? Very well, let’s translate that figure into items that you do shop for.

Carbon Tax Effect on Gasoline Prices

The Energy Awareness 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 lb of CO2) * (1kg / 2.2lb) * (12 C/44 CO2) = 2.43 kg of Carbon

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???)


(141.5/Specific Gravity) = API Gravity + 131.5

Specific Gravity = 141.5 / (API Gravity + 131.5)

This gives a specific gravity of gasoline to be 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

We are looking at a factor of 10 or more in the price of coal! That’s scary! (Actually, I assume above that coal is 100% carbon; this is an over estimate. The EIA gives figures ranging from 346-705 kg carbon per ton.))

Fortunately, we are not looking at a factor of 10 for residential electricity costs. The price of coal is but one factor in electricity costs. Power plant operation and distribution are also significant costs. Also, significant electricity is already generated by fuels other than coal.

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.

The Laffer Curve for a Carbon Tax

At first blush it appears we can raise about a trillion dollars at the cost of roughly doubling the retail price of energy. This is a stiff price increase but not insane – if we phase in a carbon tax over a period of several years to allow people to adjust. But then we run into another problem: people adjust. With a carbon tax in place, people will burn less carbon, which is good for the environment but bad for the treasury.

The second problem we encounter is the possibility that a carbon tax would be flat or even regressive. If so, we need to either rebate part of the revenues as free money from the government for all citizens, or use the tax to cut or eliminate similarly regressive taxes, such as Social Security taxes.

Conservation and rebates will both reduce revenue, so we would need to raise the rates higher than the above to get a trillion dollars into the treasury. As rates go higher the conservation rate goes higher. At some rate there is a Laffer maximum, and we cannot find it without implementing the tax and playing with the rates. Worse yes, the Laffer maximum will move over time as businesses frantically invest in now-profitable renewable energy technologies.

We don’t have certainty, but we can play with some likely scenarios. In the next chapters we will investigate several starting with the challenges of going from a personal income tax to a carbon tax. Then I’ll give you a calculator so you can play with your own scenarios.

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