Guest seriousness by David Middleton
Over the past few days, I’ve posted a couple of articles by Michael Bastasch of the Daily Caller on the IPCC’s demands for a $240/gal tax on gasoline and $122 trillion to fight the Global War on Weather. Many commentators questioned the math behind the $240/gal gasoline tax. So, I thought I would put together a post showing the math.
This is from page 2-79 of chapter 2 of SR 1.5:
Based on data available for this special report, the price of carbon varies substantially across models and scenarios, and their value increase with mitigation efforts (see Figure 2.26) (high confidence). For instance, undiscounted values under a Higher-2˚C pathway range from 10–200 USD2010 tCO2-eq–1 in 2030, 45–960 USD2010 tCO2-eq–1 in 2050, 120–1000 USD2010 tCO2-eq–1 in 2070 and 160–2125 USD2010 tCO2-eq–1 in 2100. On the contrary, estimates for a Below-1.5˚C pathway range from 135–5500 USD2010 tCO2-eq–1 in 2030, 245– 13000 USD2010 tCO2-eq–1 in 2050, 420–17500 USD2010 tCO2-eq–1 in 2070 and 690–27000 USD2010 tCO2-eq–1 in 2100.
The IPCC presented fairly broad cost ranges for the 1.5˚C and 2˚C pathways… So broad, they are almost meaningless. However, whenever a government agency says a program will cost between $690 and $27,000 per unit, it’s a good bet that it will cost at least $27,000. The IPCC being an intergovernmental agency cannot be expected to be better at economics than a single government agency. Mr. Bastasch and I both focused on the high-end estimates, So, here is a table of the full ranges for both pathways:
| Un-discounted 2010 US Dollars | ||||
| Carbon Tax per Metric Ton of CO2 | ||||
| 2˚C Pathway Low | 2˚C Pathway High | 1.5˚C Pathway Low | 1.5˚C Pathway High | |
| 2030 | $10 | $200 | $135 | $5,500 |
| 2050 | $45 | $960 | $245 | $13,000 |
| 2070 | $120 | $1,000 | $420 | $17,500 |
| 2100 | $160 | $2,125 | $690 | $27,000 |
Is this really a tax?
Some commentators have said that this isn’t a “tax.” It’s just the price of carbon emissions as estimated by the IPCC. Whether or not it takes the form of a direct tax, it’s a cost that the IPCC says needs to be extracted from the private sector in order to fund the Global War on Weather.
Putting the IPCC price of carbon into context
Since it’s difficult to relate $/ton of CO2, let’s look at it relative to common fuels used for transportation and electricity generation.
Gasoline
The folks at Resources for the Future were kind (or naive) enough to put together a handy carbon tax calculator to demonstrate the effects on various fuels. While it only goes up to $50/ton, it’s a good starting point for the math.
While numbers can vary depending on grades of gasoline, on average, the combustion of 1 gallon of gasoline yields 8.89 kg of CO2. How does a gallon of gasoline, which weighs less than 3 kg yield nearly 9 kg of CO2?
Molecular weight:
- O = 16
- C = 12
Chemical equation for combustion of octane:
- 2[C8H18] + 25[O2] → 16[CO2] + 18[H2O]
The C comes from gasoline, the O2 comes from the air.
Now, let’s translate a carbon tax into a gasoline tax:
| Carbon Tax per Gallon of Gasoline (8.89 kg/gal) | ||||
| 2˚C Pathway Low | 2˚C Pathway High | 1.5˚C Pathway Low | 1.5˚C Pathway High | |
| 2030 | $0.09 | $1.78 | $1.20 | $48.90 |
| 2050 | $0.40 | $8.53 | $2.18 | $115.57 |
| 2070 | $1.07 | $8.89 | $3.73 | $155.58 |
| 2100 | $1.42 | $18.89 | $6.13 | $240.03 |
This morning, I paid $2.70/gal at a Houston Texaco station. This price already includes $0.184/gal in Federal and $0.20/gal in Texas State taxes. That’s already a 17% tax at current prices.
This is how the IPCC carbon tax looks as a % of $2.70/gal.
| Carbon Tax per Gallon of Gasoline % of $2.70/gal | ||||
| 2˚C Pathway Low | 2˚C Pathway High | 1.5˚C Pathway Low | 1.5˚C Pathway High | |
| 2030 | 3% | 66% | 44% | 1811% |
| 2050 | 15% | 316% | 81% | 4280% |
| 2070 | 40% | 329% | 138% | 5762% |
| 2100 | 53% | 700% | 227% | 8890% |
It’s fairly obvious that the carbon pricing for the 1.5˚C pathway and the high-end of the 2˚C pathway are ridiculous non-starters as it relates to gasoline prices.
However, when it comes to electricity generation, it’s even worse.
Natural Gas
First, some US natural gas nomenclature:
SCF – Standard Cubic Foot is one cubic foot of gas at standard temperature and pressure (60 degrees F and sea level). Since both temperature and air pressure affect the energy content of a cubic foot of natural gas, the SCF is a way of standardizing. One SCF = 1020 BTUs.
While the Btu content of natural gas is variable, one thousand cubic feet (Mcf) is generally equivalent to one million Btu (mmBtu).
| scf | Standard cubic foot | 1 | scf |
| mcf | Thousand cubic feet | 1,000 | scf |
| Bcf | Billion feet, 1 million mcf | 1,000,000,000 | scf |
| Tcf | Trillion cubic feet, 1 thousand Bcf | 1,000,000,000,000 | scf |
In terms of British thermal units (Btu):
| scf | Standard cubic foot | 1,020 | Btu |
| mcf | Million Btu, mmBtu | 1,000,000 | Btu |
| Bcf | Trillion Btu | 1,000,000,000,000 | Btu |
| Tcf | Quadrillion Btu, 1 Quad | 1,000,000,000,000,000 | Btu |
Natural gas is the number one fuel for electricity generation in the US (31.7%), having edged out coal a few years ago. It’s also used for heating and cooking in many US homes. This is what the IPCC carbon tax would look like in $/Mcf of natural gas.
| Carbon Tax per Thousand Standard Cubic Feet of Natural Gas (53.12 kg/1,000 scf) | ||||
| 2˚C Pathway Low | 2˚C Pathway High | 1.5˚C Pathway Low | 1.5˚C Pathway High | |
| 2030 | $0.53 | $10.62 | $7.17 | $292.16 |
| 2050 | $2.39 | $51.00 | $13.01 | $690.56 |
| 2070 | $6.37 | $53.12 | $22.31 | $929.60 |
| 2100 | $8.50 | $112.88 | $36.65 | $1,434.24 |
The average residential price for natural gas in the US in 2017 was $10.91/Mcf (about 3X the wellhead price). This is what the IPCC carbon tax looks like as a % of $10.91/Mcf:
| Carbon Tax per 1,000 scf of Natural Gas % of $10.91/1,000 scf | ||||
| 2˚C Pathway Low | 2˚C Pathway High | 1.5˚C Pathway Low | 1.5˚C Pathway High | |
| 2030 | 5% | 97% | 66% | 2678% |
| 2050 | 22% | 467% | 119% | 6330% |
| 2070 | 58% | 487% | 204% | 8521% |
| 2100 | 78% | 1035% | 336% | 13146% |
Coal
Coal is the second most prevalent fuel for electricity generation in the US (30.1%). Coal comes in a lot of “flavors”: Anthracite, bituminous, sub-bituminous and lignite… and sometimes coke. For simplicity and due to its dominance in US coal production, I limited my analysis to Powder River Basin sub-bituminous coal. The low-end of the IPCC carbon tax for a 2˚C pathway would immediately more than double the price of Powder River Basin coal:
| Carbon Tax per Short Ton of Powder River Basin Sub-Bituminous Coal (1,686 kg/short ton) | ||||
| 2˚C Pathway Low | 2˚C Pathway High | 1.5˚C Pathway Low | 1.5˚C Pathway High | |
| 2030 | $16.86 | $337.20 | $227.61 | $9,273.00 |
| 2050 | $75.87 | $1,618.56 | $413.07 | $21,918.00 |
| 2070 | $202.32 | $1,686.00 | $708.12 | $29,505.00 |
| 2100 | $269.76 | $3,582.75 | $1,163.34 | $45,522.00 |
The average price for Powder River Basin coal in September 2017 was $12.10/short ton. This is how the IPCC carbon tax looks as a percentage of that price:
| Carbon Tax per Short Ton of Powder River Basin Sub-Bituminous Coal % of $12.10/short ton | ||||
| 2˚C Pathway Low | 2˚C Pathway High | 1.5˚C Pathway Low | 1.5˚C Pathway High | |
| 2030 | 139% | 2787% | 1881% | 76636% |
| 2050 | 627% | 13377% | 3414% | 181140% |
| 2070 | 1672% | 13934% | 5852% | 243843% |
| 2100 | 2229% | 29610% | 9614% | 376215% |
While claims of the “death of coal” have all proven premature, the IPCC carbon pricing scheme would almost immediately kill the world’s second most prevalent energy source:
Oh… But the carbon tax will be rebated!
At least that’s the claim of some nominally Republican snake oil salesmen.
THE FOUR PILLARS OF OUR CARBON DIVIDENDS PLAN
I. A GRADUALLY INCREASING CARBON FEE
The first pillar of a carbon dividends plan is a gradually rising fee on carbon dioxide emissions, to be implemented at the refinery or the first point where fossil fuels enter the economy, meaning the mine, well or port. Economists are nearly unanimous in their belief that a carbon fee is the most efficient and effective way to reduce carbon emissions. A sensible carbon fee should begin at $40 a ton and increase steadily over time, sending a powerful signal to businesses and consumers, while generating revenue to reward Americans for decreasing their carbon footprint.
II. CARBON DIVIDENDS FOR ALL AMERICANS
All the proceeds from this carbon fee would be returned to the American people on an equal and monthly basis via dividend checks, direct deposits or contributions to their individual retirement accounts. In the example above of a $40/ton carbon fee, a family of four would receive nearly $2,000 in carbon dividend payments in the first year. This amount would grow over time as the carbon fee rate increases, creating a positive feedback loop: the more the climate is protected, the greater the individual dividend payments to all Americans. The Social Security Administration should administer this program, with eligibility for dividends based on a valid social security number.
III. BORDER CARBON ADJUSTMENTS
Border adjustments for the carbon content of both imports and exports would protect American competitiveness and punish free-riding by other nations, encouraging them to adopt carbon pricing of their own. Exports to countries without comparable carbon pricing systems would receive rebates for carbon fees paid, while imports from such countries would face fees on the carbon content of their products. Proceeds from such fees would benefit the American people in the form of larger carbon dividends or could be used for transitional assistance for industries or regions hurt by the carbon fee. Other trade remedies could also be used to encourage our trading partners to adopt comparable carbon pricing.
IV. REGULATORY SIMPLIFICATION
The final pillar is the elimination of regulations that are no longer necessary upon the enactment of a rising carbon fee whose longevity is secured by the popularity of dividends. Many, though not all, of the Obama-era carbon dioxide regulations could be safely phased out, including an outright repeal of the Clean Power Plan. Robust carbon fees would also make possible liability rationalization for emitters. To build and sustain a bipartisan consensus for a regulatory rollback of this magnitude, however, the initial carbon fee rate should be set to significantly exceed the emissions reductions of all Obama-era climate regulations, and the carbon fee should increase from year to year.
Does anyone really believe that any of this sort of revenue would be evenly rebated to each and every American?
Firstly, Mordor on the Potomac would spend this faster than they could collect it.
Secondly, how in the Hell would they pay for the $122 trillion Global War on Weather, if they rebated the carbon tax to the taxpayers (and non-taxpayers)?
Thirdly, I apologize for the general lack of sarcasm in this post.
Carbon vs Carbon Dioxide
CO2 is part of the carbon cycle. The combustion of hydrocarbons combines carbon from fossil fuels and oxygen from the air to make CO2. Carbon cycle is correct. Carbon emissions can consist of CO2, CH4 and other carbon compounds. Carbon emissions isn’t wrong, but carbon compound emissions would be better.. The tax is on CO2 equivalent emissions… carbon tax isn’t wrong, but carbon compound emissions tax would be better.
My Excel Spreadsheet
https://debunkhouse.files.wordpress.com/2018/10/carbon-tax.xlsx
David: Thank you so much for responding to my comments on other posts. Responding shows a lot of integrity on your part.
I’d like to draw your attention to Box 5 (page 2-77):
“Two approaches have been commonly used to assess alternative emissions pathways: cost-effectiveness analysis (CEA) and cost-benefit analysis (CBA). CEA aims at identifying emissions pathways minimising the total mitigation costs of achieving a given warming or GHG limit (Clarke et al., 2014). CBA has the goal to identify the optimal emissions trajectory minimising the discounted flows of abatement expenditures and monetised climate change damages (Boardman, 2006; Stern, 2007). A third concept, the Social Cost of Carbon (SCC) measures the total net damages of an extra metric ton of CO2 emissions due to the associated climate change (Nordhaus, 2014; Pizer et al., 2014; Rose et al., 2017a). Negative and positive impacts are monetised, discounted and the net value is expressed as an equivalent loss of consumption today. The SCC can be evaluated for any emissions pathway under policy consideration.”
In cost-benefit analysis, we are asking how much future damage (discounted back to current dollars) will be avoided by not emitting a ton of CO2 (or the equivalent). If we have a reasonably accurate estimate of that damage (WE DON’T), it would make sense to place a Pigou tax on those emissions. If we expect $10 of damages from every ton of CO2 emitted, then it would arguably make sense to place a Pigou tax of $10 a ton on CO2 emissions to ensure that the we are obtaining at least the cost of the fossil fuel + the cost of the Pigou tax from our use of that fossil fuel. If climate sensitivity were high and damages of $100/ton were expected, then we want to obtain at least the cost of the fossil fuel + $100/ton. Cost-benefit analysis and Pigou taxes are concepts all economists support, but they recognize that accurately calculating future indirect damages is often impractical and highly politicized. In theory, we place “sin taxes” on alcohol and tobacco to reduce demand and therefore the damage cause by these products, but we don’t calculate an optimum tax based on a calculation of the damage they cause.
If I understand correctly, cost effectiveness analysis (CEA) attempts to look at supply and demand curves and predict how much the demand will drop if we artificially raise the price through taxation. If we demand that warming be limited to 1.5 or 2.0 degC NO MATTER HOW MUCH IT COSTS, then CEA tells us how much the PRICE of carbon dioxide emissions will need to rise to reduce emissions as much as these targets require. (Since we don’t know TCR and ECS accurately, we can’t accurately predict the relationship between future emissions and future temperature.) NO ONE IN THEIR RIGHT MIND IS GOING TO IMPOSE A TAX EQUAL TO THIS PRICE OF CARBON DIOXIDE EMISSIONS TO CAUSE THE REQUIRED REDUCTION IN EMISSION. Such a tax wouldn’t make any sense from a cost-benefit perspective! Government will simply MANDATE emissions reductions without imposing such massive taxes. These high carbon PRICES simply tell governments that a Pigou tax (cost-benefit analysis) will not achieve their PURELY POLITICAL OBJECTIVES of 1.5 or 2.0 degC.
When we choose to purchase a fossil fuel including a Pigou tax, we hope to maximize utility (the benefits from the fossil fuel – costs of obtaining the fossil fuel – the Pigou tax to take into account future damage). By maximizing utility, we let the “marketplace” decide how much fossil fuel we should burn and how much warming and damage will result. In theory, we come out ahead when we maximize utility.
IMO, it is important to distinguish between a CARBON PRICE and a CARBON [PIGOU] TAX. The former tell you how much value citizens could obtain from the fossil fuel the government is not going to allow to be burned to meet a political target of 1.5 or 2.0 degC. The latter tells us how much to tax emissions to achieve an optimum outcome.
IMO, since the government needs taxes to raise revenue for government operations, it would certainly make sense to raise some revenue by imposing a carbon tax (that will reduce future damage from warming) rather raise revenue by taxing capital gains (which reduces the incentive to invest and damages the economy). All economists recognize that some forms of taxation (income taxes) cause more harm to the economy than others (consumption taxes).
Frank,
I agree that this doesn’t make sense and won’t be imposed anywhere other than California.
Even if they had a firm grasp on TCR & ECS and could calculate, down to the penny, the Pigou tax required to stay below the 1.5 °C, no government on Earth would effectively spend the money. Rather than effectively spending it on decarbonization, it would be p!$$ed away on pet projects, boondoggles, paid out to special interest groups and/or redistributed to the recipient class to buy votes.
The only potential benefits of a carbon tax would be to improve the economics of carbon capture & storage (CCS) and nuclear power. A carbon tax might actually kill wind & solar and save coal & nuclear.
David wrote: “Even if they had a firm grasp on TCR & ECS and could calculate, down to the penny, the Pigou tax required to stay BELOW the 1.5 °C, no government on Earth would effectively spend the money.”
David still doesn’t understand the difference between a Pigou tax and a carbon price. A carbon price is the price needed to keep warming below 1.5 or 2.0 degC – whether or not this makes sense from a cost-benefit point of view. A Pigou tax (or the SCC) is the amount of tax that would minimize future damage (measured in today’s dollars) at the minimum cost to society. Users will continue to emit carbon when the use of fossil fuels is important enough to be worth paying a Pigou tax (+ the cost of the fossil fuel itself), but users will chose some other alternative when the use is only worth paying the cost of the fossil fuel itself. With a Pigou tax equal to say $5/gallon, we might burn enough fossil fuel to allow temperature to rise 3 degC, because gasoline is worth $8.50/gallon on most trips.
The US government rationed many items during WWII and might ration gasoline in the future. Everyone might get an equal allotment and the affluent might buy the rations of the non-affluent. In theory, those private transactions should take place at the “carbon price” predicted by the IPCC. With a Pigou tax, the amount of gas burned is not capped. The higher price caused by the Pigou tax reduces demand in an economically optimum fashion.
David wrote: “The only potential benefits of a carbon tax would be to improve the economics of carbon capture & storage (CCS) and nuclear power. A carbon tax might actually kill wind & solar and save coal & nuclear.”
If I remember correctly, CCS is projected to add about 100% to the cost of electricity generated by coal. If a Pigou tax on the burning of coal without CCS was 200% of the price of coal, CCS might be voluntarily adopted.
Electricity is a very perishable product: If it isn’t used immediately, it has almost no value because it can’t be stored cost effectively and long transmission lines are too expensive. The electricity used during periods of peak demand is far more expensive to produce because the capital cost of production is only paid back during a fraction of the time. Nuclear power, wind and solar have the highest capital costs and therefore compete with each other to provide baseload demand, but non-dispatchable wind and solar can never reliably meet baseload demand.
David: The most important factor in calculating a carbon tax or the social cost of carbon is determining the optimum discount rate to use. It has been proven mathematically that the optimum discount rate depends on the sum of the risk-free cost of capital and the future growth rate of the economy. Rich liberal who think their descendants will be worse off because we have irrepairably damaged the environment and depleted our resources expect little or perhaps negative economic growth and therefore apply a low discount rate to future damages, instinctively calculating a high SCC and Pigou carbon tax. If our descendants are already going to have a difficult time due to our excesses, it is immoral for us to add climate change to their problems.
India and the rest of the undeveloped world see that imitating China and burning lots of cheap coal can potentially produce decades of 5+% economic growth. They instinctively apply a high discount rate when calculating or thinking about the SCC, producing a negligible Pigou tax. They say: If our descendants are going to be far richer than we are if we burn cheap fossil fuels. Let’s burn them, and let our rich descendants deal with the resulting problems. However, if the West is willing to subsidize the cost of renewable energy so it is less expensive than coal, the developing world is happy to pledge at Paris minor reductions in emissions GROWTH contingent on subsidies (that will never be provided).
Republicans who believe in technological progress and future economic growth and non-affluent Americans may think like people in India: Let’s get richer and let our rich descendants deal with the environmental issues. Earlier poorer generations left environmental problems our affluent society could afford to deal with.
To some extent, the problem with calculating a SCC, a Pigou tax, or emissions reductions is that different groups perceive the world in different ways. Even in a very idealistic world, developing nations are never going to agree to preventing emissions growth at the cost of economic growth. The left, the right and the non-affluent have different expectations about economic growth. No one believes the West is going to significantly subsidize renewables in developing countries, but that is essential to meeting political goals.
The proper discount rate is easy.
David writes: “The proper discount rate is easy.”
This discount rate was arbitrarily chosen by the OMB. The Ramsey equation has been mathematically proven to provide economists with an optimum discount rate for problems such as discounting future damage from climate change. There is a Wikipedia article on this subject, but it is written for academic economists. Nordhaus has a very clear explanation in one of his early papers, but I can’t find it. The National Academy has recently written a book on recommending improvements in the process by which the Obama administration calculated the SCC. Chapter 6 (Discounting Module) of that book has a reasonably clear discussion and starts with the OMB discount rate you cite above:
https://www.nap.edu/read/24651/chapter/9
Most of the discussion centers on the Ramsey equation:
r = δ +η*g
where r is the discount rate, δ is the time preference for money (how much more valuable a dollar today is than a dollar a year from now assuming no risk), g is the growth rate of the economy, and η is the elasticity of consumption change in the utility of an additional dollar of consumption as society gets richer. (Does some spending $100,000/year get as much additional value from the last dollar he spends as someone spending $50,000/year).
None of the liberal academics I have read seem to have the slightest idea that the citizens of India and the rest of the developing world expect their governments to attempt to emulate the Chinese and grow their economies 5-10%/year (using cheap fossil fuels, especially coal). Their expectations are not the same as those of elite Western academics who calculate the SCC.
Let’s set aside the mathematics of the Ramsey equation and reasoning more intuitively. When one is poor and expecting one’s grandchildren to become far richer than one is today, spending money today to make the lives of grandchildren or great grandchildren easier doesn’t make much sense. We didn’t expect our poorer grandparents and great-grandparents (in the Great Depression or during WWI or WWII) to properly dispose of toxic mining or chemical waste. Today, we can afford to pay to correct those mistakes. The Chinese have KNOWINGLY been permitting huge environmental problems to develop because they would rather spend money growing their economy than protecting the environment. In another couple of decades, their richer descendants will be able to afford clean up.
When you are a rich environmentalist who expects your grandchildren to be poorer because of environmental damage and non-sustainable practices, you feel a moral obligation to prevent carbon emissions from making their lives even more difficult.
The Ramsey equation for selecting an optimum discount rate contains the mathematics that bridges these different perspectives. It also tell me that the developing world is never going to accept significant limitations on the growth of their emissions until they have been rich.