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The cost of carbon

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In order for the world to meet the climate goals of limiting global warming temperature rise to no more than 2oC, we will need to make a significant investment in energy efficiency and renewable forms of energy. On the other hand, the cost of doing nothing would likely run into the many trillions of dollars in the US alone. In other words, every ton of CO2 emitted has an embedded climate cost associated with it. Classic economic theory says that, as the price of a commodity rises, the amount purchased decreases. That is the theory of carbon pricing.

Every quarter, CO2 emitters in the northeast US bid for the opportunity to emit CO2 from powerplants and industry. In the latest auction (March 2019), bidders paid $5.27 to emit a ton of CO2. As the amount of carbon allowed to be emitted (the ‘cap’) has gone down, the price has risen. Over the past year, the cap has been reduced by 5% but the price paid by emitters has increased by 38%! The price of that CO2 emitters are willing to pay is very elastic.

Taxing carbon has long been discussed. Advocates of energy efficiency and renewable have been pro tax, as the increased cost of fossil fuels will improve payback times for efficiency measures. The fossil fuel industry has generally been opposed, for obvious reasons.

However, we are noting a change of positioning of some oil companies. Is this a tipping point?

A little history here: In 2018, a blue-ribbon panel, headed by former Republican Secretaries of State James Baker III and George Shultz, proposed a carbon tax that would begin at $40 a ton and would increase at a predictable rate, as yet to be determined. ($40 per ton of CO2 translates to about 35 cents per gallon of gasoline.) Such a scheme would allow industry and consumers to make energy decisions based on certainty of future prices. In their plan, all of the revenue would be returned to taxpayers in the form of a quarterly payments. There would be winners and losers; those who significantly cut back energy consumption would get more back as a rebate than they paid in higher energy prices.

Earlier this year, Shell Oil split from a Washington lobbying consortium over climate policy. It was a sign that not all oil companies were moving in the same direction. Shell and BP both have announced that they are supporting the Climate Leadership Council, the group advocating for the Baker/Schultz initiative.

What are oil and gas producers asking in return? For one thing, they want regulations on power plant emissions to be withdrawn, claiming that they would not be needed with the carbon tax. Secondly, it is expected that they will ask to be held harmless from lawsuits blaming them for the consequences of climate change.

A lot is at stake and it is not likely that a carbon tax will pass this 116th Congress. However, with the Green New Deal getting so much attention, moderates might see the Climate Leadership Council’s proposal as a better stating point.

A significant tax on carbon, with proceeds being returned to taxpayers, could be a game changer.


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