Ramez Naam @ramez Books: Nexus Series / The Infinite Resource. Faculty @SingularityU. Energy, climate, & innovation wonk. Optimist. Feb. 09, 2019 3 min read

Why do carbon taxes fall short? Here's a quick tweet thread on their limitations. For context, I am a carbon tax advocate, was on the board of WA's 2016 revenue-neutral carbon tax initiative, etc.. (for @amcafee & others) 1/

First, let me say that I still love carbon taxes, particularly carbon taxes that are used to reduce other taxes or send direct dividends back to the populace. Carbon taxes are particularly powerful in the electricity sector, where strong alternatives to fossil fuels exist. 2/

In electricity, the prices of solar, wind, hydro, and nuclear are all within a few cents per kwh of the prices of coal and gas, pretty much everywhere in the US.

A $50/ton carbon tax raises price of coal electricity by 5c/kwh, and the price of gas electricity by ~2.5c/kwh. 3/

In electricity, that $50/ton carbon tax pretty much drives the shutdown of every existing coal plant and would render natural gas electricity plants as backups to when carbon-free electricity or batteries filled by them couldn't operate. Awesome. 4/

But carbon taxes are far less powerful in other sectors. And they're far less powerful when clean alternatives don't exist or are still young and expensive. 5/

When Germany started subsidizing solar, it was ~25c / kwh more expensive than coal. No way would Germany enact the $250/ton carbon price needed. Politically impossible, and economically massive. Solar subsidies could be higher per kwh because they were more focused. 6/

When solar was only 1% of Germany's electricity production, Germany could, in effect, create a "carbon-free subsidy" of solar that was equivalent to $250/kwh. For solar, a huge push. For economy as a whole, cost limited to just that 1%. 7/

So this is the dynamic. When a technology is young it's both small in scale and expensive. So a high subsidy (or carbon tax) is needed. But choosing a subsidy focused on the still small-scale technology, you can make it affordable. 8/

Digression: Economic models of pigovian tax impacts assume that reduction in pollution happens through demand elasticity. E.g., coal is more expensive so we use less.

But the far bigger impact is technology *switching*. Get new tech cheap enough, and switch occurs. Poof! 10/

Now, in the climate areas where we have the biggest problems and the fewest solutions (agriculture, industry), those alternatives to switch to just don't exist yet. Or they're extremely expensive. It's like solar in early days in Germany. 11/

So applied R&D in those areas + *targetted* subsidy of the resulting new technologies can introduce them to market and help them scale, while re-allocating far fewer dollars than an economy-wide carbon tax. 12/

On top of this: Carbon taxes almost always exempt agriculture. They exempt diesel used on farms. And they *definitely* exempt emissions from livestock. Taxes have poor political economy. People hate them. And we romanticize farming. Subsidies are more passable. 13/

Let's also talk transportation. Unlike electricity, carbon taxes are quite weak in transportation. That $50 / ton carbon tax that would kill coal and turn natural gas electricity into backup? It would raise the cost of a gallon of gas by... 50 cents. Minimal impact, if any. 14/

Part of this is that fuel is a surprisingly small fraction of the total cost of driving. Most studies find that gasoline is maybe 1/4 of the per-mile cost of owning and driving a car. Purchase price / depreciation, maintenance, registration, insurance... those all add up. 15/

That $7,500 electric vehicle tax credit? It's probably equivalent to a $100 / ton carbon tax. And the US is not going to pass a $100 / ton carbon tax any time soon. But the EV tax credit? It passed with bipartisan support. Again, focused subsidies = better political economy. 16/

To sum this all up: A carbon tax *is* a good policy, particularly if it's paired with a dividend. It can even serve to reduce inequality depending on dividend shape.

For climate, though, it's a policy that works best in areas where alternative technology is already mature. fin/

You can follow @ramez.


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