A Carbon Tax When Oil Approaches $100/Barrel?

Rising Global Demand for Oil Provoking New Energy Crisis according to today’s New York Times. Yesterday’s front page of the Wall Street Journal headlined As Energy Prices Soar, U.S. Industries Collide.

Why not just rely upon high gasoline prices to bring down demand instead of “adding insult to injury” with a carbon tax?

One reason is that high gasoline prices alone are not enough to reduce consumption of gasoline and the resulting carbon dioxide emissions. Consumers, whether businesses or households, need a clear price signal that future prices are going to remain high before they are motivated to make the investment decisions necessary to reduce consumption. The volatile gas prices of the last few years just don’t provide that kind of signal. The rising global demand for oil headlined in the Times story is faster in developing countries, but as the Times correctly noted, “Americans’ appetite for big cars and large houses has pushed up oil demand steadily in this country, too.” The problem is that while it may be a rational economic decision to invest in a more efficient car, house, truck or airplane if gas prices are expected to remain at or above current levels, the economic decision-making is very different if consumers believe prices may plummet in two months. Europe has had considerably higher gasoline prices for many years and, not coincidentally, Europeans generally drive much smaller and more efficient vehicles.

While volatile prices do not encourage investment in efficiency, a clear and certain trajectory of increasing carbon taxes would do so. The revenue-neutral carbon tax proposed by the Carbon Tax Center provides that clear price signal. And, the gradual trajectory of increased prices that we propose gives consumers time to adjust to the higher prices by both investing in efficiency and making behavioral changes that will further reduce energy use. For more on how consumer demand for gasoline responds to price, see our issue paper by clicking here.

Another important reason why a carbon tax continues to be essential even with high oil prices is that the goal of a carbon tax is to reduce carbon dioxide emissions, not just to reduce consumption of gasoline. Generation of electricity accounts for approximately 40% of carbon dioxide emissions , compared to about 21% from gasoline and 4% from aviation. Two-thirds of the emissions reductions from a carbon tax are expected to come from the electricity sector, 11% from gasoline and only 1% from aviation. Coal use is increasing and will continue to increase without a price signal that reflects the harm caused by carbon dioxide emissions from coal-fired electric generating plants.

In addition, high oil prices encourage the development of new sources of energy with huge carbon dioxide emissions such as the Alberta oil sands projects. Tar sands development is the single largest contributor to the increase in climate change in Canada according to Greenpeace Canada. Even worse, according to a study by the Sage Centre and World Wildlife Fund-Canada, "voracious water consumption by Alberta’s oilsands threatens the quality and quantity of water available to Saskatchewan and the Northwest Territories through the Mackenzie River system." In fact, today’s New York Times cites a new study finding that "[h]igh levels of carcinogens have been found in fish, water and sediment downstream from Alberta’s huge oil sands projects." A carbon tax would reduce the economic incentive for such projects by holding down the price of oil. A carbon tax actually applied to such projects would destroy their economics.

Finally, right now the high oil prices are enriching oil producing countries and oil companies and causing severe damage to the United States economy. A revenue-neutral carbon tax will reduce demand and lead to reduced prices for the oil itself. The results? Reduced carbon dioxide emissions, less money going overseas and to big oil companies, carbon tax revenues returned to all Americans and strengthening our economy, and increased national security as we reduce our dependence on foreign oil. Win-win-win-win!

[To see a summary of recent Carbon Tax Center activities, see A Convenient Tax - Issue #3 immediately below.]


  1. says

    We are taxed enough!  I agree, the high cost of fuel is enough for me to car pool when possible, avoid jack-rabbit starts, not drive as much, etc.However, if it were possible to drive my car with a hydrogen on demand system that was safe and inexpensive, wouldn’t that be a good idea?The skeptics will say this isn’t possible.  However, I suggest we keep an open mind and remember that at one time people thought it was crazy that we’d be able to go to the moon!  Therefore, what if we consider supplemental fuels?  Specifically, hydrogen on demand that is safe and burns with your gasoline?http://saltwatercar.blogspot.com/"Where Water Powers Our Cars!"

  2. says

    If you’re so confident of the success of this scheme, Jeff, why worry about a carbon tax? You’ll never have to pay it, because you’ll never have to burn carbon. Free energy for everyone!

    Or perhaps you realize that unfortunately energy is required to pry hydrogen from water, whether or not it’s salty, and that less energy will be released in any ensuing transaction. Demand it all you want, but hydrogen production requires energy and not words, usually electricity which as pointed out above “accounts for approximately 40% of carbon dioxide emissions.”

    If I’m being too close minded by discounting salt water as a fuel, why not put your money where your mouth is and support a carbon tax? Nothing could do more to spur the development of the harmless alternative fuels that some people believe to be easily within our grasp than to make their development more profitable by increasing the cost of the polluting fuels we have at hand.

  3. Mike says

    Jeff,The carbon tax that is promoted by this website and most advocates would be revenue-neutral, i.e. income or payroll taxes would be reduced equivalently to the revenue from carbon taxes. This is a critical point feature and neutralizes the distastefulness of it being "yet another tax." Dan,I would certainly include in your list that fuel prices do not reflect the vast subsidies for fossil fuels, both direct and indirect, that lower the price of oil (at the pump), but are paid for by income taxes and debt. These subsidies amount to somewhere in the range of $500B/ year by this country alone, including some military expenses but not counting the external cost of free CO2 dumping. The carbon tax provides a mechanism to provide real market pricing, i.e. reflect the costs of those subsidies. This is a reason why self-described free-marketers love the carbon tax.

  4. says

    Rising pump prices may make weak-kneed politicians even more reluctant to utter the "T" word, but they shouldn’t. 
    Former Fed Chairman Paul Volcker (the first to use market signals to pull the US economy out of inflation by raising interest rates) put a shart point on it:  We either tax fossil fuels now or watch the economy shrivel as we hand our capital to the oil-producing countries and find ourselves paying for repeated and increasingly severe climate disasters.   A gradually increasing tax would jump start our economy towards higher efficiency — our more efficient trading partners are way ahead of us now and as fuel prices rise, their advantage grows.  A carbon tax would help us catch up.
    An expectation that taxes on fossil fuels will gradually rise would let everyone know that investment in conservation and alternatives will pay off more every year.  (Buy that attic insulation now!)  A tax on the carbon used in imported goods would signal to our trading partners that they can either tax carbon themselves or forfeit that revenue stream on exports.  
    The "tax and spend:" argument (that the government just wastes our taxes) just doesn’t apply if we plow the carbon tax revenue back into the economy on a per capita basis or by reducing payroll or income taxes.  It’s a stimulus in the right place — job creation in conservation and alternatives — without a bureaucracy.   Wind farms would become one of the best investments around.  

  5. Robert Shafer says

    A revenue-neutral retail carbon tax on gasoline is needed now for several reasons. 1) Voluntary reduction in gasoline consumption will not work. The 35 mpg CAFE standard by year 2020 will increase the efficiency of most registered vehicles on the highway by 2030, but as long as gas is cheap and cars are more fuel efficient, automobile owners will drive more, not less, according to a recent study by the Congressional Budget Office. 2) 35 mpg in 2020 is too little, too late. We need action now. 3) We need to reduce our dependence on foreign oil, especially from the Middle East. Regional conflict and unexpected interruption in the oil flow to the U. S. could cause economic havoc, unless we have an alternative energy source for transportation fuels. 4) The military cost to protect our foreign oil sources can be reduced substantially. 5) Climate warming. If we do not do something to reduce gasoline consumption, other countries could force us to use less gas by economic means, such as trade barriers or oil embargoes.  6) Peak Oil. Demand for oil will shortly exceed the world oil supply. Eventually there will be no more cheap oil. We are not prepared for this. 7) The tax must be revenue neutral. All of the tax must be returned to the nation’s taxpayers in an equitable way. The average gasoline consumption per registered driver (about 205 million) is about 700 gallons per year. A $2.00 per gallon retail tax, phased in over several years, should be returned equally as a tax credit to every taxpayer who files a 1040 IRS tax return ($1400 to single filers, $2800 to joint filers). Payroll taxes should be reduced by about $27.00 per week. People who use only public transportation, or who use only a bicycle, or carpool, should share equally in the tax credit.

  6. says

    Why call it a tax that congress is likely to make not quite tax neutral.   Indeed, rich people would pay more with a tax, but not nearly in proportion to their income.Call it an assessment politicians cannot get there hands on and return it to all who file a tax teturn.  Taxes cold still be reduced by getting rid of all grants, subsidies, tax credits.  Get rid of unfunded mandates as well, they are also a burden on our economy.  

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Last modified: November 9, 2007