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.]