Update on a Global Carbon Tax

In a previous post I looked a statement made by Richard Tol in his recent paper The Structure of the Climate Debate

Only a modest carbon tax is needed to keep atmospheric concentrations below a high target but the required tax rapidly increases with the stringency of the target. If concentrations are to be kept below 450 ppm CO2eq, the global carbon tax should reach some $210/tCO2 in 2020 or so (Tol 2013).

Tol, to his credit, replied to me (and others) in the cliscep comments. In particular

Note that these climate policies consist of two components: An initial carbon tax, and its rate of increase (4-6% a year).

The $210 carbon tax in 2020 is just a starting point. With a 5% escalation, it would double every 14 years making the carbon tax $910 in 2050, $3070 in 2075 and $10,400 in 2100. The escalator is the far more important aspect in reducing demand for fossil fuels through a combination of reducing energy use and switching to more expensive (and often less convenient) renewable sources. The escalator was not clear in the original article, and Richard Tol has agreed to make a correction.

Consider again just imposing a fixed $210 carbon tax. From the British perspective the additional tax on petrol (gasoline), with 20% VAT applied, is equivalent to 47p a litre added to the retail price. The tax is already nearly 70p a litre, so unlikely to have the impact on motorists of reducing their consumption by 90% or more. Even with the tax at 200p a litre implied by a $910 t/CO2 tax (making petrol £3.13 a litre) may not achieve this objective. For a car doing 15000 miles at 39mpg, this would generate an additional cost to the owner of £3500 per year. It would still be less than the depreciation on a family car averaged over the first three years. It might also be less than the full costs of converting to electric cars, particularly if the roll-out was not subsidized on the purchase cost and provision of charging points. Within the UK, the carbon tax would also replace the current renewables policy. Here the escalator would really hit home. For coal-fired power stations producing 400kg CO2 per megawatt hour, the carbon tax would be £70Mwh in 2020 and £300Mwh in 2050. Gas-fired power stations would have a tax of about half that level. Even wind turbines, backed by massive pump-storage schemes would be much cheaper. Nuclear power would be the cheapest alternative of all. But British voters are hardly going to keep on voting for a Government that imposes real increases in taxes of five percent a year until they become unaffordable except for the very rich.

However, it is from the global perspective that the cost of the carbon tax really hits home. In another comment Tol says

The big worry for climate policy, studiously avoided by the majority of its advocates, is that you need lots of cheap energy in the early stages of economic development.

It is worth stating again that a Global Carbon Tax needs to be Global to achieve the desired objectives. From the UNIPCC AR5 Synthesis Report Summary for Policy Makers is graphic SPM11(a). This shows the non-policy or Business as Usual RCP8.5 scenario, where emissions in 2100 are projected to be over 2.5 times the level of 2010. The 2C warming target is the RCP2.6 scenario. I have inserted a big arrow to show the difference that the global carbon tax needs to make. It can be demonstrated that most of the emissions growth will come from the developing countries, following the pattern from at least 1990.

The scale of the harm of policy is by assuming that the $210 carbon tax is applied without any change in demand at all, using the estimated CO2 emissions from fossil fuels for 2013 from CDIAC and the IMF 2015 GDP figures for ballpark estimates.
Global CO2 emissions from fossil fuels were about 33.8 billion tonnes (two-thirds of total GHG emissions). A $210 carbon tax without any effect on demand would thus generate $7100 bn. This represents nearly 10% of global GBP of $73500bn. If we assume 2% emissions growth and 3% economic growth, then the carbon tax would represent 9.6% of GDP in 2020 without any drop in emissions.
Here is the same calculation for selected countries using 2013 emissions and GDP data.

30-33% Iran, Russia, South Africa
19-20% India, China
16-18% Thailand, Malaysia, Vietnam
11-14% Poland, Czech Republic, Pakistan, Egypt, Indonesia.
7% Bangladesh, Philippines
6-7% USA, Japan, Canada, Australia
4-5% Spain. Germany, Nigeria
UK 3.4% France 2.9%

The highest tax rates are a result of inefficient economic systems. Iran has subsidised petrol, effectively a negative carbon tax. South Africa’s high emissions are as a result of apartheid. Oil embargoes caused it to convert coal to liquids, a process that generates 4-5 times the CO2 of burning coal alone. Russia, in common with its neighbours, still has the legacy of the economically-inefficient communism.
The carbon tax would also be high as a proportion of GDP for the rapidly emerging economies. It highlights the Tol’s comment about needing lots of cheap energy in the early stages of economic development. With higher fossil fuel emissions per $1000 of GDP the impact on output would be relatively greater in the emerging economies than in the OECD. A globally uniform carbon tax would end up transferring back some manufacturing back to the more energy efficient economies, slowing economic growth and thus emissions growth.
More importantly, emerging countries have large parts of the population with very low energy consumption. Even those with access to gas and electricity have much lower energy consumption than is typical in the West, whether from heating, air conditioning, cooking, or private transport. Pushing up the cost of energy will massively slow down the spread of consumerism and consequent improvements in living standards.

Three years ago I looked at the takeaway policy quote from the Stern Review.

Using the results from formal economic models, the Review estimates that if we don’t act, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year, now and forever. If a wider range of risks and impacts is taken into account, the estimates of damage could rise to 20% of GDP or more. In contrast, the costs of action – reducing greenhouse gas emissions to avoid the worst impacts of climate change – can be limited to around 1% of global GDP each year.

I largely agree with Richard Tol when he states that a carbon tax is the optimal policy in terms of maximum effect for minimum cost, at least with respect to fossil fuel emissions. Yet a high, and rapidly increasing, carbon tax would cost far more than 1% of global GDP each year, even if the additional tax revenue was spent efficiently and/or used to reduce other taxes. But the most pernicious effects would be felt in the effects on long-term economic growth – the very growth that is moving billions of people out of poverty towards the far better living standards we enjoy in the Western World. The  carbon tax does not present a feasible policy even in theory to achieve the objectives desired. Yet is, in theory, the best policy available.

Kevin Marshall

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  1. Trump is wrong on China Global Warming Hoax but right on the policy consequences | ManicBeancounter

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