Monday, December 04, 2006

The Practical Carbon Tax

The price of oil is looking to plunge again, and with it, most of the progress made thus far in the 'War on Carbon Fuel Consumption.'

Alright, the name's a lot less sexy, but seeing as our success on this front will decide our future foreign policy, trade deficit, and most importantly our ability to achieve energy independence and transition off of oil without resorting to coal or dirty oil (ie shale oil) and the environmental havoc that would wreak, I think it a much more important war to win.

We need to adopt an effective, comprehensive strategy for tackling our unhealthy oil habit if we are to win. That strategy is a carbon tax:

'Climate change is a real problem and the only way to tackle it is to reduce the gap between the price of fossil-fuel energy and alternative energy. But subsidies are not the best way to achieve that goal... A global carbon tax would be a more efficient way to close the gap between fossil and alternative fuels' -Economist, Nov. 18-24 2006.

It needs to achieve all the aims of a fuel tax (punishing consumption) while softening spikes, making gasoline prices predictable, and not giving the government ridiculous amounts of money.
Here's my proposal:

It has five points.

First, you decide (or more likely some skilled economist decides) the maximum rate at which the price of carbon fuels can rise to curb consumption without significantly impacting the economy.

Second, you define carbon-based fuels as all transportation fuels deriving more than 5% (can be a little more or less) of their energy from carbon fuels such as natural gas, coal, and oil. This ensures the taxation of second hand carbon fuels, such as coal-hydrogen, while allowing fuels like ethanol, which requires natural gas based fertilizers, some wiggle room.

Third, you take that rate of price increase, you pick a base price, and then you get target prices that will change every quarter, half year, or year (again depends on what the economist says). So, for example, you would say the price of carbon-fuels will be 3$ in 2008 and increase 10 cents every quarter thereafter.

Fourth, you achieve this target rate by, each month, taking the lowest retail price of carbon fuel and adding however much tax is necessary to raise it to the target price. Thus, with slight variations to ensure the market continues to take its course, the price of carbon-fuels will remain at the target price. This allows consumers in the market to plan fuel expenses years into the future, assisting them with decisions such as the purchase of a hybrid, and producers to do the same, allowing, for instance, ethanol producers to invest big without the fear of a sudden plunge in carbon fuel prices.

Fifth, you take all the revenue from the tax, which, because of it changes monthly, will be incredibly unpredictable, and you give it back. You simply take all the money, divide the revenue by the number of taxpayers, and mail each one a check. Because everyone gets the same check regardless of their fuel consumption, big consumers will be losing, and people who do not consume carbon fuels will be getting free money. Regardless, the American government will get nothing, the desired punitory effect of a gas tax will be achieved, and the money will remain in the private sector.

Fighting oil consumption is a subject of great interest of me, and this plan has come from many modifications. Please do tell me if you approve and/or have any more to make.


francois said...

The only problem I have is that there's really no way to keep prices stable that way. The best approach is simply to raise the gas tax and correspondingly reduce income and corporate taxes.

William said...

Unfortunately, we actually need the corporate and income taxes to support the government. Were we to replace them with the carbon tax, the government would then be in the undesirable position of being dependent upon the consumption of carbon fuels for revenue. Seeing the purpose of the tax is to dis- not en- courage the consumption of fossil fuels... we need to make sure the government does not use any of the revenue raised.