HOW VIABLE IS A CARBON TAX?

July 31, 2011 § 1 Comment

Source: Harvest Power

Most discussion regarding a price on carbon emissions avoids the ”tax” word.  Conventional wisdom goes that supporting a carbon tax is a poison pill for re-election.  Consequently Europe resorted to a cap-and-trade scheme in the belief that this was tantamount to the free market setting a price.  But political pragmatism in the form of holidays for certain industrial sectors severely diminished the effectiveness of the instrument.

Cap-and-trade does have allure.  It permits businesses to buy and sell carbon credits, thus providing a measure of flexibility.  However, by its very nature, the scheme engenders uncertainty.  In Europe, the price has fluctuated from about 13 euros ($18) per tonne of carbon –dioxide today to a high of 34 euros ($47) in 2006.  This sort of uncertainty discourages investment capital.  Uncertainty equates to a higher discount rate, which increases the transaction price.  This applies in particular to carbon sequestration schemes, all of which are expensive.  Cleaning coal derived power to natural gas levels will cost around $30 per tonne.  The European price today could not support that, and more to the point, there would be no certainty as to the price years hence.

So, over half a decade of European cap-and-trade experience is not encouraging.  The US Congress flirtation with such a scheme was dead on arrival even in a Democrat controlled House.  Today, with DC painted red, the prospects are essentially nil.  As for a tax, that is even more inconceivable.

BC could soon stand for Beyond Carbon:  A very interesting piece in the Economist describes some early success for a British Columbia experiment in carbon mitigation.  In 2008, the sitting Prime Minister Stephen Harper was re-elected in part because of his stance against a carbon tax.  Pretty conventional political wisdom at work here.  Almost unnoticed at the same time the province of British Columbia had a governor, Gordon Campbell, who introduced a carbon tax.  At first pilloried by many, it now is seen as a success by all factions.  The two key elements to success appear to be as follows.  First, and likely most important, the entire revenue from this was ploughed back into tax refunds to individuals and companies.  Second, the initial tax was modest at $10 per tonne of carbon dioxide, with a prescribed annual rise of $5.  It will be $30 in 2012.  The predictability goes right to our point earlier: it is capital investment friendly.

The BC experiment appears to be a success story, although it is still Year 4.  Per capita fuel consumption is down by 4.5%.  Economic indicators are all positive, albeit in a petroleum rich province.  Campbell was re-elected a year after this was instituted, and the new governor, from the other side of the aisle, kept all the elements of the popular program.  The current tax of $25 is 25% higher than the effective price in Europe and yet acceptable.

So, what makes British Columbia different?  All Canadian politics is skewed to the left no matter the party.  And yet, Harper appeared to have been elected in part due to the platform of no carbon tax.  BC is more temperate in climate than the rest of the country, so per capita energy use is likely less, not unlike California and Oregon, who have had their successes with energy policy.  This entire rationalization aside, the trick probably was the re-use of the revenue to benefit the public and industry.  The province of Alberta does something similar by taxing bigger producers and putting the revenue into a fund for improving the environment.  This too is a popular measure, but less far reaching.

Now Australia takes the plunge:  Australian Prime Minister Julia Gillard just this month announced a tax of A$23 per tonne on the 500 worst polluters, mostly coal mines and steel companies.  She needs the Green Party support in Parliament, and this was a factor, as it was for Angela Merkel in Germany on the decision regarding no new nuclear plants.  When all the teeth gnashing is done, some bare facts are illuminating.  The net addition to the price of coal is estimated to be A$1.50 per tonne against the backdrop of a near all-time high of A$300 per tonne feeding a voracious Far East market.  The proverbial drop in the bucket.  High quality Australian iron ore is currently also at a high, with prices in the range of A$150 per tonne, against a cost to produce of A$40.  In general, the Australian economy is on a high; unemployment is low and exports strong despite an incredibly strong Australian dollar.  Taxing industry in this situation is a lot easier, especially when the resulting revenue is being returned.  In fact, in the next four years, the related expenditure will exceed the revenue substantially.  But this economy can afford it.

The key to any acceptance of the Australian scheme is, once again, the manner in which the revenue is used.  Half will be used to reimburse consumers for increased electricity cost due to it.  Another 40% will go to aiding the transition of the hardest hit companies to cleaner technology.  The plan will pass Parliament but may not at first be popular with the public.  But nor was it so, in the early days in British Columbia.  The plan may endure with the right results, but Australia’s first female prime minister may not survive the next election.  She was elected this time around on a firm platform of no carbon tax.  Opponents will be keen to remind the public of that.

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