23 May 2017

So what would a carbon tax really cost?

While writing my paper on the tragedy of the commons and desalination, I was a little shocked to see that the cost of paying for CO2 permits -- or even the much higher social cost of carbon -- was actually quite small, i.e., the cost of offsetting carbon emissions at $12/ton would be roughly $3.60 per San Diego resident* -- a number that's a tiny fraction of people's water costs (let alone their latte budgets). Increasing the cost to $30/ton CO2e (one estimate of the social cost) would mean that San Diegans could offset the GHG-cost of 100 percent desalinated water for only $9 per year, which is about equal to the price of one hour of downtown parking.

This situation was interesting to me because it -- like the example of running a pig farm to meet clean water codes (most violate many of them) at an additional cost of $0.05/kg -- shows how absolutely CHEAP "doing the right thing" really is. If you listen to politicians, talk radio hosts and lying lobbyists, you'd think that a carbon tax (or the cost of cleaning water) would put your parents on the street, your ancestors' headstones for sale, and your kids into prostitution. But the cost is really just a tiny amount of money.

How can that cost be so low and why are people so opposed to it if it is?

The first answer is that a little cost can have a big effect if its spread across enough people. Wal-mart regularly breaks conservation records by shaving 0.2 percent off its shipping distances or packing weight. Five cent charges for plastic bags have dropped use by 50 percent or more in many cities. So the key is the total effect, not the lack of effect on you or small effect with any given person.

Second, the people who oppose these moves often face a much higher cost than the average person because they are in the oil selling, pig selling or bottled water selling business. We know about oil and pig lobbyists, but I am just as sure that Nestle, Pepsi and Coke are ALL opposed to (refundable) deposits on plastic water bottles because they do not want to raise the price of their product from $1.00 to $1.05 per liter (for example) because such a move might remind consumers that they can switch (in many places) to "practically free" tap water.

So those are the theories, but let's look at how much more things would cost (spreadsheet with numbers and sources) if we added a carbon tax of $30 per ton of CO2 (double the costs below if you're feeling a sense of urgency).

A gallon (liter) of gasoline would cost $0.27 (€0.06) more
NB: Gasoline in the Netherlands now costs €1.64/liter, which is $5.65/gallon**

One thousand cubic feet (one cubic meter) of natural gas would cost $1.59 (€0.06) more
NB: Our household uses about 30m^3 per month, so our bill would rise by €1.80 per month

One kWh would cost $0.012 (€0.011) more***
NB: Our household uses about 139 kwh per month, so our bill would rise by €1.50 per month

"Typical" meat, vegetarian, or vegan diets would cost $79, $42 or $32 per year more.

Looking into individual food prices:
  • Beef would cost $0.37/pound (€0.74/kg) more.
  • Cheese would cost $0.18/pound (€0.37/kg) more.
  • Chicken would cost $0.09/pound (€0.19/kg) more.
  • Eggs would cost $0.07/pound (€0.13/kg) more.
  • Rice would cost $0.04/pound (€0.07/kg) more.
  • Tofu would cost $0.03/pound (€0.05/kg) more.
Bottom Line: The "right price of carbon" would add trivial costs to the cost of living in richer countries, but it would do a lot to encourage changing consumption habits at the aggregate level (and changing production patterns at the corporate level). Too bad politicians seem more interested in listening to fossil-fuel lobbyists than to economists (and others) urging price signals as a cheap way to mitigate carbon emissions and the dangers of climate change.

* I assumed the same emissions for supplying desalinated water to ALL citizens, not just the 7 percent the plant can now supply.

** This price reflects existing "green taxes," which makes me wonder how much Dutch prices would change -- if at all -- under a carbon pricing scheme. I guess that it would have a low impact on households that already pay such taxes (as we do on electricity and natural gas) but a bigger impact on farmers and industry that are usually exempt from "anti-competative" or "job killing" taxes (see the pig example above for the truth in that lie!)

*** US Energy Information Agency data are very difficult to understand so I used EU data.


  1. Nice post. It's really valuable to look at the actual numbers rather than just the theory of why carbon is the cost-effective way to reduce emissions.

    I think it would be useful to make a distinction between the fossil fuel price increases and the food price increases by saying that --"Typical" meat, vegetarian, or vegan diets would cost AT MOST $79, $42 or $32 per year more.

    Ag companies would find ways to reduce emissions, for example, by capturing and burning methane, once they faced a price. This could be true of fossil fuel prices if CCS was economical, but at least in the near future, it's not.

  2. It is a nice thought experiment. Bit I think you making the same mistake as you critizing at the beginning of your post. It is the total effect what matters... (and this also counts for the costs) which means it is the sum of all small cost parts. In total this could be a significant amount and for sure not negligible for some lower income households even in rich developing countries.

    1. I don't think you're right. The total cost will be $30/ton CO2. It will be split into "small cost parts" in proportion to the CO2 consumption (like any tax on a good or service). Poorer people will be taxed in proportion to their (in)direct CO2 consumption, e.g., less than rich people who fly more, eat more exotic foods, live in bigger houses, etc.


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