Carbon dioxide: global warming contributor

CO2 is a heat-trapping greenhouse gas (GHG) [2][3] The scientific consensus is that humaninduced greenhouse gas emissions are the primary cause of global warming,[4] and that carbon dioxide is the most important of these gases.[5][6][7] Worldwide, 27 billion tonnes of carbon dioxide are produced by human activity annually.[8] The physical effect of CO2 in the atmosphere can be measured as a change in the Earth-atmosphere system's energy balance the radiative forcing of CO2.[9] Carbon taxes are one of the policies available to governments to reduce GHG emissions.[10] In the Kyoto Protocol, CO2 emissions are regulated along with other GHGs. Different GHGs have different physical properties: the global warming potential is an internationally accepted scale of equivalence for other greenhouse gases in units of tonnes of carbon dioxide equivalent.

[edit] Economic theory

Public finance

Sources of government revenue Tax and non-tax revenue Government policy Fiscal Monetary Trade Policy mix Fiscal policy Tax policy (see taxation series) Government revenue Government debt Government spending (Deficit spending) Budget deficit and surplus Monetary policy Money supply Central bank Gold standard Fiat currency

Trade policy Balance of trade Tariff Tariff war Free trade Trade pact See also Taxation series Project
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A carbon tax is an indirect taxa tax on a transactionas opposed to a direct tax, which taxes income. A carbon tax is also called a price instrument, since it sets a price for carbon dioxide emissions.[11] In economic theory, pollution is considered a negative externality, a negative effect on a party not directly involved in a transaction, which results in a market failure. To confront parties with the issue, the economist Arthur Pigou proposed taxing the goods (in this case fossil fuels) which were the source of the negative externality (carbon dioxide) so as to accurately reflect the cost of the goods' production to society, thereby internalizing the costs associated with the goods' production. A tax on a negative externality is called a Pigovian tax, and should equal the marginal damage costs. Within Pigou's framework, the changes involved are marginal, and the size of the externality is assumed to be small enough not to distort the rest of the economy.[12] Some argue that impact of climate change could result in catastrophe and non-marginal changes.[13] "Non-marginal" means that the impact could, at some time future date, significantly reduce the growth rate in income and welfare. The amount of resources that should be devoted to avoiding low-probability, high cost climate change impacts is controversial.[13] Policies designed to reduce carbon emissions could also have a non-marginal impact.[14] Prices of carbon (fossil) fuels are expected to continue increasing as more countries industrialize and add to the demand on fuel supplies.[clarification needed][citation needed] In addition to creating incentives for energy conservation, a carbon tax would put renewable energy sources such as wind, solar and geothermal on a more competitive footing, stimulating their growth.

[edit] Social cost of carbon

See also: Economic impacts of climate change#Marginal impacts The social cost of carbon (SCC) is the marginal cost of emitting one extra tonne of carbon (as carbon dioxide) at any point in time.[15] To calculate the SCC, the atmospheric residence time of carbon dioxide must be estimated, along with an estimate of the impacts of climate change. The impact of the extra tonne of carbon dioxide in the atmosphere must then be converted to the equivalent impacts when the tonne of carbon dioxide was emitted. In economics, comparing impacts over time requires a discount rate. This rate determines the weight placed on impacts occurring at different times.

According to economic theory, if SCC estimates were complete and markets perfect, a carbon tax should be set equal to the SCC. Emission permits would also have a value equal to the SCC. In reality, however, markets are not perfect, and SCC estimates are not complete (Yohe et al.., 2007:823). An amount of CO2 pollution is measured by the weight (mass) of the pollution. Sometimes this is measured directly as the weight of the carbon dioxide molecules. This is called a tonne of carbon dioxide and is abbreviated "tCO2". Alternatively, the pollution's weight can be measured by adding up only the weight of the carbon atoms in the pollution, ignoring the oxygen atoms. This is called a tonne of carbon and is abbreviated "tC". Estimates of the dollar cost of carbon dioxide pollution is given per tonne, either carbon, $X/tC, or carbon dioxide, $X/tCO2. One tC is roughly equivalent to 4 tCO2.[16] Estimates of the SCC are highly uncertain.[17] Yohe et al. (2007:813) summarized the literature on SCC estimates: peer-reviewed estimates of the SCC for 2005 had an average value of $43/tC with a standard deviation of $83/tC. The wide range of estimates is explained mostly by underlying uncertainties in the science of climate change (e.g., the climate sensitivity), different choices of discount rate, different valuations of economic and non-economic impacts, treatment of equity, and how potential catastrophic impacts are estimated. Other estimates of the SCC spanned at least three orders of magnitude, from less than $1/tC to over $1,500/tC. The true SCC is expected to increase over time. The rate of increase will very likely be 2 to 4% per year.

[edit] Carbon leakage

Carbon leakage is the effect that regulation of emissions in one country/sector has on the emissions in other countries/sectors that are not subject to the same regulation.[18] Leakage effects can be both negative (i.e., increasing the effectiveness of reducing overall emissions) and positive (reducing the effectiveness of reducing overall emissions).[19] Negative leakages, which are desirable, are usually referred to as "spill-over".[20] According to Goldemberg et al.. (1996, p. 28), short-term leakage effects need to be judged against leakage effects in the long-term.[21] A policy that, for example, saw a carbon taxes set only in developed countries might lead to leakage of emissions to developing countries. However, a desirable negative leakage could occur due to a lowering in demands of coal, oil, and gas from the developed countries and thus the world prices. This will lead to developing countries being able to afford more of any fossil fuel type, thus being able to substitute more oil or gas for coal, in effect lowering their national emissions. In the long-run, however, if the transfer of less polluting technologies is delayed, this substitution by income effects might have no long-term benefit.

[edit] Border adjustments, tariffs and bans

A number of policies have been suggested to address concerns over competitive losses due to one country introducing a carbon tax while another country does not.[22] Similar policies have also been suggested in an attempt to induce countries to introduce carbon taxes. Suggested policies include border adjustments, trade tariffs and trade bans.

Border adjustments would account for emissions attributable to imports from nations without a carbon price. An alternative would be trade bans or tariffs applied to non-taxing countries. It has been argued that such approaches could be disadvantageous to a target country as a trade measure (Gupta et al.., 2007). To date, World Trade Organization case law has not provided specific rulings on climate-related taxes.

[edit] Other types of taxes

See also: energy tax and fee and dividend Two other types of taxes that are related to carbon taxes are emissions taxes and energy taxes. An emissions tax on GHG emissions requires individual emitters to pay a fee, charge or tax for every tonne of greenhouse gas released into the atmosphere,[23] while an energy tax is charged directly on the energy commodities. In terms of mitigating climate change, a carbon tax, which is levied according to the carbon content of fuels, is not a perfect substitute for a tax on CO2 emissions.[24] For example, a carbon tax encourages reduced use of fossil fuels, but it does not provide an incentive to mitigate or improve mitigation technologies, e.g. carbon capture and storage. Energy taxes increase the price of energy uniformly, regardless of the emissions produced by the energy source (Fisher et al.., 1996, p. 416). An ad velorem energy tax is levied according to the energy content of a fuel or the value of an energy product, which may or may not be consistent with the emitted amounts of green house gases and their respective global warming potentials. Studies indicate that to reduce emissions by a certain amount, ad velorem energy taxes would be more costly than carbon taxes.[10] However, although CO2 emissions are an externality, using energy services may result in other negative externalities, e.g., air pollution. If these other externalities are accounted for, an energy tax may be more efficient than a carbon tax alone.

[edit] Petroleum (motor gasoline, diesel, jet fuel)

Many OECD countries have taxed fuel directly for many years for some applications; for example, the UK imposes duty directly on vehicle hydrocarbon oils, including petrol and diesel fuel. The duty is adjusted to ensure that the carbon content of different fuels is handled with equivalence.[25] While a direct tax should send a clear signal to the consumer, its use as an efficient mechanism to influence consumers' fuel use has been challenged in some areas:[26]

There may be delays of a decade or more as inefficient vehicles are replaced by newer models and the older models filter through the 'fleet'. There may be political reasons that deter policy makers from imposing a new range of charges on their electorate. There is some evidence that consumers' decisions on fuel economy are not entirely aligned to the price of fuel. In turn, this can deter manufacturers from producing vehicles that they judge have lower sales potential. Other efforts, such as imposing efficiency

standards on manufacturers, or changing the income tax rules on taxable benefits, may be at least as significant. In many countries fuel is already taxed to influence transport behavior and to raise other public revenues. Historically, they have used these fuel taxes as a source of general revenue, as their experience has been that the price elasticity of fuel is low, thus increasing fuel taxation has only slightly impacted on their economies. However, in these circumstances the policy behind a carbon tax may be unclear.

Some also note that a suitably priced tax on vehicle fuel may also counterbalance the "rebound effect" that has been observed when vehicle fuel consumption has improved through the imposition of efficiency standards. Rather than reduce their overall consumption of fuel, consumers have been seen to make additional journeys or purchase heavier and more powerful vehicles.[27]

[edit] Calculation
A carbon tax that compensates for the SCC varies by fuel source. The carbon dioxide production of the fuel source per unit mass or volume is multiplied by the SCC to obtain the tax. Based on the mean peer reviewed value ($43/tC or $12/tCO2), the table below estimates the tax: CO2 Emissions[28] Tax (mass of CO2 (per fuel unit) produced) $0.11/USgal ($0.028/L) $0.12/USgal ($0.032/L) $0.12/USgal ($0.032/L) $0.00066/cu ft ($0.023/m3) n/a n/a n/a n/a CO2 Emissions[28] (mass of CO2 produced) n/a n/a n/a 117 lb/MBTU (181 g/kWh) 215 lb/MBTU (333 g/kWh) 213 lb/MBTU (330 g/kWh) 205 lb/MBTU (317 g/kWh) 227 lb/MBTU (351 g/kWh)

Fuel

Tax per kWh of electricity[29] n/a n/a n/a $0.0066 $0.0121 $0.0119 $0.0115 $0.0127

19.6 lb/US gal (2.35 kg/L) 22.4 lb/US gal diesel fuel (2.68 kg/L) 22.1 lb/US gal jet fuel (2.65 kg/L) 0.1206 lb/cu ft natural gas (1.93 kg/m3) 2791 lb/ton coal(lignite) (1.396 kg/kg) 3715 lb/ton coal(subbutuminous) (1.858 kg/kg) 4931 lb/ton coal(butuminous) (2.466 kg/kg) 5685 lb/ton coal(anthracite) (2.843 kg/kg) gasoline

Note that the tax per kWh of electricity depends on the thermal efficiency of the generating power plant, which varies from power plant to power plant. The table follows the American Physical Society (APS) estimate of 10.3 BTU/Wh (33%). APS notes that "It is expected that

future plants, especially those based on gas turbine systems, often will have higher efficiencies, in some cases exceeding 50%." A theoretical conversion rate of 100% is 3.412 BTU/Wh. A more practical limit for thermal power plants is Carnot's theorem.

[edit] Implementation
Both energy and carbon taxes have been implemented in responses to commitments under the United Nations Framework Convention on Climate Change.[10] In most cases where an energy or carbon tax is implemented, the tax is implemented in combination with various forms of exemptions.
India

On July 1, 2010 India introduced a nation wide carbon tax of 50 rupees per metric tonne ($1.07/mt) of coal both produced and imported into India.[35] In India coal is used to power more than half of the countrys electricity generation.[36] India's total coal production is estimated to reach 571.87 million tons in the year ending March, 2010 and is expected to import around 100 million tons. The carbon tax expects to raise 25 billion rupees ($535 million) for the financial year 2010-2011. According to Mukhergee, the clean energy tax will help to finance a National Clean Energy Fund (NCEF).[37] Industry bodies have not favored the levy and rear that the resultant higher price of coal could trigger inflation.[35] While many remain apprehensive, a carbon tax is a step towards helping India meet their voluntary target to reduce the amount of carbon dioxide released per unit of gross domestic product by 25% from 2005 levels by 2020. Ramesh told reporters in June 2010 that a domestic tax should come before a global carbon tax, and India has imposed one while others debate the issue.[37] For more information about Indias carbon tax and other efforts being taken to mitigate climate change please follow the link to Indias Climate Change Initiative for 2010: http://www.indiaenvironmentportal.org.in/files/India%20Taking%20on%20Climate%20Change. pdf