Carbon Taxes
A Special Tax on the Carbon Content of Fuels
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Victoria Transport Policy
Institute
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Updated
18 August 2008
This chapter discusses carbon
taxes, which are special taxes based on fuel carbon content intended to encourage energy conservation and
climate change emission reductions.
Carbon taxes are taxes based on fossil fuel carbon content, and therefore a tax on carbon dioxide emissions. They differ from current North American fuel excise taxes, which are applied primarily to motor vehicle fuels as a way to finance highways and other transportation services. Because carbon taxes are intended primarily to internalize the environmental costs of fuel consumption and encourage energy conservation, there is no particular requirement for how their revenues should be used. Revenues can be used to reduce taxes, provide rebates, or finance new public services, including energy conservation programs. If most revenues are returned to residents and businesses, resulting in no significant increase to total government income, the taxes are considered revenue neutral, called a tax shift. Many economists advocate tax shifting to help achieve strategic policy objectives: raise taxes on bads, such as pollution emissions, and reduce taxes on goods, such as labor and investments.
Carbon taxes are generally applied by state, provincial or federal jurisdictions at the point of production, distribution or sales.
The price Elasticity of gasoline is typically about -0.3 in the short run and -0.7 in the long run, meaning that a 10% price increase reduces fuel consumption 3% in a year or two, and 7% in five to ten years. Short-term fuel savings consist of reduced driving and a shift toward more fuel-efficient vehicles owned in multi-vehicle households. Over the long-term, higher fuel prices encourage consumers to purchase more fuel-efficient vehicles. About two-thirds of long-term fuel savings typically come from increased fuel efficiency and one third from reduced vehicle travel. As a result, increased fuel taxes cause greater fuel savings but less vehicle travel reductions then the same amount of revenue collected through per-mile fees, road tolls or parking charges.
The Elasticity of vehicle travel with respect to fuel price is typically found to be -0.20 to -0.30, with values of about –0.1 in the short run, and up to –0.50 over the very long run. Some U.S. studies of fuel price and consumption patterns during the 1990s, when real fuel prices declined and real incomes increased, found lower price responses (Hughes, Knittel and Sperling, 2006; Small and Van Dender, 2007), but more recent research indicates more normal elasticities (CERA, 2006; Williams Derry, 2008).
Table 1 Travel Impact Summary
|
Objective |
Rating |
Comments |
|
Reduces total traffic. |
2 |
Has a modest impact on vehicle
travel. |
|
Reduces peak period
traffic. |
1 |
Peak-period travel tends to
be less price sensitive than off-peak travel. |
|
Shifts peak to off-peak
periods. |
0 |
|
|
Shifts automobile travel to
alternative modes. |
1 |
Provides a modest incentive
to shift mode. |
|
Improves access, reduces
the need for travel. |
|
|
|
Increased ridesharing. |
1 |
|
|
Increased public transit. |
1 |
|
|
Increased cycling. |
1 |
|
|
Increased walking. |
1 |
|
|
Increased Telework. |
1 |
|
|
Reduced freight traffic. |
1 |
|
Rating from 3 (very
beneficial) to –3 (very harmful). A 0 indicates no impact or mixed impacts.
Carbon Taxes are an effective Energy Conservation and Emission Reduction strategy, help reduce vehicle travel, and provide revenue. Because travel reductions are relatively modest, congestion reduction and roadway cost savings also tend to be modest compared with the same revenue collected through other charges such as urban roadway or parking fees. Carbon taxes tend to provide greater total benefits than many other energy conservation and emission reduction strategies, since it provides traffic reduction benefits such as reduced congestion, road and parking costs, accidents and sprawl.
Fuel Tax increases, such as Carbon Taxes, tend to reduce traffic casualties. Grabowski and Morrisey (2004) estimate that each 10% fuel price increase reduces total automobile deaths by 2.3%, with about twice as large an impact on younger drivers, who tend to be more sensitive to fuel prices. Sivak (2008) found that a 2.7% decline in vehicle travel caused by fuel price increases and a weak economy during 2007-08 resulted in much larger 17.9% to 22.1% month-to-month declines in traffic deaths, probably due to disproportionate reductions in vehicle travel by lower income drivers (who tend to be young and old, and therefore higher than average risk) and speed reductions to save fuel.
Implementation costs are minimal, since most jurisdictions already collect fuel taxes. The petroleum industry argues that increased fuel taxes harm the economy, but this is probably not true, since the costs are primarily economic transfers within the economy: increased payments by motorists are offset by increased revenues or reductions in other taxes (TDM and Economic Development). Although steep, unexpected fuel price increases impose transition costs to the economy (i.e., producer and consumer choices based on low fuel prices are inefficient when fuel prices increase), and transfer of wealth from petroleum consuming regions to petroleum producing regions, a predictable increase in fuel taxes is not necessarily harmful to productivity in a region if revenues are retained within the economy (Shapiro, Pham and Malik, 2008). Raising current fuel taxes encourages consumers to develop energy efficient travel patterns, which reduces their exposure to economic risks from future fuel price increases.
Table 2 Benefit Summary
|
Objective |
Rating |
Comments |
|
Congestion Reduction |
1 |
Modest reductions in
vehicle travel. |
|
Road & Parking Savings |
2 |
Modest reductions in
vehicle size and travel. |
|
Consumer Savings |
-1 |
Increases vehicle operating
costs. Overall impacts depend on how revenues are used. |
|
Transport Choice |
-1 |
Mixed. Driving becomes less
affordable, but may increase support for alternative modes. |
|
Road Safety |
2 |
Mixed. Increased safety
from reduced driving may be offset by use of smaller cars that offer less
occupant protection. |
|
Environmental Protection |
3 |
Significant reduction in
fuel use and related pollutants. |
|
Efficient Land Use |
2 |
Modest reductions in
vehicle travel. |
|
Community Livability |
2 |
Modest reductions in
vehicle travel and vehicle size. |
Rating from 3 (very beneficial) to –3 (very harmful). A 0 indicates no impact or mixed impacts.
Critics often claim that Carbon Taxes are unfair to people who must consume more than average fuel due to their job, location or lifestyle, such as truck drivers, residents or rural and northern communities, and recreational motor boaters. However, in virtually all cases these people can significantly increase their energy efficiency particularly over the long term, by insulating homes, choosing more fuel efficient vehicles, and reducing mileage. Critics claim that rural residents cannot save energy because they lack high public transit service, but they can achieve large fuel savings by choosing more efficient vehicles, ridesharing and consolidating trips.
Many critics claim that this tax will hurt low income households. They are wrong. Although fuel price increases may seem regressive (a dollar tax imposes a greater burden on poor than wealthy people), lower-income people purchase much less fuel than higher income people. Low-income households will benefit overall from a tax shift that returns revenues as per capita rebates, progressive tax reductions, or new services that benefit lower-income people. Described differently, although fuel taxes are regressive, representing a greater portion of household expenditures for lower-income than higher-income households, targeted tax reductions, cash rebates and improved services for poor people tend to be extremely progressive with respect to income, so revenue-neutral carbon taxes can be extremely progressive overall.
This tax is even more progressive if implemented with energy conservation policies and programs, such as improved walking and cycling conditions, increased ridesharing and public transit services, smart growth land use policies, and home insulating programs. Because such programs tend to experience economies of scale (for example, as rideshare demand grows the chance of finding a favorable rideshare match increases exponentially, and a public transit demand grows, unit costs of providing high quality service declines).
Table 3 Equity Summary
|
Impacts |
Rating |
Comments |
|
Treats everybody equally. |
-1 |
Some groups (i.e., rural
residents) bear greater costs than others. |
|
Individuals bear the costs
they impose. |
2 |
Increases the portion of
vehicle costs recovered through user fees. |
|
Progressive with respect to
income. |
-1 |
Fuel taxes are regressive,
but overall impacts depend on how revenues are used. |
|
Benefits transportation
disadvantaged. |
3 |
Can reduce roadway expenses
borne by non-drivers, and encourages development of travel alternatives. |
|
Improves basic mobility. |
0 |
No significant impact. |
Rating from 3 (very
beneficial) to –3 (very harmful). A 0 indicates no impact or mixed impacts.
Carbon Taxes can be justified in most geographic conditions, particularly those that import petroleum. Carbon tax increases are usually implemented by federal or state/provincial governments. Some regional or local governments have modest fuel tax options.
Table 4 Application Summary
|
Geographic |
Rating |
Organization |
Rating |
|
Large urban region. |
2 |
Federal government. |
3 |
|
High-density, urban. |
2 |
State/provincial
government. |
3 |
|
Medium-density,
urban/suburban. |
2 |
Regional government. |
1 |
|
Town. |
2 |
Municipal/local government. |
1 |
|
Low-density, rural. |
2 |
Business Associations/TMA. |
0 |
|
Commercial center. |
2 |
Individual business. |
0 |
|
Residential neighborhood. |
1 |
Developer. |
0 |
|
Resort/recreation area. |
1 |
Neighborhood association. |
0 |
|
|
|
Campus. |
0 |
Ratings range from 0 (not
appropriate) to 3 (very appropriate).
Incentive to Reduce Driving.
By increasing the variable cost of driving, fuel tax increases support most other TDM strategies. Carbon Taxes are an Energy Conservation and Emission Reduction strategy. They are a Fuel Tax Increase and a Comprehensive Market Reform.
Carbon Taxes are implemented by Federal, State or Provincial governments. Some Regional or Local governments have optional fuel taxes, but these tend to be too small to have much impact on travel behavior. Motorist organizations, the petroleum industry, trucking organizations and transport-intensive industries tend to oppose such tax increases, while environmental organizations and government agencies (which require new revenue) often support them.
The primary barrier to Carbon Taxes tends to be political resistance from petroleum, vehicle and transportation industries, and motorists. Such tax reforms may depend on making them part of a package that satisfies a variety of objectives and constituencies.
Durning and Bauman (1998) and the
Table 5
|
Fuel |
Unit |
2008 |
2009 |
2010 |
2011 |
2012 |
|
Carbon |
Tonne of Carbon |
$10 |
$15 |
$20 |
$25 |
$30 |
|
Regular Gasoline |
cents/liter |
2.33¢ |
3.50¢ |
4.66¢ |
5.83¢ |
6.99¢ |
|
Diesel |
cents/liter |
2.69¢ |
4.04¢ |
5.38¢ |
6.73¢ |
8.07¢ |
|
Jet fuel |
cents/liter |
2.61¢ |
3.92¢ |
5.22¢ |
6.53¢ |
7.83¢ |
|
Propane |
cents/liter |
1.54¢ |
2.31¢ |
3.08¢ |
3.85¢ |
4.62¢ |
|
Natural gas |
dollars/gigajoules |
$0.50 |
$0.74 |
$0.99 |
$1.24 |
$1.49 |
|
Coal – low heat |
dollars/tonne |
$17.77 |
$26.66 |
$35.54 |
$44.43 |
$53.31 |
|
Coal – high heat |
dollars/tonne |
$20.77 |
$31.16 |
$41.54 |
$51.93 |
$62.31 |
This table shows
The