Taxing all energy – not just fossil fuels – will smooth decarbonization and future-proof paying the cost of the loss and damage attributable to man-made climate change that will prevail for centuries – long after carbon emissions cease altogether.
To incentivise the transition from ‘dirty’ high-carbon fuels to ‘clean’ low-carbon fuels or energy, requires a strong carbon tax signal that relates directly to carbon emissions. That may be stating the obvious. What is less obvious, however, is that carbon taxes must be applied to all energy types and not just fossil fuels.
That may sound bizarre, but consider this: simply taxing coal-fired and even gas-fired power stations to extinction over the next 40 years will leave a huge hole in the tax revenue needed to combat ongoing climate change. To compensate, taxing overall energy usage should gradually take up this slack. Tax rates need to be proportionate to the carbon intensity of the energy sources, but also dynamically scaled to keep the ongoing total tax revenue constant as carbon usage declines.
Every fuel has a carbon intensity, i.e. the ratio of the amount of CO2 emitted divided by the useful energy the fuel produces. These emissions are expressed as kg-CO2/tonne of fuel and the energy is expressed as MWh/tonne of fuel, so the ratio or carbon intensity becomes kg-CO2/MWh. This is shown in the bar chart in Figure 1 for a range of fossil-fuel and renewable energy sources. Expressed as ‘life cycle’ values, even wind turbines and solar panels have some CO2 footprint, typically incurred during their manufacture, installation, operation and decommissioning. This is called embedded carbon. By weighting energy tax proportionately to carbon intensity and scaling the tax to overall energy use, the tax self-adjusts according to how the energy is generated. The total tax bill is preserved and there is no hole in the tax revenue stream. As coal phases out, gas is taxed more. As gas phases out, wind and nuclear are taxed more. The revenue stream remains constant even after the last giga-tonne of CO2 is emitted. Such an approach ensures that the revenue footing the bill for manmade climate change is smoothly transitioned from taxing fossil fuels to taxing renewables, without noticeably affecting the average taxpayer. Thus climate change mitigation and adaptation is future-proofed.
The citizens of Boulder, Colorado, have already acted on their concern about global warming and in 2006 voted in their Climate Action Plan (CAP). The CAP tax is levied on city residents and businesses and is based on the amount of electricity they consume. It generates approximately $1.8 million each year that now funds decarbonisation initiatives. Tax is levied only on grid-supplied electricity. While this does not equate fully to the energy tax formulation advocated here, it is an enlightened beginning. We need to follow Boulder’s lead by introducing a national energy tax – but one that both differentiates between energy sources and dynamically recalibrates the taxes proportionately, to maintain a constant revenue stream whatever the energy mix.
Figure 1. Life-cycle emissions account for all the CO2, in every way possible, associated with the total output of an energy source. Nuclear power and wind score well because the equipment assets produce much more power per kg-steel. There is some debate about the value for biomass. (Copyright Predict Ability Ltd, with thanks to NEI)
Photo Credit: Boulder CO at twilight. By Phil Armitage [Public domain], via Wikimedia Commons
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