Carbon Taxes

I'm in favor of a Carbon Tax.

Many people are against it because it is a market distorting subsidy for clean energy. In fact, it is a market correcting feature. A carbon tax internalizes the damage caused by fossil fuels. The damage includes, but is not limited to climate change. It would also allow us to reduce taxes in other areas ... it wouldn't mean slowing economic growth, simply "re-progamming" growth it in the right direction.

Carbon taxes are one form of a more general method of taxation known as "Pigouvian Taxes". A good explanation of this can be found here at Greg Mankiw's blog. Mankiw is a Havard Economist, who used to be head of the Council of Economic Advisors to GW Bush. Even one of Bush's advisors think a Carbon tax is a good idea!

The simple summary is "tax what you don't want". We want less pollution, so lets tax it. We want more employment and jobs, so lets reduce payroll & income taxes.

The best report I can find on external costs of energy this is an EU study. These results include:

* Increase in deaths due to respiratory disease (from air-borne particulates & pollutants)
* Increase in ill-health due to noise & air-borne pollution
* Building deterioration due to acid rain,
* Crop yield reductions due to NOx & SO2
* Global Warming
* Amenity losses
* Ecosystem damage

The results lined up something like this (I've averaged across countries):

Source External Price (euro-cent per kWh)
Coal: 6.1
Oil: 6.7
Gas: 1.8
Nuclear: 0.4
Biomass: 1.5
Hydro: 0.4
PV: 0.6
Wind: 0.1

It is interesting to note is the low external cost of nuclear energy. I believe alot of the safety concerns of nuclear are exaggerated. That said, I'm not necessarily a big fan of nuclear, but compared to coal, its a much better way to supply base load to an electricity grid.

The average price of wholesale electricity right now is somewhere around 4-5 euro-cent per kWh. So in order to level the playing field, we need to tax coal & oil at least that amount again.

Looking at the results above, I'd say a tax of 6 euro-cent/kWh is reasonable.

To translate that into a carbon price (even though its not 100% correct to do this as the external prices are not due only to global warming alone). The UK's environment department DEFRA report that for the UK's energy mix there is 0.43 tCO2/MWh. This implies a carbon price of 139 EUR / tCO2 ... wow ... its a big number, considering the current EU ETS phase II contracts are trading at 20EUR / tCO2.