Saturday, June 27, 2009

Some Carbon Math.

The U.S. House of Representatives passed an heavily amended version of the Waxman-Markey "Cap and Trade" Bill, which beginning in 2012 levies a tax to emit carbon dioxide at a rate of $13 per ton. This rate will increase steadily over the years, with the goal of forcing reductions of CO2 to less than 17% of current emissions by 2050 (83% by 2020).

The CBO claims that such a tax will cost the average household only $175 in energy costs by 2020. Shall we check the numbers?

The current total US emission of CO2 is about 6400 million US tons per year. The 2012 tax on this CO2 emission will total $83B. If we assume that all of this tax ultimately will be assessed on the 185 million taxpayers in the country (all costs to utilities, manufacturing, transportation, etc. are passed on to the total taxpayer base), the total 2012 tax increase on average per taxpayer is about $450. About one third of the taxpayers actually pay no tax; if we assume that this will also be the case for the CO2 tax (the bill provides for a CO2 tax credit for each lower income household), then the total burden in 2012 per net paying taxpayer will be more like $650. So, a household of two taxpayers will get walloped with an effective $1300 CO2 bill.

To account for the huge disparity with the CBO estimate, either the government will force some entities upstream in the cost flow to eat these costs - with accompanying adverse consequences to the economy, or only a fraction of CO2 emissions will be taxed, which defeats the purpose of the legislation. Something doesn't quite make sense here, and we will post clarifications or revisions to our estimates if the need should become evident.

Intellectual honesty requires us to disclose that we do detect some faint strains of free-market environmentalism in this approach, which has appeal. Free-market environmentalism applied to fair-value pricing of federally owned timber or mineral resources makes sense, since such environmental effects are nearly wholly confined to the land mass of the United States. We could in principle tax ourselves to oblivion for CO2 and do nothing about the increasing emissions from industrialized China and India. Perhaps we could send them the bill?

P.S. - Intellectual honesty, too, would require Democrats to concede that nuclear power must play a prominent role in reducing our dependence on fossil fuels for energy generation. We will not hold our breath for such a proclamation.

Addendum: The Heritage Foundation has produced a bar graph showing the increased household energy costs caused by Waxman-Markey through 2035.

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