Carbon Tax: The Low Oil Price Opportunity

Carbon taxes constitute a widely discussed policy tool for reducing greenhouse gas emissions and slowing humanity's headlong rush toward catastrophic climate change. Taxing energy from fossil fuels makes that energy more expensive, thereby making renewable energy comparatively cheaper. There are ways of reducing the economic hardship of higher energy prices (such as rebating some or all of tax revenues to low-income households so they can afford the gasoline or natural gas they absolutely need), but carbon taxes can be a hard sell for two reasons: first, a lot of people just don't like new taxes of any sort; and second, energy is implicit in the entire economy, so a hefty carbon tax could make daily life more expensive in both obvious and subtle ways.

The hardest time to argue for a carbon tax is when fossil fuel prices are already high. Just a couple of years ago, oil prices were in the vicinity of $100 a barrel. Meanwhile Chinese coal consumption was still bounding ahead, leading investors in Australia to open new mines and American coal companies to start building export terminals. But now all of that has changed. Fossil fuel prices now are remarkably low. Oil is trading for $30 a barrel, gasoline is at prices that American motorists hadn't seen in well over a decade, and the airlines are poised to turn a tidy profit with jet fuel so cheap. China's coal binge is now winding down, at least temporarily, so world coal prices are depressed, too. And natural gas is cheap as well--especially in the U.S., where the price is hovering at just a little over $2 per million Btus, the same price as forty years ago when adjusted for inflation.

The reasons for the current low-price environment are hotly debated on the financial pages, with some citing supply (the U.S. fracking frenzy, the Saudis' flooding of the oil market), and others pointing to slowing demand resulting from an overall weakening of the global economy. No doubt both arguments are correct at least in part. The industry clearly made massive capital investments and shale drillers took on a lot of debt when prices were high, leading to overproduction. Nevertheless, my own view is that currently low fossil fuel prices are most helpfully interpreted as signs of deep and worsening economic problems in China, Europe, and elsewhere. But the penny hasn't dropped quite yet in that regard: Chinese officials insist that their economy is still growing, and mainstream economists are holding to the opinion that the world as a whole isn't in recession.

This is clearly a golden opportunity--if perhaps a brief one--for climate activists to push for carbon taxes at every applicable governmental level. The argument can be made that, with fossil fuel prices so low, a tax wouldn't hurt much, and it is especially needed now to incentivize renewable energy (the price of wind and solar electricity is dropping, but that doesn't do much to boost demand for renewables when coal and natural gas prices are falling too).

Carbon taxes have already been implemented in many countries, including Japan, South Korea, Australia (later rescinded by a conservative government), Denmark, Germany, Finland, Ireland, the Netherlands, Slovenia, Sweden, Switzerland, and the UK. In North America, British Columbia was the first state or provincial jurisdiction to enact a carbon tax; Alberta now has one too. In the United States, the City of Boulder, Colorado has had a carbon tax, as do the San Francisco Bay Area and Montgomery County, Maryland. Efforts are underway to bring carbon taxes to the states of Washington and Vermont.

The effectiveness of carbon taxes of course varies with the size of the levy. Some analysts argue that simple fossil fuel extraction caps, adjusted downward annually, perhaps supplemented with carbon fuel rationing schemes (see Tradable Energy Quotas, or TEQs), would be simpler and more effective means of reducing emissions.

In any case, for those who see carbon taxes as a useful tool in fighting climate change, now is the time to act--either to implement taxes or to strengthen them. We don't know how long fossil fuel prices will remain this low. Oil, gas, and coal production rates are currently declining in the U.S. At current oil and gas prices, many producers are losing money, and there will likely be many bankruptcies throughout the industry in the months ahead. Further, we don't know how long we have before the economy officially enters recession, making new taxes even less popular.