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The Progressive Economics Forum

The Carbon Tax We Pay To The Oil Companies

Marc Lee’s most excellent paper to the PEF session on carbon pricing at the CEA meetings in Vancouver got me thinking.  (That whole session was awesome, by the way — including Lars Osberg’s provocative analysis that the vast majority of Canadians, whose real consumption has not grown in recent years, have already met their personal Kyoto targets.  It’s only the fat cats who are causing us to bust our Kyoto quotas.)

Marc pointed out that the recent dramatic rise in gasoline prices has had the same impact on both consumer welfare and purchasing decisions as a massive carbon tax.  The only difference is that we pay this tax to the oil companies (whose profits at $140/barrel oil are astronomical), and that they use these “tax revenues” to enrich their shareholders rather than fund public services and environmental conservation initiatives.

This logic is irrefutable.  Now let’s put some numbers on it.  According to a U.S. government web site, one U.S. gallon of gasoline (3.79 litres) contains 2.42 kg of carbon.  That’s 0.64 kg per litre.

Since the beginning of 2007, the retail price of gasoline in Canada has surged by 50 cents (or over 50 percent).  Some of that reflects the usual summertime seasonal run-up, but let’s not quibble.  50 cents extra for 0.64 kg of carbon equals a carbon tax equivalent of over $750 per tonne.

[NOTE: See comments below.  Most of the proposals being debated are for a tax on carbon dioxide-equivalent emissions, not a tax on carbon per se – even though they are called “carbon taxes” (for shorthand).  In this case, the equivalent tax that would generate a 50-cent per litre increase in gasoline prices is around $200 per tonne of CO2 equivalent.]

Any reaction to this back-of-the-envelope calculation?  (I heard a number of something like $250/tonne thrown around at the PEF panel, but didn’t note the details.)

The Alberta-led Conservatives, of course, aren’t going to mess with this “free-market outcome.”  In fact, they’ll reinforce it — for example, with federal corporate income tax reductions that more than offset the effect of the piddling increases in provincial royalties which the Stelmach government has introduced on tar sands production.  Yet even as they applaud this unprecedented tax grab by their corporate friends, they’ll stand up and denounce the Liberals’ mild-mannered “green shift” as a tax grab.  Go figger.  I hope they get struck by lightning today.

Meanwhile, imagine the reaction from ordinary Canadians if the price of gasoline rose 50 cents per litre because of a government tax.  Riots in the streets would be an understatement.  Yet people accept that oil companies can do the same thing (and use the money for themselves, rather than the public good).  Sure, people complain.  But they accept it.  This is Marx’s “fetishism of the market” raised to a whole new level.

All this certainly puts the debate over carbon taxes in a new context.  The real issue shouldn’t be whether or not carbon should become more expensive.  It already is — far more dramatically than even the most raving environmentalist would have dared propose two years ago.  The real issue is who pockets the tax revenue, and what they do with it.  And why on earth people accept as “natural” or “inevitable” this blatant profiteering by private corporations.

Enjoy and share:


Comment from Jim Stanford
Time: June 19, 2008, 5:29 am

Here’s another path to a similar result: One barrel of oil contains (on average) 6.1 GJ of energy. Oil contains 19.9 tonnes of carbon per TJ of energy. One TJ equals 1000 GJ. Therefore, one GJ of oil contains 0.0199 tonnes of carbon. Therefore, one barrel of oil (6.1 GJ) contains 0.121 tonnes of carbon. The price of oil has doubled this year (up $70 per barrel). A $70 charge for 0.121 tonnes of carbon is equivalent to a carbon tax of almost $600 per tonne.

[NOTE: See further comments below. This is equivalent to a tax on CO2 emissions of $150 or more per barrel of oil. Most of the proposals being debated deal with taxes on emissions of CO2-equivalent, not on carbon per se.]

That’s a bit lower than the $750 estimate obtained using the gasoline method (maybe the difference is due to the markup on gasoline refining & retailing? or to changes in energy and carbon content going from oil to gasoline?).

At any rate, I think this verifies that the oil industry’s carbon tax on Canadians is truly massive.

Comment from Marc Lee
Time: June 19, 2008, 5:40 am

Hey Jim,

My back-of-the-envelope calculation goes something like this:

BC’s shiny new (as of July 1) carbon tax of $10 per tonne is equivalent to 2.4 cents per litre at the pump, according to the BC budget. From there just think how far back you want to go.

So 50 cents a litre increase is about $210 in carbon tax equivalent. At the CEA I mused at the end of the presentation that the run-up in prices over the past three years was approximately a $270 carbon tax equivalent.

You might be mixing up carbon and carbon dioxide in your calculations. One tonne of carbon is equal to 3.67 tonnes of CO2.

Comment from Jim Stanford
Time: June 19, 2008, 6:57 am

Hi Marc
What are you doing up so early???
I double-checked … it is carbon, not carbon-dioxide, I was measuring.
So perhaps there’s some other difference in how the BC $10/tonne-to-2.4 cents/litre ratio was calculated. That ratio would imply carbon content of gasoline 3-4 times as much as what I was using above.
I will browse around a bit to see if anyone else has estimated these ratios.

Comment from Jim Stanford
Time: June 19, 2008, 7:17 am

OK I’ve figured it out.

The BC tax, the Green Party’s proposals, and (I presume) most other proposals are all based on taxing carbon dioxide-equivalent emissions (not carbon content), even though they are called “carbon taxes.”

So, the imputed CO2 tax equivalent of the 50-cent rise in gasoline prices since January 2007 is indeed around $200+ per tonne as Marc suggested. An equivalent tax on carbon would be much more expensive (in the $750 range). Now I am with the program!

The main point stands: the run-up in oil and gasoline prices over the last year has been far greater than could ever result from any politically-feasible carbon tax.

Comment from Phillip Huggan
Time: June 19, 2008, 7:43 am

Jim, carbon isn’t expensive just because oil prices rise. The reason high oil prices don’t act as a natural lever to stimulate green investments, is because coal production is stimulated even more. Even before recent scientific discoveries demonstrate the harmful effect of soot was underestimated 4x by IPCC, coal was known to be the most inefficient power source.
Most enviornmentalist and economic analysis I’ve seen makes the same mistake. High oil prices only act to stimulate clean energy in the net if coal were to be banned. There are some cosmetic new laws in the US about limiting new coal plant construction, but nothing appraoching a ban.
High oil prices don’t help the environment, apart from a minor recessionary effect via inflation, because of coal.

Comment from Robert McClelland
Time: June 19, 2008, 9:06 am

The main point stands: the run-up in oil and gasoline prices over the last year has been far greater than could ever result from any politically-feasible carbon tax.

Yup and it hasn’t had any effect on our consumption.

Comment from duncan cameron
Time: June 19, 2008, 9:48 am

The main problem with the carbon tax is that it takes microeconomic analysis to be the way to look at what goes on in the world: If the price goes up, demand goes down. What is needed is macroeconomic analysis, so as to get at the distribution and re-distribution effects of oil price hikes which deflate the whole economy, creating unemployment, and cause severe problems for people at the lower end of the income scale.
The $200 or $270 per ton number when compared to the $10 per ton number used by Dion this morning is very powerful. If a campaign were to be developed to oppose the tax grab by the oil companies (and delivering the bacon to coal at the same time as pointed out above) and calling for a windfall green tax this calculation would be invaluable. Well done Jim and Marc.

Comment from Marc Lee
Time: June 19, 2008, 9:56 am

Not true. It is clearly having an impact across a variety of modes: people driving less, carpooling more, switching purchases away from SUVs to more fuel efficient options, and more transit ridership. But for many, they cannot make changes right away and so it takes some time for the impacts to happen.

This is called inelastic demand. It is not particularly responsive to changes is price, but to say that price has no impact is clearly false.

Comment from Robert McClelland
Time: June 19, 2008, 10:46 am

The stats don’t lie, Marc. Canadians are consuming gasoline at the same rate they always have. And they aren’t ditching their SUVs either.

Trucks comprise an all-encompassing category that includes minivans, sport-utility vehicles, light and heavy trucks, vans and buses. Total sales of these vehicles surged 3.5% to a record high 831,535 units in 2007. This was the third consecutive year of growth in annual sales of trucks.

Trucks represent a growing share of the new vehicle market in Canada. In 1992, they accounted for only 35.0% of the entire market; by 2007, this share had risen to nearly one‑half (49.2%).

Gasoline prices have been rising at a rate that far exceeds inflation for the past 10 years. If that isn’t enough time for the consumer to respond then it’s unlikely that it’s going to happen any time soon. And this applies overall to oil as well. Despite a price increase of 1000% over the past decade the world continues to consume more of it every year.

If a tipping point does exist we certainly haven’t reached it and a carbon tax that raises the price by a tiny fraction of what we’ve already seen over the past decade won’t put us there.

Comment from Phillip Huggan
Time: June 19, 2008, 11:36 am

“Yup and it hasn’t had any effect on our consumption.”

I was impressed with a recent finding that it is the turnover of capital stock that is key. I’d expect a carbon tax to have much greater effect in China where they are about to construct a whole bunch of (soon to be stranded or retired early) coal plants at 5 cents(?)/kWh instead of wind turbines at 8 cents/kWh.
When Dion becomes PM, I’d expect some sort of building retrofit plan (at least that’s what IPCC claims is the most efficient low-footprint pathway for wealthy nations) to accelerate the effects of the Liberal’s relatively light carbon tax.
I wonder how much of the 14% market share rise in truck purchases from 1992, are from the introduction of new SUV models (Explorer and Jeep Cherokee only became popular in early 90’s) and even newer car-SUV crossovers (didn’t exist in 1992). Buses and heavy duty trucks in the stat? People need heavy duty trucks for work. If I saw stats that suggested light-duty truck sales increased more than small/mid-sized cars since oil prices bottomed in 1998, I’d be more convinced, but not entirely. Canada’s conspicious consumption has increased greatly since 1998, first from cutting the debt, and then because of high commodity prices and the flight from US financial pyramid schemes (ABCP, debt).
The simple reason I reflexively think high gasoline prices modifies driving behaviour, is that in Winnipeg recently, all the local news services are reporting an increase in gas-station drive-away thefts (also rural thefts on farms and summer camps). I’m 100% confident this behaviour is being repeated around the world everywhere there isn’t a pay 1st policy. I trust this corny news anecdote in the absence of vehicle sales figures that don’t account for “cool” new car models and increased consumer consumption capability. What was the unemployment rate in 1992, 8% or something? The country was about to go bankrupt. Between a $30000 truck or a $20000 car, people picked the car.

The carbon tax is a price signal for future capital upgrades. Show we the stats with the above ajustments and I’ll eat this blog post.

Comment from Paul T.
Time: June 20, 2008, 9:46 pm

As much as we think we live in some sort of democracy, this price gouging and blatant disregard for proper adjustment mechanisms, is but another sign that the future, with such capitalist type adjustments will continue to divide and raise the contradictions inherent. The neo-liberal regime is coming dangerously close to throwing us all into some quite chaotic disruptions.

Carbon taxes are a moot point given the response by the markets. For progressives to even further consider carbon taxes given the substantive shifts in pricing is beyond any rationality I know of. Who are we kiddning here, lets get serious, the markets are failing on so many levels that to continue to raise such paltry ideas in the face of such horrendous failings of the markets these days is utter nonsense. The speculative and the real are now lubricating the pumps of mass starvation, they have unleashed havoc on so many negative attributes across the economies world that somehow convincing ourselves that carbon taxes on consumption are somehow a legitimate path forward given the increases in fuel prices is wrong in so many turns.

The oil companies, the producers and the speculators have got to be reeled in before we think of any notion of carbon taxes that pick on the consumers.

We need that $4000 vehicle that runs on sunshine, water, hydrogen, wood, co2 or just about anything that when consumed limits the amount of co2- soon. I hear that it will be making it’s appearance at the summer Olympics. Then watch those speculators jaws drop!

Comment from Andrew Jackson
Time: June 22, 2008, 6:59 am

Some relevant comments on all this from the OECD which I have just posted.

One thing I find a little puzzling is that the operating profits of the oil and gas sector as reported by StatsCan have jumped, but not by nearly as much as one might have expected given the surge in crude oil prices. I like the idea of an excess profits tax but we have to think about how to operationalize it and calculate revenues.

Comment from Phillip Huggan
Time: June 23, 2008, 11:25 am

“I like the idea of an excess profits tax but we have to think about how to operationalize it and calculate revenues.”

Just copy whatever windfall tax was recently proposed in the US Senate, and voted down by Republicans like John McCain. The EU has recently given clearance for its member nations to windfall tax oil or subsidize domestic oil consumption. The former prescription works, while the latter works against itslef by stimulating long-term oil consumption.
Obviously a carbon tax should include gasoline. My biggect concern with Dion’s plan is that airplanes are excluded. This is really stupid. GHG emissions from airplanes are 2-4x (probably more as preliminary cloud research suggests contrails are more likely to warm than cool) as damaging as ground emissions. If anything, the tax should be increased on airlines. This is just a subsidy to politicians of all stripes who travel regularly. In my adult life I’ve taken a Greyhound over a dozen times and an airplane once. People who travel on airplanes can afford to pay the tax; are affluent. People who travel by bus; under this plan they have to pay the tax while people who travel by plane are exempt? Oh to live in their world…
One of the most harmful effects of global warming will be to retard global agriculture production, despite what IPCC says. Where low-footprint farming best practises are not being retarded, the airplane exemption should be turned into a 3x tax, and maybe a partial exemption for fertilizer production with the best-practises qualifier. I’m not worried if business travellers pay an extra $20 an airfare between Montreal and Ottawa (of course they won’t bus), I am worried about an extra dime added to the price of bread.

Comment from Rod Smelser
Time: July 2, 2008, 12:40 am

Is there any data anywhere on the disposition of oil company profits? Are they retained or distributed to shareholders? If they are retrained, what are the companies putting the money into? More oil exploration or alternative energy research?

Comment from Dave T
Time: July 3, 2008, 2:23 pm

Robert McClelland, sorry but you are quite simply wrong. Canadians are buying fewer SUVs, pickups and other gas guzzlers:

This has been the case in the US for a while. And they are buying more small cars.

Prices do matter; it just takes a while for the fleet to turn over. You use 2007 statistics, and you need to look at 2008.

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