Carbon tax – don’t forget about ethanol and bio-diesel.

In his essay in The Des Moines Sunday Register (10/5/2014), Richard Doak used the example of British Columbia (BC) as a regional government that has gone out on its own and instituted a carbon tax.  He wrote that the carbon tax as been a success.  The revenue neutral tax has allowed BC to reduce personal and corporate income taxes to quite low levels.  He reported that in BC, “Economic growth is slightly better than the rest of Canada…”
He asked, “Why can’t Iowa be like that?”  Throughout the essay, Doak talked about taxing “fossil fuels”.  What he did not talk about was that fact that the BC carbon tax applies to ethanol and bio-diesel, because both contain carbon that is released into the atmosphere when burned.
When all aspects of production are considered, there is still a question about which fule, gasoline or ethanol, puts more carbon into the atmosphere.  At the time of combustion, ethanol puts about one third less carbon into the atmosphere than gasoline.  So, to the extent that there is discussion in Iowa or the U.S. about a carbon tax, the tax on ethanol should  be about two-thirds of the tax on gasoline.  It should not be zero.
Doak also talks about replacing the gasoline tax with a carbon tax to fund road building and maintenance.  He make the point that a tax on coal and natural gas, used to make electricity, will make users of electric cars pay their share for roads.  In almost any scenario of the future, electric cars will use a very small fraction of the total electricity output and will not come close to paying their fair share of road use.  Most of the cost of a carbon tax on coal and natural gas will be paid by households and businesses.  Doak is right that roads should be financed by users, but a carbon tax is not a good solution.
Link to Register article: http://www.desmoinesregister.com/story/opinion/columnists/iowa-view/2014/10/04/richard-doax-climate-change/16747421/
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2 thoughts on “Carbon tax – don’t forget about ethanol and bio-diesel.

  1. Is it possible that free markets can be inefficient? Pollution causing companies come to mind. What if a factory had waste and were located on a river. The free market solution would be to dump the waste into the river because that’s the cheapest disposal solution and would increase the company’s profits, right? Obviously this could be bad for society, who drinks from this river.

    I think in some cases the government needs to make rules for companies who harm society. Obviously we can’t let a company dump toxic waste into rivers, so why should we let companies fill our air with harmful chemicals that could potentially cause problems such as global warming?

    A pigovian tax is a tax on this kind of company. It discourages production by raising costs, and therefore the price of their product. If society-harming companies had to pay for their costs to society, renewable power would become a much more competitive product. Also, making the market more efficient has a side-effect – more money for the government. Decreasing income tax on everyone is more of a happy side-effect of making the market more efficient.

    http://en.wikipedia.org/wiki/Pigovian_tax
    http://www.investopedia.com/terms/p/pigoviantax.asp

    • Austin,

      “Tragedy of the commons” is the economic term for the abuse of property that is not privately owned. It applies to water and air pollution as well a depletion of natural resources such as fisheries and forests. It is a proper role of government to regulate these things. This is not a flaw of capitalism. Capitalism involves privately owned property. Where possible and practical, private ownership is one answer. Where not possible, such as in the case of rivers and air, then government regulation of pollution is the answer. Regarding global warming and a carbon tax, I still don’t like the idea of money flowing through government. But, to the extent that a carbon tax is used, it should be revenue neutral and there should be no exemption for plant based ethanol.

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