Sunday, April 20, 2008

A Carbon Tax...Thing

Okay, I apologize for the absence of any content here. I've been involved with things like writing final exams. Aside from that the news has been pretty boring - US biofuel policy is (among other things) driving up food prices, we still don't know how to fix this credit crunch (can we stop calling it a crisis? It's been ongoing for eight months.), etc.

Anyway, here's a dumb thought about climate policy. It's dumb because while it might sound good to some, it's completely impossible to implement effectively. Not that that particularly matters to a lot of people who make policy decisions, judging by their track record. So, the idea.

Basically, it boils down to taxing differences in intensity between companies in the same industry. Suppose we have a bunch of oil sands plays, one of which produces output less efficiently (in terms of greenhouse impact) than the rest. So we're talking intensity.

The idea would be to tax producers who fail to meet the 'best practice' standards (I've devolved to using bureaucratic jargon) of their peers. So in the prior example, all of the oil companies who lag behind the industry leader get hit with a carbon tax proportional to the lag in intensity.

One could of course utilize the worldwide 'best practice' standard instead of the national standard, but that detracts from the political appeal, I think. Let's make up some numbers here for clarification.

SunCana produces 100 units of output, emitting 6000 tons of GHG-equivalent. Remember, there are other gases besides CO2 which have different impacts, and causing a shift from CO2 to, say, NO2 emission is not a worthy goal. So their intensity is 60tons/unit.

EnCor produces 150 units of output, emitting 8000 tons of GHG-equivalent. Their intensity is thus 40 tons/unit. So SunCana has a 50% worse emissions intensity than EnCor. Apply an appropriate scaling factor (possibly nonlinear, possibly a function of many things) to convert this percentage to tax per ton. Suppose we choose 40, implying SunCana gets hit with a $20/ton (20=.5*40) tax on its output.

Okay, that's a disgustingly large tax if you think about it simply - $1200 per unit of SunCana output - but I think the point is clear. Alternatively, think of 'a unit of output' as 'a thousand barrels of oil', which implies $1.2/barrel. You can choose whatever nonlinearities or adjustments you want to try and minimize competitive disadvantage or whatever.

It's still impossible to implement. What firms count as in the same industry? Does the government have full information about their emissions? Is it costless to design such a very complicated system? There's no particular message here, I simply enjoyed thinking about this.

1 comment:

Matt Nolan said...

This reminds me of the Japanese "Top Runner" program:

It was one of the systems NZ was looking at when introducing energy efficiency models.

We've ended up just going for labeling and direct regulation instead.