Carbon tax and how it will impact the US’s economy

Carbon tax and how it will impact the US’s economy

Paying Taxes is an indispensable duty of a citizen in the USA. You might  have noticed taxes appear everywhere in our daily lives. For example, Sales Tax, which is tax placed on purchased goods and services. Sales Tax fluctuates depending on each state in America. For example, in the US, the sales tax rate in Pennsylvania is 6%. In contrast, California has a sales tax rate of 7.25%. There’s a Social Security Tax on employees and employers, where employees pay 6.2% of their wages, while employers need a total contribution of 12.4%. The main topic today is Carbon taxes. According to the Carbon Tax Center, a carbon tax is a fee imposed on the burning of carbon-based fuels (coal, oil, gas). Consumers may reduce their carbon emissions by converting to green tech or new technologies. This tax focuses on businesses, industries, and companies that release carbon dioxide through some of its operations. The ultimate goal of carbon taxes is  environmental protection, or to reduce the amount of greenhouse gases being released into the atmosphere. The USA currently does not have a carbon tax implemented, but there is in Canada. Carbon emissions in Canada are taxed at 30 Canadian dollars, which is about $23.88 converted US currency. Since the US currently does not have a carbon tax, we can predict one by comparing it to a country with a similar economy such as Canada. Howard 21 tells us that even though the US has a much larger economy than Canada in terms of GDP, their average income per capita is similar, meaning that they have similar economies. This allows us to create a ratio between their currencies, which would be 1 US dollar to 1.25 Canadian dollars, creating a ratio of 1/1.25. Then, we can cross multiply this to the ratio of the US carbon tax over the Canadian carbon tax, which is $30 per ton of CO2. After canceling out some terms, we are left with about $24 (US dollars) per ton of CO2.

To figure out what this actually means, we must calculate on average how much CO2 someone produces. The EPA tells us that each gallon of gas produces 0.00889 tons of carbon dioxide, meaning 112 gallons of gas produce a ton of carbon dioxide. As of 2018, Matthew DiLallo says on average, each person uses 656 gallons of gas per year. Dividing 656 by 112, you get ~5.9, meaning every year, each person would pay around $141.60 of carbon tax. The entirety of the US would produce around 46.4B federal revenue each year from carbon taxes, with the assumption that the population, price, and gas use stays the same. With this information, we wonder, will implementing Carbon taxes benefit or hurt our economy?

The average American spends $760.08 annually on gas money. In total that means in one year, the United States spends around $249,458,256,000! Since the average American produces 20 metric tons of carbon dioxide and each metric ton would cost $24 of carbon tax, the entire US(331M) would produce over 7.9B per year of federal revenue.

The United States was said to have the largest transportation share in total expenditures (Expenditure). Although electric cars are generally more expensive, around $8,000 more. The long-term advantages are greater than the excess costs. To maintain and charge an electric car costs $350. This means the average American would pay $410 less than gas cars.

A carbon Tax shifts the general costs of products in the U.S. economy away from carbon concentrated goods. This would motivate companies to move towards less carbon concentrated creation measures and decrease the use of fossil fuels.

A sample of the potential carbon tax proposal for the United States was recently constructed. The proposal would enact a carbon tax of $50 per metric ton of carbon. This would then grow 5% every year. This tax is estimated to raise federal revenue to 1.87 trillion dollars in only 9 years. Over these 9 years, the carbon tax alone would collect $2.6 trillion over time. However, this would cause an Excise tax offset in the economy, (the carbon tax would reduce income and payroll tax revenue.) The rise of pricing would cause costs to decrease the amount of income accessible to consumers for purchasing goods and services. The high cost of the tax and the increase of price will reduce the long-term output of carbon by %4. However, as a result of this tax hours worked would decrease by 421,00 full-time jobs. This consumption-based tax will impact the economy by reducing real after-tax wages throughout the country. An excise tax would not change the choice between present and future consumption. This will not directly alter the incentive to save or invest. If the carbon tax was brought to the USA it would distort investment choices across the economy in a variety of ways. The carbon tax would create a decline of demanded goods produced with an intensive percentage of carbon.

Additionally, the tax could raise a high amount of revenue. Depending on how high the price of the carbon tax is, the revenue will shift on a different scale. As the tax increases the revenue may not increase that fast. This is because people will respond by emitting less carbon and using fewer fossil fuels. The revenue will begin to ascend after years go by. As the rate goes up and the emissions decline faster then the rate goes up. Due to this factor eventually, this would lead to a decline in revenue.

The transport sector is the largest source

of carbon dioxide (CO2) emissions in the European Union (EU), contributing to 27% of total CO2 emissions, with passenger cars alone accounting for 41%. The EU transport sector is currently heavily dependent on products derived from fossil fuels, such as petrol and diesel, 93% of which are imported and whose combustion results in Greenhouse Gas (GHG) emissions. These emissions have increased since 1990 and continue to increase. If these transport emissions are not controlled, the national climate targets for 2030 will not be met. To meet the Paris climate targets for 2050, vehicle emissions must be reduced by 94% from 2005 levels. Such a radical change cannot be achieved only through incremental improvements to existing vehicles. It requires general changes, such as the way vehicles are owned, taxed and driven. Among other things, a shift in tax policy towards lower-carbon vehicles and incentives for car sharing, together with reform of vehicle taxation, congestion charging, road pricing, parking restrictions, public transport, walking and cycling, could help achieve the Paris goals.

Such a move would reduce gasoline prices by more than 18 cents/gallon. At the same time, the proposed carbon tax would start at $24per ton in 2020, raising the price of gasoline by about 20 cents per gallon. Taken together, the addition of the carbon tax and the excise tax deduction would result in vehicle fuels being almost entirely exempt from tax increases in the early years of the policy. Such an exemption would offer obvious policy advantages for policymakers seeking a market-based approach to climate change. Vehicle users clearly prefer lower gasoline prices, and critics always point to higher prices at the pump as a major drawback to any carbon tax.

Moreover, projections from the most widely used energy models in the country suggest that a carbon tax would have little impact on drivers behaviour. In theory, by increasing the price of gasoline and thus the cost of operating a vehicle, a carbon tax would encourage the purchase and use of alternatives to gasoline-powered vehicles such as electric vehicles, hybrids, or public transportation.

Thus, we can extrapolate the conclusion that enhancing carbon taxes will positively affect electric transport, as drivers will prefer using a means of transportation with less taxes and no cost for gasoline.

However, a carbon tax being imposed doesn’t only mean that people will be taxed for producing CO2 through driving, it also means they will be taxed for producing CO2 through manufacturing and factories. In fact, the U.S. produced 1.72 billion metric tons of CO2 in 2019 from producing electricity alone. If the carbon tax is $24 per metric ton, then the manufacturers would have to pay $41.28 billion per year. Although some of these power plants are owned by the government, most are owned by private owners or cities, so they will still have to pay the carbon tax.

The light blue line represents the current electricity production and price, being 4.13 billion megawatt hours of electricity for $421.26B. Since the carbon tax would force people to pay an extra $41B, the price would increase to $462B. This ends up in the demand decreasing for electricity produced coal.

Luckily, there are other ways of making electricity, the main one being solar power, especially with new green technology being created and tested. Since solar power is a substitute for burning fossil fuels, as the price of burning coal increases from the carbon taxes, more people will turn to solar power. Unlike burning coal to create electricity, solar power produces no carbon tax, making it seem like a very plausible solution. Not only this, an energy analysis study done by Lazard shows solar power is actually half the price of burning coal, $50 per megawatt-hour, while burning coal costs $102 per megawatt-hour. The obvious answer would be to switch to solar power, however, solar panels cost a lot to implant. According to energysage, a 1 megawatt solar farm would cost around $1M to install, and Freeing Energy says each megawatt farm produces 2,146 megawatt-hours per year. Meanwhile, Synapse says coal plants cost $2B for a 600 megawatt coal plant, or $3.3M for 1 megawatt. McGinley tells us a 500 megawatt coal farm produces 3.5B kWh, or 3.5M mWh, which would mean a 1 megawatt coal farm produces 7 thousand mWh. To do an equal comparison, we’ll compare 3.3 megawatt solar farms to one megawatt coal farm as they cost $3.3M dollars. In short, solar farms produce 7,080 megawatts if you spend $3.3M on solar, and coal farms produce 7,000 for the same price. Before the final conclusion, it is necessary to add in the cost of coal per short ton($38.53) multiplied by the amount of coal used(1,049M) to get the total amount of money coal-burning plants spend on coal(40.4B), plus the cost for manufacturing both. Multiplying the amounts of megawatt-hours by the price of producing solar energy and burning coal, we get $345,000 for solar energy and $714,000 for coal. Therefore, by approximately 40.4B, solar power would actually be cheaper than burning coal even without the carbon tax. More importantly, solar power does not produce any greenhouse gases, thus making for a cleaner environment.

Expanding on solar power, recently, space solar power has started to be explored, and it has been found that space solar power could generate 2,000 gigawatts of energy per year. This is because outside Earth’s atmosphere, the sun’s rays are a lot stronger than on Earth as Earth’s atmosphere deflects some of the rays off. Also, unlike on Earth, space doesn’t have day/night, so while solar panels on Earth only have ±12 hours to work with, space solar panels have more than 23 hours. Unfortunately, though we have tested solar panels in space, it is much too expensive, the National Space Society saying it is 100 times too high to be actually competitive versus other options for electricity. At least not yet. In the future, space-based solar panels are a very plausible option when we develop cheaper and better technologies.

In conclusion, carbon tax makes burning fossil fuels to create electricity more expensive than using solar power plants by more than $41B. Therefore, in the future, though there won’t be an immediate and extremely large change, solar power is sure to become a more popular option for producing electricity, there will be more incentive to research space-based solar power, and the world will be cleaner and have less CO2.

So, a carbon tax will have three direct impacts on the economy, an increase in the usage of electric transportation, possible transfer to solar tech from coal-based power, and a large increase in federal revenue. Electric transportation, or eclectic cars, will generally be more expensive, it would cost less in the long term. In fact, it would be $410 less compared to gas cars. Also, the federal revenue would be around $7.9B, which can be used on education, healthcare, and many other uses. Finally, burning coal for making electricity is around $80B more expensive, so people will be saving $80B when saving for solar energy. Therefore, in general, a carbon tax would have a positive impact on the economy.

As great as the benefits of applying carbon taxes may be, there are many obstacles that must be overcome in order for carbon taxes to officially enter the economy of the USA. The first substitution, electric cars, are very advanced and would cost a lot of money to build, to advertise, and much more costly for consumers. It may cost from 30k to millions of dollars for the more advanced electric vehicles. Though, the average price for EV (electric vehicles) does shift from time to time, it’s still set at a high price no matter how much the price decreases. Considering the cost of electric cars, how will a citizen with an average income be able to afford this expensive car? What happens to the extra supply if the demand for this product does not create an equilibrium with the amount of supply? Also, after paying the cost for the car, you will still need to charge it and maintain it, which is a separate price. However, maintaining electric cars is less costly than maintaining gasoline – powered cars. An EV would cost about $900 per year compared to $1200 for gasoline cars. Solar panels are a great idea to reduce carbon emissions too. But, the same problem occurs again, the exorbitant price. Solar panels cost around $11K to $14K for an entire solar panel system on an average – sized home. This was a 2% increase of the price from the year before. It costs around $200 to $250 per solar panel. Building solar panel farms would cost a lot too. It costs $0.86 to $1.36 per watt and a solar farm is at least 1 megawatt(MW). That totals up to between $820,000 and $1.36 million per solar panel farm. Although expensive, this is enough to power 200 homes. Also, federal revenue would mean everyone will need to pay taxes, which means they’ll lose money. This might prevent people from using gasoline -powered cars in order to reduce the amount of carbon emissions. But, this will impact the government properly generating federal revenue, and that would eventually impact the US economy. These are some factors and obstacles that may arise during the early stages of implementing a carbon taxation system and introducing electrical cars and solar panels to the crowd.