Monday, September 25, 2006

A look at a CO2 for Payroll tax swap.

I felt that it might be interesting to look at some numbers related to the concept of replacing the payroll tax with a CO2 emissions tax as Gore recently proposed. I assume that any major change like this one would be phased in over a number of years (i.e. 10% for each of 10 years).

It looks to me that annual payroll taxes amount to ~$750 B.
Roughly 100 M taxpayers x $50,000/taxpayer x 15.3% payroll tax (worker + corp)

The US uses about 7.5 B barrels of petro/yr and ~1.1 B tons of coal/yr. Obviously putting all the tax on either would be unfair to the other ~$100/barrel of oil or $680 ton of coal.

By my rough calculations 1 barrel of oil yields about 0.4 tons of CO2 emissions (20 lbs x 42 g/bl) and 1 ton of coal yields about 2.1 tons of CO2 emissions. A total of ~5.5 B tons of CO2 from these two sources: 3.2 B tons from oil and 2.3 B tons from coal. [Natural gas CO2 contributes another ~1.2B tons of CO2 emissions. All 3 produce a total of ~6.7 B tons.]

This implies a tax of about $110 per ton of CO2 emitted, which works back to a surcharge of $47/barrel of oil and $225 per ton of coal.

It works out to a total of $1.12/gallon over the decade, or $0.11/gal hike each year, significantly less than the "natural" price swings we have seen lately. This is about half the increase I expected.

On the other hand $225+ per ton of coal? Yikes!
Coal only costs about $30-40 ton delivered to the plant today.
Even if you break this down to a $22.5/ton yearly increase over the decade this is a significant increase compared to the baseline. A carbon tax at this level would increase the cost of coal energy by about 0.2 cent/kwh/yr or ~2.1 cents/kwh for the decade. Around a 5% increase a year [assumes 4-5 cent/kwh baseline] before savings from carbon storage projects. [Natural gas electricity prices should rise about 1 cent/kwh for the decade (45% of coal's increase).]

You can bet this would speed up efforts to capture and store carbon mightily. The website is proposing a 2012 start date for a new prototype "clean coal" plant. The plant is called FutureGen, presumably because they don't need to worry about generating with clean technology until far in the future.

Workers and companies would save a combined 1.53% of payroll tax each year as the tax is phased out. This equates to an average of ~$765 saved per year per employee (assuming a $50k base salary for the average worker). For the decade each worker would save an average ~$3,750 in payroll taxes.

At the end of the decade, would the average worker be better off under this scenario?

If the average taxpayer uses ~12,000kwh/yr and drives 12,000 miles/yr, the extra cost (assuming they did not become more efficient during the decade) would be around $1,200 for direct energy expenses, leaving them $2,500 better off (before potential knock on effects of higher energy prices).

One of the best arguments for a tax swap like this is that relative to today's system, it would encourage employment and discourage pollution and waste.

Edit 10/1/06: updated figures to include natural gas CO2.


At 4:05 AM, Blogger Engineer-Poet said...

Don't forget natural gas in that list.  The US used about 22 trillion cubic feet in 2005.

Another factor is that a tax on domestic carbon use gives an advantage to foreign products which embody carbon but don't pay the tax.  Examples include plastics, ammonia, nitrates, aluminum, iron and steel.  You'd have to have a levy on imports based on the least-efficient producer outside the tax regime (assuming that the carbon tax is adopted as part of a climate-treaty organization).  Unless imports fall toward zero, that's going to add to your revenue and cut the per-ton fee some more.

At 9:29 AM, Blogger Daniel said...

Thanks E-P.
Good point about the natural gas. I should have realized something was missing when I only got 5.5 B (instead of 6.5-7 B) tons of CO2 emitted.

NG makes up about 20% of our total CO2 emissions. So about 150B of the payroll tax would fall on NG, the CO2 tax on gas would fall to $1.12/gal and ~$225 per ton of coal.

As I understand it, NG emits close to 45% less CO2 per BTU than coal, so electricity from NG would go up ~1 cent (vs. 2.1 cents for coal) as a result of shifting to a CO2 tax.

Import tariffs for embodied (CO2/energy) should be imposed.
No idea what order of magnitude this would be. There will be many devils in these tariff details.

At 8:47 PM, Anonymous Anonymous said...

How would a retired person deal with this? We'd have to expand a program to help retired people heat their homes in winter.

At 1:23 PM, Blogger Daniel said...

Good point anonymous.

The tax swap outlined above would not benefit retired people directly (assuming they cannot or will not work).

While I don't have exact figures, there are (or soon will be) about 40 million retired people in the US (there were 34 million in '98). Assuming the $1,200/yr in direct cost escalation per taxpayer is about equal to the knock on effects of the carbon tax, seniors would be ~$2,500/yr worse off by the end of the decade under the new system unless a tax credit or subsidy were directed to them. Such a senior tax credit/subsidy would cost around $100 B once fully implemented, but only $10 B/yr each year as it is phased in (+$250/yr/senior).

The extra expense to ensure that retired seniors are no worse off would increase the carbon tax by ~13% from $110/ton of CO2 to about $125/ton. Which means an increase of $1.26/gal of gas, and 2.4 cents per kwh of coal (half that for natural gas) by the end of the ten year phase in.

At this point all working taxpayers, retired senior citizens and corporations (outside of CO2 heavy industries) would benefit or at least be no worse off under the tax swap.


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