0.17 Energy: global warming change  (Page 7/8)

Taxes on gasoline and diesel fuel taxes are obvious forms of carbon taxation. Consider experience in developed nations.

The average tax was $2.53 per gallon, compared to a U.S. federal tax of only 28 cents and 38 cents in some states and 48 cents in others. The combined U.S. taxes do not begin to cover the costs of maintenance and repair of roads.

European rates are about 4 times higher than U.S. and 10 times higher than Venezuelan rates. The typical U.S. rate combining Federal plus state tax is 65 cents per gallon.

By any measure, U.S. taxes on vehicle fuels are well below the marginal cost of road use a clear violation of the economist’s condition for efficiency in resource allocation. We have seen in Chapter 17 that the resulting costs of wear and tear on roads can be very high.

In any case, the U.S. could contribute notably to efforts to reduce global warming simply by raising gasoline and diesel fuel taxes high enough just to cover the mc of road and highway use by vehicles.

4. cap and trade systems

Cap and Trade systems attempt to place a price on global emissions of carbon, a major contributor to global warming. Ideally, such systems work in the following fashion:

A cap and trade system imposes strict quantitative limits (caps) on emissions from industry or agriculture. Then permits are granted for emissions. A market is created wherein the permits can be sold by those who emit less and purchased by those who emit more. How is this done? The sequence for implementing a system is as follows:

1. Government first establishes a limit on the amount of CO ₂ released by industry.
2. Then, governments issue a fixed number of emission permits,
3. Ideally, these permits are then auctioned (or given away) by the governments.
4. Firms are allowed to sell excess permits that they do not need.

This system, it is hoped, will allow market forces to then distribute and price emission allowances. One or another form of Cap and Trade systems have already been introduced in the EU, the U.S. State of California, and China.

The European Cap and Trade system has, to date, been executed poorly. There, the carbon trade market is grossly oversupplied because the EU gave away to many credits. By November 2014, carbon permits traded for less than $8.00 per metric ton, and Europe was in that year burning more coal than before the Kyoto agreement of 1997. This experience does not at all mean we should ignore this tool. It means that the European mistakes must be avoided.

As the caps decrease year by year, the permits become more valuable (unless the government increases them).

Firms producing products that led to CO ₂ emissions bid for these in the market. The price goes up. Emissions of CO ₂ become increasingly more expensive. So firms are given incentives to reduce emissions, either through new technological innovations, or cut-backs in production that causes emissions.