The $40 carbon tax is dead as a doornail, and here’s why

This past week, a group headed by former Secretaries of State George Shultz and Jim Baker proposed dramatically to introduce a $40 per ton carbon tax in order to address the rising threat from global warming.

The good news is that the proposal comes at the onset of a Republican Administration and comes from former high-level Republican officials.

The bad news is that $40 per ton won’t get the job done, not even close. You need $120 per ton — and not later, now — to transform the alternative fuels market. And don’t think that $120 will get the job done in shifting the nation dramatically to electrics. For that, you’ll need something like $600 per ton.

And, yes, the Secretaries and their friends proposed that the carbon tax would rise over time. But we don’t need a tax that will bite in 2045, that doesn’t fund innovation. Real companies need profits now.

Let’s get into the sad math of carbon, shall we?

The renewable fuels math

Here’s your baseline, There’s 19 pounds in CO2 emissions from a gallon of gasoline, so a driver generates a ton of emissions every 105 gallons.

Let’s say you switch to a renewable fuel that offers a 50% drop in carbon — which takes dramatic changes in feedstock and processing technology and isn’t easy by any means — just ask KiOR or Abengoa. Although you’d still emit the same amount of CO2, half of it would be renewable, which is the emissions equivalent of emitting a ton of CO2 every 210 gallons. The benefit that would have to be shared by you (as a reward for switching fuels) and the producer and the supply chain (for switching to a renewable fuels technology and all the elements of transport and storage that have to change) would be $0.19 per gallon.

There’s not much evidence that drivers switch fuel technologies for a $0.19/gallon benefit, and that’s if the entire benefit went to the customer. And there’s no evidence that anyone will finance new renewable fuels technology for a $0.19 per gallon benefit, and that’s if the entire benefit went to the producer. Technology that would exist via a policy fiat, would be made at smaller scale, and would have something like 1100 basis points higher financing costs.

It gets worse for electrics

Aha, you tell me, I’ll buy an all-electric zero emission vehicle. None of this food-chomping, engine-corroding renewable fuel for me! you say.

Remember, if all you get is $40 per ton in that carbon tax, say goodbye to your $7500 tax credit for purchasing an electric car. That credit means everything. Based on the average number of miles that Americans drive, it adds up to $1.33 per gallon over a 10-year period that you are likely to own that vehicle.

Now, what do you get from the carbon tax? The US is not all wind, solar, hydro and biomass — and there are emissions for electricity. According to this neutral source, overall, there’s a 33% carbon benefit driving a “zero emission” electric vehicle compared to driving a conventional vehicle.

So, your current tax credit is worth the same as a carbon price of $417 per ton. That’s the math.

And don’t think that, despite a gaudy load of publicity for electrics, sales have been exactly jumping off the charts. It’s true that Americans bought 150,000 more electric cars in 2016 than in 2011. But they are buying nearly 5 million more non-electrics than in 2011. For every extra electric on the road, there’s been 30 gas-guzzlers purchased by us all.

And that’s with a $417 carbon price via the tax credit. And that’s not taking into account that California is where most electrics have been sold and, in California, there’s another $80 added to the carbon price via the Low Carbon Fuel Standard.

That’s why it will probably take a $600 carbon price to make electrics move in today’s market in climate-changing numbers. Simply because they’re sold only in boutique numbers for a $497 carbon price.

What’s working?

Something that is really changing the way fuel is made and delivered in the United States is the combination of the Renewable Fuel Standard and the California Low Carbon Fuel Standard. Anyone considering a greenfield low-carbon fuel plant is, trust me, thinking only about the California market right now.

That’s why Neste is looking into establishing a domestic capacity in the US for renewable diesel. That’s why no one can easily make money making renewable jet fuel in the US, despite airlines begging for it (because the California LCFS doesn’t extend to jet fuel). That’s why there is any discussion at all about building renewable fuel capacity in the US — because of the RFS and the LCFS.

So what should nations do?

One, sit back and enjoy and enforce the standards already there. They are working to transform the fuel mix in the US, right now. And the good news is that, increasingly, these are proven technologies that can now be routinely deployed where the project economics add up. It’s more about carbon footprint, feedstock availability and infrastructure than about technology risk. More and more.

Two, put in more LCFS standards, and extend them to aviation. That way, there’s renewable jet fuel for airlines who need it, and more and more renewable diesel for heavy-duty transport for which battery technology is currently ill-suited.

But let’s put the $40 per ton carbon tax right where it belongs. It’s not to say that the idea isn’t worth the paper it’s written on. It’s worth exactly the value of the paper it’s written on — as a feedstock ready for transformation from something noble and useless into something noble and useful — into renewable fuels, that is.