07 December 2008

Progressive Energy Policy

If there is debate among Canadians about whether global warming is real or, as Oklahoma Senator James Inhofe said in a July 2003 Senate floor speech, “the greatest hoax ever perpetrated on the American people,” I haven’t detected it. On July 1st of this year British Columbia became the first jurisdiction in North America to introduce a consumer-based carbon tax. The tax applies to virtually all fossil fuels, and its sole purpose is to combat global warming by encouraging conservation and fuel-switching by making fossil fuel gradually more costly relative to clean alternatives. The tax initially added about 2.4 cents per liter (about 9 cents per gallon) to the pump cost of gasoline. The Province estimates the incremental cost to consumers for gasoline at about $20/year for Prius owners and $68/year for Dodge Ram pickup owners. The tax will increase annually through 2012. At that time, the tax on gasoline will be 7.2 cents/liter.

The carbon tax is designed to be revenue-neutral. When it began last summer, every British Columbian received a tax rebate of $100 from the Province. Low-income British Columbians will receive annually a “climate action credit” of $100 per adult plus $30 per child. Corporate and personal income taxes will drop to help offset the pocketbook effects of the carbon tax. So the intent--there is debate on whether it will actually turn out this way--is not to increase taxes overall, but to deter, by economic means, fossil fuel consumption. Also the Province is sponsoring an extensive program called LiveSmart BC (www.livesmartbc.ca) which, among other things, helps consumers pay for energy efficiency improvements to their homes.

A commentary: I worry that what I considered to be promising and long overdue progress away from unsustainable energy will be reversed by the dramatic decline in fossil fuel prices since July. Particularly in the U.S., where fossil fuel has long been dirt cheap, favorable trends were underway. These trends developed not because of any government policy but purely because of economics. Consumers were reducing fossil fuel use because its cost was busting their budgets. Mr. Obama plans taxpayer investment in alternative energy, but capital investments alone are doomed to fail--if the objective is inducing consumers to switch to non-fossil fuel sources of energy--unless supported by energy market economics. By and large, Americans are going to tend to favor the cheapest form of energy, period. So I hope Mr. Obama’s near-term plans include a mechanism to, if market forces have not already done so, gradually raise the cost of fossil fuel relative to sustainable alternatives.

To give a concrete example: If a condition of GM’s imminent taxpayer bailout were the company must produce an all-electric vehicle model by 2012, and if gasoline costs $2/gallon in 2012, the government policy forcing electric vehicles to market would accomplish little more than compel GM to lose even more money. A progressive energy policy should focus first on increasing the cost of what we don’t want: burning of carbon-based fuels and reliance on imported oil. Then GM’s all-electric car would be poised to succeed, for GM and for society. Further, if a relatively high cost of fossil fuel in the future were assured (by a carbon tax if need be) thereby reducing alternative energy project capital investment risk, it’s likely that private enterprise would make some--maybe much--of the alternative energy investment perhaps now being contemplated for taxpayer financing by the President-elect. A truly progressive energy policy along these lines is one example of what I’d call the change we need.

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