Last Wednesday, my professor said that when consumers notice an increase in prices because of carbon tax, they will switch to buying the cheaper products or stop using the higher priced products. So, the carbon tax is an efficient tool to make people change their behavior by including social costs (such as climate change, global warming, etc) into private costs (the firm’s profit or the consumer’s budget). Undoubtedly, I cannot reject this idea.
While carbon tax is a way to add social weight to prices and make people aware of climate change, the United States (where carbon tax is often promoted) is the highest energy consumer in the world (per capita). According to statistics, in 2011, the total energy consumption capita (in kilogram of oil equivalent) equaled 7,032, which was 3.5 times higher than in China and 10 times higher than in India. Moreover, the US consumption of energy shows an upward trend. Do you know why the US uses a lot of fuel?
The answer is that the energy prices, such as for gasoline, have been cheap. This is because the US government spends a huge sum of money to subsidize energy. According to the website thinkprogress.org, the American government spends around $20.5 billion annually to support the production of petrol (oil, coal, and gas). This budget comes from the federal level (85%) and the state level (15%). Even if the US is not the biggest subsidizer, compared to Japan ($19 Billion), China ($17 billion), and South Korea ($10 billion), the US still has a relatively high subsidy.
Most of the subsidy goes to big gas producers in the form of tax breaks and giveaways, but also as loans at favorable rates and price controls (source: http://priceofoil.org/fossil-fuel-subsidies/). About 12% of the subsidy goes to five big producers: BP, Exxon, Chevron, Shell and ConocoPhillips.
ECON 101 textbooks say that a perfect competitive market without any intervention from the government is the best. Why? The interference from the government causes a price distortion. After that, it changes the individual demand. For example, due to subsidies, the opportunity cost of using fuel is low. So, the consumer perceives that the gas is cheap and plentiful and people tend to use more energy.
What would happen if all countries stopped subsidizing energy? According to the Huffington Post, the International Energy Agency estimates that removing subsidies to the consumption of fuel would cut carbon-dioxide emissions by 7 percent by 2020.
Let’s get back to carbon tax. Both carbon tax and fuel subsidies aim to change the price, then change consumer behavior. Is it a paradox? The government imposes a tax (a carbon tax) while they pay the tax (an energy subsidy) themselves. why do we need to confuse people?
Why do we want to make the economy so complicated? Is it easier to stop subsidizing a few gas producers rather than changing everything in the whole economy and causing a lot of transaction costs? Should we stop subsidizing before imposing a carbon tax?