The Truth About Carbon Taxes

Varying wind patterns.

Sea levels being higher than you're used to.

No less than forth and I can see differences from when I was a child.

Not mitigating CO2 emissions and destroying our biodiversity, we are killing our planet.

Ultimately, the emergency climate comes down to a single number, the concentration of carbon

in our atmosphere.

The measure that greatly determines global temperature.

Putting a hard number on the economic impacts of climate change is difficult, it’s difficult

to say that Hurricane Harvey, which caused 125 billion dollars in damages would not have

happened or been less severe without the effects of climate change in play.It’s difficult

to say that the 2018 wildfires in California, which caused nearly 150 billion dollars worth

of damage, were caused by climate change.

It’s difficult to say that climate change caused the severe cold snap of 2021, which

left millions of Texans without power, and cost the state’s economy upward of 130 billion

dollars.

[1]

But it’s not difficult to say that these natural disasters have been increasing in

frequency and severity, and the reasons for this are well understood and documented.

Multiple studies, across industries, have all agreed that climate change driven by human

carbon emissions is going to cause severe economic unrest, and that’s ignoring the

obvious human impacts of these natural disasters.

These extreme weather events affect the most vulnerable people in our societies most.

[2]

We need to address this problem now, but finding ways to accelerate our shift from fossil fuels

has been difficult.

We depend on fossil fuels to drive our economy, so not using them to save our economies is

a catch 22.

These intangible economic impacts are unmotivating to most industries.

We need an immediate way to encourage the shift by imposing tangible economic pressure.

This is where carbon taxes come in, taxes that are levied directly on the source of

carbon emissions, but this economic policy comes with its controversies and problems.

It’s easy to understand the arguments against carbon taxes.

Take a simple carbon tax that is placed directly on fuels according to their carbon emissions.

The idea here is to decentivize the use of carbon intensive fuels, but how would that

actually play out?

At an individual human level the most obvious answer is that fuel prices will go up and

make it more expensive for normal people to get to their jobs and heat their homes.

Individuals that can afford new electric vehicles will buy new electric cars, but the reality

is the vast majority of people can’t afford to make that switch, and electric car manufacturing

isn’t producing enough vehicles to allow that immediate change.

The people who struggle most financially, will be pushed even further into poverty.

On a larger scale, the economic impacts are harder to predict.

Electricity prices would of course also be affected.

Our grids rely on fossil fuel for power, and an increase in fuel cost would be passed onto

consumers.

But, increased electricity and fuel prices impact every single industry on the planet.

A sudden increase in overhead costs for businesses would likely cause a dip in countries GDPs

as industries adapt.

These are serious issues that governments need to consider and weigh up against future

and often intangible economic losses as a result of climate change.

There are so many variables we need to consider when creating policies like this.

What is the optimum pricing of carbon taxes?

They need to be high enough to make high carbon intensity fuels like coal really unattractive

and force them out of the market, but they can’t be so high that they cripple the economy.

What should the revenue be spent on?

Should the money go back into rebates for lower economic classes that are going to feel

the pinch most or should it be used as a tax swap for corporations to reduce the drop in

GDP?

Today, we are going to examine these questions with the help of two computer models and the

work of MIT researchers [3] who combined the two models to predict the future under various

taxation scenarios.

The models used were the ReEDS model, developed by the US Department of Energy to simulate

the electric grid, and the USREP model, developed by MIT, which simulates the electrical grid's

effects on the US economy.

Combined these computer models allowed the researchers to make predictions on how different

policies would affect not just the electrical grid, but the US economy as a whole.

And the results are pretty fascinating.

Two starting scenarios were tested.

Starting in 2020, the carbon tax would start at either 25 dollars per ton of CO2 or 50

dollars per ton of CO2.

So how does that work?

How do we measure CO2 release?

One way we can do this is by taxing fuels according to their carbon dioxide emissions

per million btu, which stands for British Thermal Unit and I refuse to use it, so let’s

do a quick conversion to the big boy pants scientific unit of Joules, which more or less

equals 1 gigajoule plus some change.

1 gigajoule of coal is only about 34 kilograms of coal.

[4] Maybe 2 bags worth of your traditional home heating coal.

Coal emits about 0.1 metric tonne of carbon dioxide per gigajoule.[5] If we priced our

carbon tax at $50 dollars per metric tonne that would result in 5 dollars of additional

cost.

However, we can see that natural gas releases about half the carbon dioxide that coal does,

making its penalties half that of coal, and thus giving it a major advantage in the market.

[5]

Next, these studies applied two annual rates of carbon tax hikes.

One where the tax would increase by 1% a year, and one where it increased 5% a year.

Combined this gives us 4 scenarios.

Let’s see what happens in these 4 scenarios.

The electricity price projections from 2020 through 2050 for each scenario looked like

this.Unsurprisingly electricity prices jumped in all 4..

With the initial spike being entirely determined by the starting tax of 25 and 50 dollars per

tonne of CO2, but despite the tax increasing by 1% or 5% every year, the prices do not

continually increase.

The electricity grid adapts and evolves to the new tax environment very quickly.

With the most aggressive tax policy the initial price spike is 50%, a very large increase,

which decreases to 30% by 2030, and then decreases again in 2040.

These price’s increases are daunting, but it’s incredible to see how this simulated

electric grid adapted.

This is the energy generation projection for the entire US under a no tax reference case.

Coal, natural gas, and nuclear provide the brunt of the country's energy, with the only

major drivers for change being cheap wind and solar increasing in generation and being

supported by rapid response natural gas power plants.

Both eating into coals percentage.

30 years with only a minor increase in renewable energy.

However, this is what happens under the high tax scenario.

Coal is immediately and unceremoniously yeeted from the electrical grid.

Its high carbon intensity power becomes completely unviable.

Within a few years the coal power plants are throttled out of existence, while natural

gas power plants and wind energy quickly taking over the void left behind.

Solar energy gradually increases in capacity, but the study does mention that the mix of

solar and wind is highly sensitive to assumptions made in the model.

Most interestingly, in this high tax scenario a completely new type of technology appears

around 2040.

With that 50 dollar carbon tax increasing by 5% every year, the carbon tax in 2040 in

this scenario will be 133 dollars per tonne of CO2, and at this stage it actually becomes

economical to combine natural gas with direct carbon capture.

Direct carbon capture, a technology that absorbs carbon dioxide directly from the air currently

costs between 250 to 600 dollars per tonne. [6] It’s nowhere near cost effective, but

that price is expected to continue falling, and it will be a lot cheaper to extract carbon

dioxide from the exhaust of a gas turbine than trying to capture it after it’s diluted

into the atmosphere.

And say by 2040 we manage to get the price down to 100 dollars per tonne, combining this

technology with natural gas plants will make a lot of sense.

That’s 33 dollars of cost savings for every tonne of captured carbon dioxide.

What’s truly encouraging is that under this scenario carbon dioxide released drops by

over 90% by 2050.

If we plot the other tax scenarios on this graph this is what we get.

The big takeaway from this particular graph is that the 25 dollar at 5% growth is more

effective long term than the 50 dollar at 1%, which makes perfect sense as the high

growth 25 dollar tax overtakes the low growth 50 dollar tax within 18 years.

This plays out with our emissions projections too, with emission reductions stagnating for

the 1% growth scenarios.

They just about manage to offset increases in emissions from economic growth, which is

not enough.

It’s clear a higher rate of increase of 5% is needed to encourage rapid responses

from industries.

All 4 scenarios resulted in coal dying.

It seems the magic number to make that happen is around 30-40 dollars per tonne of carbon

dioxide, and in every scenario, eliminating coal is what drives the major drops in carbon

emissions, and we absolutely need to prioritize getting it out of our energy generation mix.

So what actually happens to all that money raised?

This graph shows the revenue raised under the 4 different conditions.

With the high tax high growth scenario raising over 600 billion dollars.

That’s a lot of money.

What should we actually do with this money?

It doesn’t just vanish.

This study examined 3 primary ways to recycle the money raised to offset the negative effects

of the tax.

Lump sum rebates to households affected by the carbon tax, labor income tax reductions,

and capital income tax reductions along with 5 hybrids of these 3 potential tax pathways.

They found that direct returns of the money to households is the most progressive, meaning

it minimizes the impact to low income households.

However, they found that direct capital tax reductions are the most efficient for maintaining

the economy.

It’s essentially a tax swap, any money raised from the carbon tax is just used to reduce

capital taxes.

But this is the least progressive policy, favoring richer households.

The best policy seems to be a hybrid system, where 6-8% of the carbon tax is recycled to

low income houses, while the rest goes directly to a tax swap with capital tax.

This seems like a happy medium between progressivity and economic efficiency.

It’s clear that carbon taxes work, straight taxation of the fuels is the easiest to understand,

but places like California have implemented cap and trade systems that put a hard cap

on carbon emissions with allowances to different companies.

Companies that manage to reduce their emissions can then trade that allowance to other companies

that need it.

This is a much harder system to keep track of however, as there is no easy way to monitor

a company's emissions across activities.

And we have seen with high profile cases like Volkswagen’s emission cheating technology

that was fitted in 11 million vehicles, that companies are willing to find ways to cheat

these systems if possible.

A direct tax on fuels is impossible to cheat.

This system works.

It forces polluters to adapt their business quickly, it causes a radical reduction in

carbon emissions, and encourages innovation.

Many countries are implementing carbon taxes and are gradually ratcheting them up, but

the United States is not one of them.

In fact the fossil fuel industry is still benefiting from massive tax subsidies while

their own lobbyists fight against carbon tax with the high IQ argument of “taxes are

bad”.

No-one wants to pay more taxes, but the reality is this tax can be implemented and result

no extra tax revenue being raised, it just shifts where taxes are being pulled from and

encourages the shift to low carbon energy that will save us millions of dollars in the

long run from reducing the impact of climate change on our planet.

This is one of the few videos we have made where we have focused on a single study.

Videos like this can feel really dry, just filled with data and graphs.

We have tried to make subjects like this as interesting as possible, because it’s incredibly

important that this information be publicly known and understood.

Part of making it interesting is by making it visually stimulating and there is only

so much you can do with a graph in 2D motion graphics before it starts to feel like a high

budget powerpoint presentation.

Investing in our 3D animation capabilities was our biggest goal for 2021 and I think

it's paid off, allowing us to create our little virtual Real Engineering office in blender.

Where we can place models of the machines we talk about and leave easter eggs scattered

around the room that the vast majority of ye never notice.

Most importantly, it allows us to make the raw data we talk about a little more visually

interesting.

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