This cost differential results from a number of possible factors such as equipment age, raw material quality, supply chain logistics, plant location, etc. CO2 abatement cost, however, was not a factor when these plants were built, expanded or improved since CO2 emission costs were the same for both plants: zero. Zero is obviously too low, but, nevertheless, the cost was the same for both.

A carbon tax, however, will destroy the economic balance between these two polluters. CO2 emissions will no longer cost the same for both plants. At lower tax levels such as $40, the annual cost for both plants will indeed be the same: $40,000 likely to be passed through to consumers as a price increase.

As the tax increases, however, this consistency disappears. Once the tax exceeds $40, one of the polluters will implement its $40 per tonne abatement measures and freeze its annual CO2 expense at $40,000. The other polluter, however, will continue to pay more tax every year until the tax exceeds its abatement cost of $400 per tonne. If, for example, the tax is $200, the first polluter will continue to pay $40,000 while the other will pay $200,000 or five times as much.

However, it gets even better for the $40 company. Compliance will cost this company $40 per tonne. Assuming it does not close, the other company must price its goods to reflect a $200 per tonne tax. This enables the $40 company to raise its prices to just below those of the $200 company, increase its bottom line and still compete. If the $200 company folds, the result is the same. The $40 company can set a price just below what the $200 company would have to fetch to stay in business. Anything higher may entice the $200 company to restart.

So, not only will one company pay less tax than another, but that same company will also charge prices as if it were taxed at a higher rate. The carbon tax will create extra profit for those polluters with the lowest abatement costs. Perhaps this is why some large energy companies have endorsed a carbon tax.

This discriminatory cost burden will be randomly imposed. Historically, CO2 emitting activities were encouraged, demanded and even subsidized by nearly everyone including government, business and consumers. CO2 was thought to be benign. Disparate CO2 abatement costs are not the result of wrong or nefarious decision making by anyone. The disparity results from satisfying economic and public policy demands at a competitive cost; from making good decisions at the time. No one should be needlessly penalized for acts once encouraged as productive and necessary or for consequences that were unforeseeable or irrelevant.

A carbon tax will stack the deck against against some facilities and in favor of others in a manner totally unrelated to a polluter’s culpability or its past decisions. This inconsistency will cross sector lines. Some industrial facilities or sectors will pay more for each tonne of abatement even though all tonnes of CO2 have identical impact no matter who the polluter may be. Others will actually profit from price increases enabled by the tax. The potential for economic disruption is severe.

I suspect extreme disproportionate harm will be inflicted on small businesses. Due to efficiencies of scale, large emitters will likely have lower per tonne abatement costs, and compliance, therefore, will impact them less and profit them more than smaller emitters with higher per tonne costs. If this is true, a carbon tax will give very large companies a significant advantage over smaller competitors. This inconsistency is not desirable in a carbon policy.

We need a way to equalize as much as possible abatement costs across all facilities and all sectors. What is needed is a carbon market where a market based credit price caps abatement costs for all polluters. Those who can abate for less will do so, but nobody will pay more than the market price. Pricing Carbon Does Not a Market Make explains why a carbon tax cannot create a robust carbon market although it may generate demand for third-party offsets. A tax is not the solution and, in fact, may create significant and destructive economic distortions by randomly creating winners and losers due to widely ranging abatement costs.

Best,
Bob