Monday, April 28, 2008

Effect of carbon tax on gasoline prices

This is a back-of-the envelope calculation to show what the approximate effect of carbon tax would be on fuel prices.

First, figure out how much carbon is in your unit volume of fuel.

For liters, this is easy. Gasoline is about 85% carbon by mass (the rest is hydrogen), although this number may vary based on blends and additives. The density of gasoline is about 0.73 kg/l so multiply the density by the carbon fraction (.73 x .85), and you get 0.62 kg carbon per liter.

For gallons, just multiply 0.62 by the number of liters per gallon, which is 3.78.
3.78 x .73 x .85 = 2.35

Most proposed carbon prices are by the metric tonne, which is 1000 kg. So a $10 per tonne carbon tax would be $1 per 100 kg, or one cent per kg.

With 0.62 kg/liter, this amounts to 0.62 cents of excess tax burden per liter of fuel.

For a gallon, this is 2.35 cents per gallon extra in tax.

However, there is a catch. Producing and transporting gasoline to the end user requires the use of gasoline (or equivalent). I don’t have a good figure for this (anyone?), but I have a vague recollection that each unit of fuel you use requires an additional 0.2 units to get from the ground to your car. So if these costs are passed on to the consumer, a $10/tonne tax would cost 0.75 cents per liter- a 20% increase over the 0.62 cent rise.

The $10/tonne tax on a gallon of gasoline would be 2.8 cents per gallon, up 20% from 2.35.

Most carbon tax proposals call for a tax rate somewhere between 10 and 100 dollars per tonne of carbon, which would equate to a tax of 2.8 to 28 cents per gallon. The current federal tax is 18 cents/gallon, and the current state tax average is about 28 cents/gallon. So even a high carbon tax would be of a similar size to current taxes.

28 cents is only about 8% of the current cost of gasoline ($3.50/gal)- with most of that cost coming from the high price of oil caused by poor supply and high demand. So even the most extreme carbon tax scheme floated by reasonable people would have a much smaller effect than market forces, slightly larger than federal taxes and similar to state taxes.

I’ve heard fearmongering that a carbon tax could add $2 to the price of gasoline. This would require a rate of 200 cents / 0.28 cents per carbon tax dollar = a carbon tax of $714. I can't even find nutjob greenies who support a tax that large.

Of course, if you really want to reduce the price of gasoline, you need to reduce global demand for oil- or hope that supply will continue to increase forever.

5 comments:

Silver Fox said...

Gasoline prices in the U.S. are relatively low compared to worldwide prices, because our state and federal taxes are relatively low (see Stop Whining). If we had higher taxes, with or without a carbon tax (hopefully of the reasonable kind), possibly the "way" higher prices would result in less consumption. Maybe.

BrianR said...

nice post ... I always enjoy back-of-the-envelope stuff like this

Callan Bentley said...

Chuck,

You rock. Thanks for going through this for us.

-CB

Mel said...

I concur! Sweet post.

Shaun said...

Well according to recent news coming out of the US, mass transit is at it's highest uptake since 1957 (http://money.cnn.com/2008/06/11/news/mass_transit/index.htm?cnn=yes), car pooling is up 88% (http://wsbradio.com/news/051408commute.html) and gasoline consumption in the UK has dropped 20%. I LOVE high gas prices. Mind you, I don't have a car....