Beyond the Cusp

July 28, 2010

The Bottom Line Problem With the Carbon Tax

There are a number of things that are simply wrong about the carbon tax. Yesterday we had an article titled Hot Enough For You Yet? giving some overview of general reasons the carbon tax is bad for America. Today we will get into some particular examples where the carbon tax is just plain wrong.

The first example will demonstrate how the carbon tax discriminates against small local companies. For our example, we have two companies that make, what else, widgets. The first company, let’s call it Wally’s Old Style Widgets in central Alabama, makes approximately 25,000 widgets per year using one-hundred year old equipment that make a heavier and longer lasting widget. The other company, we’ll call it Super Modern Widget and Other Gadget Conglomerate of Oregon, makes 100,000 widgets per month along with numerous other products with two-year-old state of the art equipment. Before the carbon tax, both company’s widgets sold for about the same price in central Alabama and though Wally’s Old Style Widgets were a slight bit higher in price, the companies in central Alabama also had older machines that were already set-up to use Wally’s Widgets. So, for them everything was simply fine.

Along comes the carbon tax. Right off the bat, in an honest attempt to comply with the new carbon credit regulations, Wally invested some hundred thousand dollars in scrubbers and other pollution and carbon reducing equipment. This had to be reflected with an increase in the price of his widgets. On top of this, while his competitor across the country in Oregon did not need to modify his equipment one iota and still managed to get paid for his excess carbon credits while Wally had to buy carbon credits or replace every piece of his equipment. Since the latter would have bankrupted his company, he did the best he could with a bad situation. As time passed the price on Wally’s Widgets kept slowly increasing as the government charged more and more over time for carbon credits. Very soon, Wally’s Widgets now cost twice that of his competitor, Super Modern Widget et al even after shipping costs. One by one, all of Wally’s customers had to stop buying the locally made Widgets, as they became cost prohibitive and buy the lighter and more fragile Widgets from Oregon. End of story is the small local business was run out of business simply because he served a local need and was not big enough to not be allowed to fail.

Our next example, we will have two companies who both make millions of widget fasteners. Both companies have modern equipment. The only difference is one company makes their widget fasteners from stainless steel and the other from a rubber and epoxy mixture. The advantage of the stainless steel is longer lifespan and a tighter fit while the rubber and epoxy fastener makes less noise and needs less lubrication though not lasting as long or making as firm a connection. For many uses of widget fasteners, the difference is not significant. But in high stress applications the stainless steel fasteners outlast the rubber and epoxy by almost a two to one difference thus even though the stainless steel cost 25% more, they are the better more cost efficient fastener.

Along comes the carbon tax. Needless to point out that the rubber and epoxy mix fasteners do not require smelting and are made from simple high-pressure injection molding and a 12-hour curing time. The stainless steel require smelting the steel, mixing in the custom combinations for each type of steel, then pouring the molds and curing. The steel requires, by comparison, a carbon intensive procedure and thus is hit harder by carbon credits. Eventually, either the price of items requiring the stainless steel fasteners are going to get far more expensive, or everyone will need to settle for an inferior product where due to cost the stainless steel product has been priced out of consideration.

The last examples are two identical companies who do yard care. This example requires we look at the situation without carbon tax and with the carbon tax. First without the tax. The first three years these two lawn care companies compete, they each increase their business by 12% per year. After three years, one of the companies decides to double their advertising dollars and as a result, they now grow at 20% per year while the other drops to only 9% profit. The company advertising gets the increase of their investment and the other company takes a hit for not keeping up.

Now add in carbon tax. Once again, the two companies both go with 12% gains for three years. The government computes their allotted carbon ration to reflect exactly that 12% annual increase. Now when the one company increases their advertising dollars and realized a 20% yearly increase the government penalizes them for going over their carbon allotment. Meanwhile, the company that only increased at 9% will receive money for their unused carbon credits. The basic result is some of the monies made with the increase in advertising from the more aggressive company will be taken by the government and given to his competitor who was less aggressive. To me, that is just plain wrong.

Beyond the Cusp


1 Comment »


    “Now when the one company increases their advertising dollars and realized a 20% yearly increase the government penalizes them for going over their carbon allotment.”

    Note the “carbon allotment”. Pay attention to what the carbon allotment IS!

    Under current rules, the US will completely deplete its initial carbon allotments good through 2050 in only…6 years, EU in 12 years and China in 24 years!!!!

    This would happen before the US could even “recover” from the debt and entitlements, mortgage and GDP debacle unfolding now:

    Fair carbon means no carbon for rich countries

    * 21 September 2009 by Jim Giles

    “WHAT might a truly fair and effective solution to climate change look like? One answer to that question has just been released and it makes for disturbing reading. For one thing, the scale and speed of emissions cuts required by developed nations is far greater than the commitments governments are currently willing to make.

    The new analysis is based on the idea that each person on the planet has the right to the same carbon footprint. Researchers at the German Advisory Council on Global Change, which advises the country’s government, looked at the impact of this fairness principle on attempts to limit the average global temperature rise to 2 °C, a level that is widely regarded as necessary to avoid disaster, such as high rises in sea level.

    Calculations published earlier this year (Nature, DOI: 10.1038/nature08017) suggested that no more than 750 billion tonnes of carbon can be released between now and 2050 if the world is to have a 2-in-3 chance of staying within the 2 °C rise. If that global allowance was distributed according to population levels, many developed nations would face almost immediate carbon bankruptcy.

    With 4.6 per cent of global population, the US would receive a 35 billion tonne allowance between now and 2050, which it would use up in around six years at current rates. The European Union’s budget would run out in 12 years and China’s in 24. “It is clear that the industrialised countries must carry out rapid and comprehensive decarbonisation if they wish to present themselves as credible advocates of global climate protection,” concludes the council.
    The US carbon budget would run out in six years, Europe’s in 12 and China’s in 24 years

    Big emitters like the US would only be able to meet their target by buying unused emissions from poorer nations that have large populations but low per-capita emissions. For example, India and Brazil’s allowances would last 88 and 46 years respectively at current rates. That imbalance has benefits, says the council, because the money transferred would help poorer nations to improve their living standards using low-carbon technology such as wind and solar electricity generation.

    Climate policy researchers say the analysis is a useful framework for evaluating the global challenge, but probably will have little effect on the crucial climate negotiations scheduled for December in Copenhagen, Denmark.

    Michael Grubb at the University of Cambridge says that nations will come to the negotiations with emissions reduction targets in mind, based on what they believe is possible domestically. They would not be willing to sign up to a formula that takes that decision out of their hands, even if it is rational and equitable. “This proposal is not grounded in political realities,” adds Elliot Diringer at the Pew Center on Global Climate Change in Washington DC.

    South Africa is one nation that might find the results hard to live with. It relies heavily on coal-fired power plants and so is grouped with rich nations in terms of per-capita emissions, despite having a GDP per capita just below the global average. To meet its allowance it would have to buy emissions credits from abroad. Without overseas support that prospect would be unacceptable in a developing country struggling with poverty.

    Some flexibility would be needed to deal with cases like that, says Dirk Messner, vice-chair of the council and director of the German Development Institute in Bonn, probably in the form of aid from richer nations. But even if some countries do not like the allowance that the formula produces, it could still be used to shed light on progress at Copenhagen. “I hope it will bring some transparency to the debate,” Messner says.
    Issue 2726 of New Scientist magazine”


    Comment by givemELL — July 28, 2010 @ 7:25 PM | Reply

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