Carbon Taxes Explained: Economic Impact and Climate Policy Analysis

[00:00:00]Varying wind patterns.

[00:00:02]Sea levels being higher than you're used to.

[00:00:05]No less than forth and I can see differences from when I was a child.

[00:00:10]Not mitigating CO2 emissions and destroying our biodiversity, we are killing our planet.

[00:00:17]Ultimately, the emergency climate comes down to a single number, the concentration of carbon in our atmosphere.

[00:00:27]The measure that greatly determines global temperature.

[00:00:36]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.

[00:01:01]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.

[00:01:14][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.

[00:01:25]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.

[00:01:40]These extreme weather events affect the most vulnerable people in our societies most.

[00:01:45][2] We need to address this problem now, but finding ways to accelerate our shift from fossil fuels has been difficult.

[00:01:54]We depend on fossil fuels to drive our economy, so not using them to save our economies is a catch 22.

[00:02:03]These intangible economic impacts are unmotivating to most industries.

[00:02:08]We need an immediate way to encourage the shift by imposing tangible economic pressure.

[00:02:15]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.

[00:02:26]It’s easy to understand the arguments against carbon taxes.

[00:02:27]Take a simple carbon tax that is placed directly on fuels according to their carbon emissions.

[00:02:32]The idea here is to decentivize the use of carbon intensive fuels, but how would that actually play out?

[00:02:40]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.

[00:02:50]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.

[00:03:06]The people who struggle most financially, will be pushed even further into poverty.

[00:03:11]On a larger scale, the economic impacts are harder to predict.

[00:03:15]Electricity prices would of course also be affected.

[00:03:18]Our grids rely on fossil fuel for power, and an increase in fuel cost would be passed onto consumers.

[00:03:25]But, increased electricity and fuel prices impact every single industry on the planet.

[00:03:31]A sudden increase in overhead costs for businesses would likely cause a dip in countries GDPs as industries adapt.

[00:03:40]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.

[00:03:50]There are so many variables we need to consider when creating policies like this.

[00:03:55]What is the optimum pricing of carbon taxes?

[00:03:56]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.

[00:04:07]What should the revenue be spent on?

[00:04:09]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?

[00:04:20]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.

[00:04:33]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.

[00:04:48]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.

[00:04:59]And the results are pretty fascinating.

[00:05:01]Two starting scenarios were tested.

[00:05:04]Starting in 2020, the carbon tax would start at either 25 dollars per ton of CO2 or 50 dollars per ton of CO2.

[00:05:12]So how does that work?

[00:05:14]How do we measure CO2 release?

[00:05:16]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.

[00:05:37]1 gigajoule of coal is only about 34 kilograms of coal.

[00:05:41][4] Maybe 2 bags worth of your traditional home heating coal.

[00:05:45]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.

[00:05:58]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.

[00:06:09][5] Next, these studies applied two annual rates of carbon tax hikes.

[00:06:15]One where the tax would increase by 1% a year, and one where it increased 5% a year.

[00:06:22]Combined this gives us 4 scenarios.

[00:06:24]Let’s see what happens in these 4 scenarios.

[00:06:28]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.

[00:06:55]The electricity grid adapts and evolves to the new tax environment very quickly.

[00:07:00]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.

[00:07:13]These price’s increases are daunting, but it’s incredible to see how this simulated electric grid adapted.

[00:07:21]This is the energy generation projection for the entire US under a no tax reference case.

[00:07:27]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.

[00:07:41]Both eating into coals percentage.

[00:07:44]30 years with only a minor increase in renewable energy.

[00:07:48]However, this is what happens under the high tax scenario.

[00:07:53]Coal is immediately and unceremoniously yeeted from the electrical grid.

[00:07:57]Its high carbon intensity power becomes completely unviable.

[00:08:02]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.

[00:08:13]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.

[00:08:23]Most interestingly, in this high tax scenario a completely new type of technology appears around 2040.

[00:08:30]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.

[00:08:49]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.

[00:09:13]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.

[00:09:23]That’s 33 dollars of cost savings for every tonne of captured carbon dioxide.

[00:09:28]What’s truly encouraging is that under this scenario carbon dioxide released drops by over 90% by 2050.

[00:09:37]If we plot the other tax scenarios on this graph this is what we get.

[00:09:42]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.

[00:10:00]This plays out with our emissions projections too, with emission reductions stagnating for the 1% growth scenarios.

[00:10:07]They just about manage to offset increases in emissions from economic growth, which is not enough.

[00:10:14]It’s clear a higher rate of increase of 5% is needed to encourage rapid responses from industries.

[00:10:22]All 4 scenarios resulted in coal dying.

[00:10:25]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.

[00:10:44]So what actually happens to all that money raised?

[00:10:47]This graph shows the revenue raised under the 4 different conditions.

[00:10:52]With the high tax high growth scenario raising over 600 billion dollars.

[00:10:56]That’s a lot of money.

[00:10:57]What should we actually do with this money?

[00:10:59]It doesn’t just vanish.

[00:11:01]This study examined 3 primary ways to recycle the money raised to offset the negative effects of the tax.

[00:11:08]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.

[00:11:21]They found that direct returns of the money to households is the most progressive, meaning it minimizes the impact to low income households.

[00:11:30]However, they found that direct capital tax reductions are the most efficient for maintaining the economy.

[00:11:36]It’s essentially a tax swap, any money raised from the carbon tax is just used to reduce capital taxes.

[00:11:44]But this is the least progressive policy, favoring richer households.

[00:11:49]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.

[00:12:01]This seems like a happy medium between progressivity and economic efficiency.

[00:12:06]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.

[00:12:23]Companies that manage to reduce their emissions can then trade that allowance to other companies that need it.

[00:12:29]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.

[00:12:37]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.

[00:12:50]A direct tax on fuels is impossible to cheat.

[00:12:55]This system works.

[00:12:56]It forces polluters to adapt their business quickly, it causes a radical reduction in carbon emissions, and encourages innovation.

[00:13:04]Many countries are implementing carbon taxes and are gradually ratcheting them up, but the United States is not one of them.

[00:13:12]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”.

[00:13:24]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.

[00:13:47]This is one of the few videos we have made where we have focused on a single study.

[00:13:52]Videos like this can feel really dry, just filled with data and graphs.

[00:13:57]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.

[00:14:06]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.

[00:14:18]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.

[00:14:29]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.

[00:14:37]Most importantly, it allows us to make the raw data we talk about a little more visually interesting.

[00:14:44]Blender is a free software that anyone can use, but it can be a bit daunting to learn a new program like this.

[00:14:51]Luckily there are excellent classes on Skillshare for all your blender needs.

[00:14:55]Whether you are looking for the skills you need to bring your engineering design concepts to life with beautiful realistic renders, or want to create colorful cartoonish animations, Skillshare has a class to teach you all you need to know.

[00:15:09]This is just one of many learning paths on Skillshare, from creative skills like photography and video editing to productivity skills like project management and habit formation.

[00:15:19]So, whether you are interested in making a career pivot, or up-leveling your skills in your current role in 2022, Skillshare is a fantastic resource to help you learn new skills to support your passions.

[00:15:33]The first 1,000 people to use the link in the description, or press the button on screen now, will get a 1 month free trial to join Skillshares growing community of online learners.

[00:15:45]If you are looking for something else to watch right now, you could watch our last video on the incredible engineering of the James Webb Telescope, or watch Real Sciences latest video on the material properties of spider silk.