Monday, October 11, 2010

Energy In the US Is Already Pigovian Taxed

A comment I posted on "The growing fallout of the shale revolution" on Newmark's Door in response to another comment:
All energy sources in the US are Pigovian [or Pigouvian] taxed.

Petroleum based energy and other carbon based energy are already heavily taxed on a federal and state level in the US. For example, taxes are added to the price of gasoline at the pump, and gas stations, distributors, wholesalers, refiners, drillers, explorers. etc. also pay various taxes, which increase the price of energy in the US. The consumer pays all these taxes in the final price.

The fact the theses taxes are not called Pigovian or that these funds are not set aside to reduce externalities is inconsequential in their economic effect.

If one priced an externality at $X and then added that to the base cost of energy, one would find that the already existing taxes diminish the need for an additional tax to raise the relative price of energy to account for externalities.

Plus, not all externalizes are negative. Imagine the number of ambulances and emergency equipment that would be needed if after every run, batteries had to be recharged for several hours or overnight. The negative effect from needing multiple batteries, extra vehicles or other energy sources would outweigh the gain from switching away from gasoline.

Shale gas burns substantially cleaner than many other carbon forms of energy. That is a positive externality from shale. Raising the price and lowering the usage of shale gas, lessens that positive benefit of shale gas. One cannot just add the negative costs to a tax without subtracting out the positive benefits.

Like all things in life, there are trade offs.

Even with oil, there are positive externalities. It has the second highest energy density of our available energy sources, surpassed only by nuclear energy. That means, less volume, less weight, less resource production needed for energy equivalence, which all create positive externalities and which are almost never counted in the measure of carbon energy externalities.

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