Surprise! Current Motor Fuel Taxes Exceed the Estimated Social Cost of Carbon (SCC) in Most Industrialized Countries

“Simple math demonstrates that the average taxes (including duties) on gasoline and diesel in virtually every developed country exceed the average U.S. EPA’s (over)estimated global social cost of carbon now and through 2025 (at least). In fact, motorists in most European countries already pay taxes in excess of the upper bound estimate of the social cost of carbon through the middle of this century.”

According to the U.S. Environmental Protection Agency (EPA), the average global social cost of carbon (SCC), which is the level at which a global carbon tax should theoretically be set, ranged from $5.6 to $41.8 per tonne of carbon dioxide in 2010 (in 2012 US$), and should rise to between $18.7 and $77.4 in 2050 (as shown in Table 1). Per the EPA, the “central value” is represented by the “3% Average” column in the Table. Upper bound estimates are obviously much higher (see last column). [1]

There are several good reasons to believe that both average and upper bound SCC estimates are severely overstated. Suffice it to say that the major reasons for this are, first, the globe is warming much less rapidly than projected—not to be confused with “predicted”—by models of the same vintage as the models used by EPA to estimate SCC, that is, models from the 1990s and early 2000s [Ref. 2, pp. 4–13].

Second, the SCC estimates downplay, if not ignore, technological change that ought to occur over the next century or more and increase adaptive capacity, if the past couple hundred years are any guide. This means that impacts would be much lower than projected, particularly for the poorest countries which are deemed to be most at risk from global warming [Ref. 2, pp. 13–21]. No matter, for this exercise let’s assume that EPA’s SCC estimates are accurate.

Table 1: Social Cost of 1 Tonne of CO2, 2010 – 2050 (in 2012 dollars), updated from EPA, Social Cost of Carbon, Technical Support Document, using Federal Bank of Minnesota, CPI calculator.

To get a feel for the quantities involved, consider that one U.S. gallon of gasoline produces 19.6 pounds of carbon dioxide, that is, roughly 110 U.S. gallons of gasoline would produce 1 tonne of CO2. On the other hand, it takes about 100 gallons of diesel to produce 1 tonne of CO2. [3]

COMPARING TAXES ON MOTOR FUELS TO A NOTIONAL TAX ON CARBON DIOXIDE

U.S.:  Currently, the average combined U.S. federal, state and local gasoline taxes amount to 49.5 cents per U.S. gallon (I’ll round it off to $0.50 a gallon). [4] Thus, gasoline in the U.S. is already being taxed at an equivalent rate of $55 per tonne of CO2. Similarly, combined diesel taxes are 54.6 cents per gallon [4], which would be equivalent to $54 per tonne of CO2. [3]

But according to Table 1 these amounts exceed the average social cost of carbon now and through 2025 (at least). Therefore, based on the average SCC, there is no justification based on the externality of carbon dioxide emissions for regulations (or new taxes) on U.S. motor fuels or motor-fuel-consuming vehicles between now and at least 2025 or, based on the central value, 2050. [This includes rules mandating specific levels of biofuel usage in motor transport.]

Europe:  Table 2 shows for 27 European countries what the combination of excise duties and VATs for gasoline (petrol) and diesel translates into in terms of dollars per tonne of CO2 emitted.

Table 2: Equivalent CO2 tax (2012 US$ per tonne of CO2) for gasoline and diesel based on combined excise duties and VAT, European countries, May 2012. Sources: Refs. 3, 5 and 6.

A comparison of Tables 1 and 2 indicates that many drivers in these European countries are already paying double or triple of what even an upper-bound global CO2 tax ought to be through the middle of this century ($162).

The numbers suggest that the motorists probably already pay a substantial share of the total SCC attributed to all fossil fuel sources in several of these countries. Consider the U.K., for example. Based on fuel usage [Ref. 7, p. 23] and data from Table 2, U.K. motorists paid $49 billion in 2010 in duties and VAT (assuming 1 Euro = $1.25).

Total CO2 emissions from energy consumption in all sectors that year amounted to 492 million tonnes (of which 25% was from the transportation sector). Motorists, therefore, paid the equivalent of $100 per each tonne of CO2 from all fossil fuel combustion, or $400 per tonne of CO2 from all transport sources.

CONCLUSION

Simple math demonstrates that the average taxes (including duties) on gasoline and diesel in virtually every developed country exceed the average U.S. EPA’s (over)estimated global social cost of carbon now and through 2025 (at least). In fact, motorists in most European countries already pay taxes in excess of the upper bound estimate of the social cost of carbon through the middle of this century.

Qualitatively, these results would hold even if the social cost of other greenhouse gases were included.

Therefore, it seems there is no greenhouse gas–related rationale for regulations (or new taxes) on motor fuels or motor fuel consuming vehicles between now and 2025 (at least).

REFERENCES

[1] Social Cost of 1 Tonne of CO2, 2010 – 2050 (in 2012 dollars), updated from EPA, Social Cost of Carbon, Technical Support Document, using Federal Bank of Minnesota, CPI calculator.

[2] Goklany, Indur. 2009. Trapped Between the Falling Sky and the Rising Seas: The Imagined Terrors of the Impacts of Climate Change. University of Pennsylvania Workshop on Markets & the Environment, December 13 2009.

[3] Energy Information Administration, How much carbon dioxide is produced by burning gasoline and diesel fuel?.]

[4] American Petroleum Institute. Motor Fuel Taxes, April 2012.

[5] Europe’s Energy Portal. 2012. http://www.energy.eu/.

[6]Conversion factors: 1 Euro = $1.25; 3.78 liters = 1 U.S. gallon.

[7] U.K. Department of Energy and Climate Change. 2011. U.K. Energy in Brief 2011.

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