nekomatic wrote: ↑
Mon Aug 23, 2021 9:00 am
Fishnut wrote: ↑
Sun Aug 22, 2021 12:40 am
I know this is a very basic question, but how does a carbon tax actually work? Speaking from a place of complete ignorance on the subject my fear is that the costs will simply be passed on directly to the consumer rather than them forcing companies to change their practices
This is a very simplistic answer, but surely the idea is that any time one supplier chooses to simply pass on a cost directly to the consumer, another starts figuring out what they can do differently so as to pass on less cost and win the consumer’s custom.
That can have unintended consequences, of course.
Typically you would tax raw materials, whose main use or potential is releasing their carbon, according to how much carbon they might release.
So, for example, suppose there is tax of £200/tonne of carbon. You could rate it on carbon contained, or CO2 released. So if that £200 is reckoned on tonnes of actual carbon contained, then the equivalent tax in terms of CO2 released, assuming 100% release then £200/ tonne (C) = £200 x 12/44 = £54.55 / tonne (CO2 released). I think it is more common to describe it in terms of the CO2 price rather than the C price, but the C price is easier to use.
So, for example, on this basis the tax for methane (CH4) would be about (1x12)/(1x12 + 4x1) x £200 = 12/16 x £200 = £150 per tonne of methane
And the tax on petrol, taking that as roughly C8H18 (octane) would be about (8x12)/(8x12 + 18x1) x £200 = 96/114 x £200 = £168/42 per tonne of petrol
And the tax on alcohol (ethanol, C2H5OH) for combustion would be (2x12)/(1x12 + 1x16 + 6x1) = 24/46 x £200 = £104.35 per tonne of dry ethanol
And so various taxes on other fuels can be calculated, according to their composition, the above are simple examples for pure fuels. Often they are not pure. For example, ethanol often has 4% water content, natural gas often has a material proportion of argon and other impurities.
That's all fairly straightforward. We have a good idea of the make-up of these simple fuels, and can tax them fairly precisely on their carbon content, which we can reasonably expect to be all released. I think you would expect to pay tax on petrol, even if your intended use was cleaning your bicycle chain.
But it is less clear for alcohol, a lot of thta is not combusted. But it creates a potential loophole if some alcohol is not subject to the tax. Limestone is even more problematic. A lot of limestone is converted to lime by burning he CO2 out, but probably more of it is used as aggregate. Limestone is highly variable in actual composition.
Who is taxed?
Suppose you buy a bottle of beer at a shop. VAT is clearly a consumption tax applicable to the final consumer. If you go into the shop, change your mind, and don't buy the bottle of beer, VAT isn't will not be charged and the VATman gets no money today. But the customs man has already taken the duty on the beer sitting on the shelf. It was payable at the point of passage across a "duty border". That can be point of importation or on leaving beer the factory, or on leaving a bonded warehouse. I recently bought 6 bottles of wine made in 2003. They have sat in a bonded warehouse ever since arriving in Britain around about 2005, and were only withdrawn from bond shortly prior to me buying them. Duty was payable at the rate chargeable in 2021. But I might equally have bought them from a private unbonded cellar, and duty might have been on them paid back in 2005, at the 2005 rate.
The merchant also has local land taxes, employment taxes, and vehicle and fuel taxes on the vehicle that delivered the wine to my house. The businessman needs to cover all of these costs. But they are paid and incurred at the time, only the VAT is conditional on the final sale.
With carbon taxes, I expect we would largely charge them as close to source as possible, to minimise collection cost and reduce avoidance. Though, as pointed out, probably with some things, like limestone, you have to distinguish what they are being used for, and so won't necessarily charge at the quarry exit.
When you buy electricity, some of which si made by burning gas, I would not expect you will be charged an explicit carbon tax on it. I could be wrong, there are more ways of doing this. But in line with common taxation practice in this country, the gas will be more likely be taxed at point of entry to the country, or exit from the well. So it is already refleceted in the cost of the gas the power station pays. That then goes into the cost of the electricity the power station exports, if it is to cover its cost. Similarly, the cost is already bound up in other carbon heavy products like aluminium and cement, because the manufacturers will have had to pay carbon tax on the carbon emitting ingredients. Though how to handle the limestone going into cement, when so much of it is used instead as aggregate, is tricker than how to handle the gas which will almost certainly be burned, or used in a chemical process.
The point of his taxation is to make manufacturers recognise the tax cost of the fuels, etc, they use, and seek to minimise the cost of production by reducing carbon output to the extent practical.
There is a general conundrum in economics on "who bears a tax, producer or consumer?" Suppose the government introduces a new tax on crisps of £5 a kg, to discourage us from eating them. Suppose a 100g packet of a particular brand currently sells for 80p. (For simplicity, I'll ignore other taxes taht might apply.) So at 100g, there's 50p tax on it. But some of the 80p is profit. The new profit-maximising price of the packet of crisps is in general going to be a less than £1.30. Suppose it happens to be £1.25. So in a sense the consumer only bore 45p of the new tax, and the producer/retailer bore 5p of it. But philosophically you can also argue that is meaningless, as it is context-dependent and depends where you start from.