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Henry Hewitt

Henry Hewitt

Henry Hewitt is an investment strategist and portfolio manager with 36 years of experience in renewable energy. He is also a seasoned writer having published…

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Why A Carbon Tax Would Be The Ultimate Energy Game-Changer

Why A Carbon Tax Would Be The Ultimate Energy Game-Changer

Last on the list of investment imperatives, and usually least on investors’ minds, is the question of unpleasant side-effects, which Adam Smith called externalities. If you dump garbage on your neighbor’s yard, are you not liable for the cost to clean it up?

At the very least it is bad manners. Sometimes it is worse. Does it matter if nearly everyone else is doing it, or at least playing along? The only reason many fossil fuel operations are ‘cost-effective’ is that their side-effects are socialized, i.e. the neighbors have to pay for cleaning up the garbage that comes their way.

Who in law is “my neighbor?” In the Book of Luke (10:27) Jesus says that we should love our neighbor. So, a lawyer asked him: “And who is my neighbor”? (10:29.) The story of the Good Samaritan follows. Closer to the present day, the English high court pondered this question in the great case of Donoghue v. Stevenson (1932). Lord Atkin wrote:

“The rule that you are to love your neighbour becomes in law, you must not injure your neighbour; and the lawyer's question, Who is my neighbour? receives a restricted reply. You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour. Who, then, in law is my neighbour? The answer seems to be – persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question.” Related: Is France Ready To Move Away From Nuclear Energy?

The greatest subsidy of all for fossil fuels is the emission of CO2 without having to pay for it. It is, therefore, arguable that the single greatest weapon in the battle to mitigate climate change would be to put a price on carbon.

The IEA reckons the annual value of direct subsidies to the fossil fuel industry runs over $500 billion. An IMF working paper released this month (How Large Are Global Energy Subsidies?) figures that the “Post-tax energy subsidies are dramatically higher than previously estimated—$4.9 trillion (6.5 percent of global GDP) in 2013, and projected to reach $5.3 trillion (6.5 percent of global GDP) in 2015.”

“The fiscal, environmental, and welfare impacts of energy subsidy reform are potentially enormous. Eliminating post-tax subsidies in 2015 could raise government revenue by $2.9 trillion (3.6 percent of

global GDP), cut global CO2 emissions by more than 20 percent, and cut premature air pollution deaths by more than half. After allowing for the higher energy costs faced by consumers, this action would raise global economic welfare by $1.8 trillion (2.2 percent of global GDP).” Related: The Broken Payment Model That Costs The Oil Industry Millions

Critics of renewable energy, seemingly blind to the massive subsidies devoted to fossil fuels and nuclear energy, complain that solar and wind energy depend upon subsidies. It is true that they have, in the past; it is also true that subsidies are no longer necessary. Consider these two recent projects tied to power purchase agreements: At the end of 2014, Saudi based ACWA Power bid 5.98 cents per kWh, for a project in Dubai, below the cost of natural gas in the region (which is 9 cents per kWh), without any subsidies, expecting double digit returns. Michael Liebreich, the founder of Bloomberg New Energy Finance says “This is the shot that will be heard around the world.

On July 7, Bloomberg reported that Buffett Scores Cheapest Electricity Rate With Nevada Solar Farms:

“Berkshire Hathaway Inc.’s NV Energy agreed to pay 3.87 cents a kilowatt-hour for power from a 100-megawatt project that First Solar Inc. is developing, according to a filing with regulators. That’s a bargain. Last year the utility was paying 13.77 cents a kilowatt-hour for renewable energy. The rapid decline is a sign that solar energy is becoming a mainstream technology with fewer perceived risks. It’s also related to the 70 percent plunge in the price of panels since 2010, and the fact that the project will be built in Nevada, the third-sunniest state.”

Not a bad piece of business for a niche, i.e. thin film technology. Related: Buffet’s Solar “Insurance” Coup In Nevada

To put that figure (3.87 cents per kWh) in perspective, if a carbon tax were initiated at $30 per tonne (At that price, the world’s annual CO2 output would be priced at $1 trillion – approximately 35 billion tonnes x $30 -- and it is hard to see how Wall Street could resist getting in on the action), a coal power plant, which emits almost 1 metric ton of CO2 per megawatt-hour, would have the same cost just for carbon as the entire “all-in” cost for PV. The coal plant also has to constantly pay for fuel. (Though, to be fair, the NV Energy price takes advantage of the 30 percent Investment Tax Credit (ITC). The ACWA project in Dubai, as mentioned, does not).

Maybe this is at the root of last year’s oil price collapse. Instead of thinking that high fossil fuel prices will someday drive customers to seek renewables as an alternative, it may be time to admit that low cost renewables, now scaling rapidly, are going to eat fossil fuels’ lunch. Yamani was right: the oil age will not end because we have run out of oil. It is probably premature to lobby for a solar depletion allowance, and it is probably past the time to justify one for oil depletion.

By Henry Hewitt for Oilprice.com

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  • Glenn on August 03 2015 said:
    To suggest that the oil industry is socializing the cost of oil production because it doesn't include the cost of environmental or health side affects is a huge stretch. Worse, you can come up with all kinds of large numbers which anyone can make sound statistically valid and we all know about lies and stats. We'll never arrive at a number which can be objectively validated.

    First, this isn't just about the oil industry, it's about consumers who is the end user so perhaps a better way to put this is that it's a consumer subsidy if it can actually be called a subsidy at all.

    Second, if we can apply the subsidy argument to oil production then what about gold, zinc or iron mines not to mention coal? What about hydro dams in Quebec which degrade river systems and the their local environments? How about nuclear and wind farms which have also have environmental impacts? Or how about the toxic byproduct from solar panel production? How about a poacher in Africa trying to feed his family?

    You can make the argument that just about anyone engaged in an economic activity has a so-called subsidy because all of the above have environmental and health effects and aren't being taxed to account for those environmental and health affects.

    Let's stop being hypocrites and look at the entire range of economic activity and put a tax on it instead of singling out one industry without which, all kinds of other economic activity and great advancements for human kind could not have occurred.

    None of my above arguments is to suggest that we shouldn't transition to a cleaner economic model. We obviously need to but it will happen anyways, environmental taxes or not, and the timeline for these coming changes won't change much with or without taxes.

    The biggest problem with these kinds of taxes however is that they will flow into government coffers and be spent on any number of ill-conceived taxpayer giveaways, covering debt or government schemes which won't pan out.

    On a side note, a few years ago I concluded that there is really no such thing as profit. If we truly accounted for all of our human economy activities, both social and environmental, virtually all profit would disappear along with all incomes above $100,000.

    How can we profit, except for perhaps a very slim margin as reserve, if income were distributed fairly and we actually cleaned up after ourselves?
  • Fabian on August 04 2015 said:
    And moreover when all available land is going to be covered with solar panels or wind farms what are we going to do? I'm going to paint my house pink and neon lime and see what my neighbors say. And yes the ecological impact of mining all this lithium for batteries, I will love to see that. You can clean emissions but the aftermath of mining...
  • Harbinger on August 05 2015 said:
    AS CO2 is not doing what is claimed for it, then the idea of subsidy for the emissions of CO2 is totally farcical, yet another scam. The push for a global "carbon" price started in 1992, with Al Gore in line up. The UN has been pushing for this ever since, with the annual beanfest known as the "Conference of the Parties", where thousands of politicians and NGO's gather in exotic places to tell us not to consume. In spite of increasing CO2 levels, temperatures have not risen, global ice levels are increasing, including the Arctic, which was supposed to be ice free in Summer by 2012.

    The whole game is a busted flush, but there are mega bucks in all the taxes and subsidies, so the big companies jump onboard for their share in the trough.

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