It is well known that excess carbon pollution is responsible for degradation of environments. Most of the pollution in the US comes from transportation and electricity generation. Electricity generation has to be fixed before transportation can be fixed, because we will need the electricity to run transportation. Additionally tackling transportation pollution is a much more complex topic, making it a bad first step. Since electricity demand will continue to rise as we become a more technologically advanced society, simply decreasing the amount of electricity consumed is not an option. For this reason, economic action must be taken to impact the supply side without having a negative impact on the quantity supplied. This means that the only possible target for economic intervention in this dilemma is taking economic action which decreases the amount of carbon pollution from electricity production. Fossil fuels generate more pollution per unit of electricity then nuclear and renewables. Most electricity production comes from fossil fuels (60%). The remaining is generated pretty evenly by nuclear and renewables. Therefore, the way to tackle this problem is to decrease the percentage of electricity generated from fossil fuels and increase the percentage produced from nuclear and/or renewables.
There are two types of economic activities that can be taken to decrease pollution per production: a carbon tax, or an innovation credit. There are two possible methods to the carbon tax: a flat rate carbon tax, and a cap-and-trade system.
The simplest is a flat rate carbon tax. In this model a flat cost is associated with each unit of pollution and charged as a tax to be paid to the government at the end of the year. The government can increase or decrease the tax rate until they achieve the desired impact. This method increases the prices of pollution (and electricity) and increase the tax revenue. This causes a decrease in the production of electricity and a decrease in the profit of producers. Since this solution impacts prices, it impacts the demand side of the supply and demand curve. This causes a decrease in the quantity demand which causes an increase in the equilibrium price resulting in a deadweight loss.
The more complicated method is cap-and-trade system. In this model tradeable permits are issued which allow a certain amount of pollution per time. If a company is able to reduce pollution, they are able to sell their permits to other companies requiring permits. This method sets a limit to the maximum pollution per year by setting a limit on the supply. A way for the government to decrease the limit over time is to buy back the permits. Since this solution impacts supply, it impacts the supply side of the supply and demand curve. This causes a decrease in the quantity supplied which causes an increase in the equilibrium price resulting in a deadweight loss.
These two taxing methods of a carbon tax have three things in common: the amount of pollution is decreased, electricity prices will rise, and a deadweight loss is incurred.
In the flat rate carbon tax, the increase in electricity prices ends up in the governments hands to pay off debt. Theoretically this tax revenue could go into grants for producing electricity production plants which generate less pollution per unit of electricity to aid the problem. However, the revenue collected would most likely not be used for this. Additionally, even if it were it would be an inefficient process due to the middleman of the government who also has to determine who to give grants too.
In the cap-and-trade system the increase in electricity prices end up in the permits and their holders. The permit holders have no incentive to invest this capital into electricity generation plants which produce less pollution as this would lower the price of the permits lowering the price of their investment and return. Through this model the increase in price actually causes investors to want to increase the pollution released per electricity produced and inhibit the growth of electricity generation through a less polluting processes as this is the only way for them to maintain and profit from their investment in the long term.
The deadweight loss created by these types of carbon taxes decreases the amount of electricity that would be consumed if the price was lower. This results in less revenue than optimal which decreases the possibility for these companies to evolve and invest into electricity generation plants which produce less pollution per unit of electricity. Additionally, tasks which would be using this electricity still happen, but just use a different power source. Think of a person buying and using a gas-powered car or trimmer versus an electric car or trimmer. The job is still preformed but with an energy source that produces more pollution per job. These examples and others produce more pollution per job as mobile internal combustion engines are much less efficient and pollution producing then large-scale plants. The deadweight loss in this scenario and the majority of others would actually cause an increase in pollution as other power sources (mostly gas engines) are much less efficient than electricity generation plants using the same fossil fuel.
On the other side of a carbon tax is an innovation credit. In this model a company which generates electricity using fossil fuels and produces pollution would be rewarded for investing assets into new electricity generation facilities through a tax credit. This could take the form of a one for one credit up to the total income tax due by this company. In this model if a fossil fuel electricity production company had $10 million dollars due in income taxes and they invested those $10 million dollars into electricity generation facilities such as renewables or nuclear which produce less pollution per unit of electricity, they would pay zero dollars in income taxes. In this scenario the government does not collect the tax revenue from the electricity generation from fossil fuel industry and these companies now have $10 million dollars invested into electricity producing facilities which produce less pollution per unit of electricity. These companies are then able to generate electricity with these new facilities that produce less pollution paid for from what would have been their tax expenses. This method has the direct effect of lowering prices of electricity by decreasing companies’ taxes allowing them to make a larger net profit margin allowing them to decrease prices. This method also has the direct effect of increasing supply by using previous expensed funds to create more plants to produce electricity.
This method has the impact of: decreasing the prices of electricity, increasing the production of electricity, increasing the profit of producers, decreasing pollution per unit of electricity, and decreasing the tax revenue. Since this solution impacts both supply and price it impacts both sides of the supply and demand curve. Both impacts in the curve causes an increase in the quantity demand and quantity supplied and a decrease in the equilibrium price.
In the beginning of this paper, we determined that the way to tackle this problem is to decrease the percentage of electricity generated from fossil fuels and increase the percentage produced from nuclear and/or renewables. The only economic action studied in this paper which accomplished this task is the innovation credit. We determined earlier that the approach of limiting the demand side is inefficient as more electricity is needed for technological advancements, the only economic action which increases the demand is the innovation credit. From these facts alone it is evident that an innovation credit is the only economic action that can be taken to tackle this problem.
Yet there remains a question, how much of an impact could an innovation credit really have, is there really enough tax revenue to make a difference? The short answer, an astounding yes. The long answer, at least 100 billion a year is collected in taxes from the fossil fuel industry (~6% of tax income in the U.S.). In 10 years, we would have over 1 trillion in funds invested in nuclear and renewables. Currently the average nuclear power plant costs 6 to 9 billion dollars to construct. In the US we have 55 nuclear power plants. Assuming that we use all of these funds to produce nuclear power plants we would be able to build 11-16 power plants per year, an increase of about 20-30% next year compared to all nuclear power plants. Once construction finished this would shift the electricity generation form 20% derived from nuclear to 22%-26% with just one years’ worth of this policy in effect. Even using the highest estimates of pollution from nuclear electricity at 117 grams of CO2 emissions per kilowatt-hour compared to Natural gas (442 g CO2 / 1 KWH) and coal (Hard: 864 g CO2 / 1 KWH Brown:1,034 g CO2 / 1 KWH) is less than a quarter to an eight of emissions produced. Additionally, electricity production from nuclear is less costly than production from fossil fuels meaning that once these facilities exist it will be less profitable to continue using fossil fuels for this purpose contributing to a decrease in electricity produced from these sources and therefore a decrease in pollution.
The only way to decrease pollution in the long run is to decrease the average amount of pollution produced per unit of electricity. The only way to accomplish this is to support and encourage the infrastructure of renewable and nuclear energy production facilities and the best way to do that is through an innovation credit. The innovation credit decreases the price of electricity, causing the opposite of a deadweight loss, increases the supply of electricity, lowers the pollution produced per unit of electricity, and increases the profit of the producers all by decreasing the tax revenue. An innovation credit is the first and best economic action solution to dealing with carbon pollution.
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