A new carbon standard

Taxes on CO2 emissions alone won't get us where we need to go.

By Daniel Sperling
DANIEL SPERLING, professor and director of the Institute of Transportation Studies at UC Davis, is co-leader of the University of California study of the proposed low-carbon fuel standard.

June 21, 2007

PROMINENT VOICES are calling for national carbon taxes as a way to fight global warming. Former Federal Reserve Chairman Alan Greenspan, the Los Angeles Times' editorial board and economists on the left and the right all support a carbon tax as the cure for our greenhouse gas pains. It isn't, at least for transportation. As the California Air Resources Board votes today in Los Angeles on adopting new carbon standards, we should understand that global warming can't be solved by a single policy or solution.

Carbon taxes — taxes on energy sources that emit carbon dioxide (CO2) — aren't a bad idea. But they only work in some situations. Specifically, they do not work in the transportation sector, the source of a whopping 40% of California's greenhouse gas emissions (and a third of U.S. emissions).

The one sector where carbon taxes will work well is electricity generation, which accounts for 20% of California emissions (and 40% of U.S. emissions). The carbon tax works because electricity producers can choose among a wide variety of commercial energy sources — from carbon-intense coal to lower-emitting natural gas to zero-emission nuclear or renewable energy. A modest tax of $25 per ton of carbon dioxide would increase the retail price of electricity made from coal by 17%. Given the many choices, this would motivate electricity producers to seek out lower-carbon alternatives. The result would be innovation, change and decarbonization.

Transportation is a different story. Neither producers nor consumers would respond to a $25-a-ton tax. Fuel producers would not respond because they have become almost completely dependent on petroleum, which supplies 96% of all transportation fuels. They cannot easily find low-carbon alternatives. Even corn ethanol is only slightly better than gasoline.

Drivers also would be unmotivated by a carbon tax. A CO2 tax of $25 a ton would raise the price of gasoline only about 20 cents a gallon. This would not induce drivers to switch to low-carbon alternative fuels because virtually none are available. In fact, it would barely reduce their consumption. A recent study at the UC Davis Institute of Transportation Studies found that the "price elasticity" of demand for gasoline has shrunk; a price increase of 10% induces less than a 1% reduction in gasoline consumption. Thus, that 20-cent increase would be barely noticeable. In the transport sector, a carbon tax would have to be huge to induce change.

What about mandating use of particular fuels? That doesn't work because it is impossible to know which horse to back. At UC Davis, we have decades of experience in transportation technology, policy and consumer behavior — yet we still cannot predict which fuels are likely to succeed. What we do know is that there are many low-carbon fuel options available and that many industry and university labs are making rapid progress in developing more. The potential for new fuels with dramatically lower emissions is very real, but we have no clear winner yet.

And elected officials are no more qualified to pick winners than are university scientists. I just returned from another trip to Washington, where farm lobbyists have stirred a buzz for ethanol and coal lobbyists for coal-based liquids. But ethanol made from corn provides little reduction in greenhouse gas emissions, and coal liquids threaten huge increases. Leave it to politicians, and this is what they will mandate.

Here is what we can say — and did, in our recent recommendations to Gov. Arnold Schwarzenegger and the Air Resources Board: Cutting carbon emissions from transportation fuels with mandates and taxes won't work. But a new approach using a low-carbon fuel standard will. This new standard will require oil companies and other fuel providers to reduce carbon and other greenhouse gas emissions of transportation fuels by at least 10% by 2020. It will be up to the providers to choose how to do that, including blending low-carbon biofuels into conventional gasoline, selling low-carbon fuels, such as hydrogen, and buying credits from providers of other low-carbon fuels, such as low-carbon electricity or natural gas. This allows businesses to identify new technologies and strategies that work.

The low-carbon fuel standard picks neither winners nor losers. Instead, it sends a fuels-neutral signal that alternatives are welcome in California's $50-billion-a-year transportation fuels marketplace. The Wall Street Journal recently described a new "fuels gold rush" as innovators and well-funded distributors battle for California's emerging alternative fuels market. Real solutions to global warming are needed. Let's just be sure they're effective.