Texas already has a carbon tax
Now it is true that Texas’ elected officials are not falling over each other to propose carbon fee bills. And yet, if you think about it, Texas already has not just one but several taxes that are functionally similar to a carbon fee, if not a very efficient one.
To begin with, Texas imposes a 20 cent per gallon tax on gasoline, which is in addition to the 18.4 cent per gallon tax imposed by the federal government. As with a carbon tax, a gas tax makes the price of gasoline more expensive, which discourages use. Texas’ gas tax is the equivalent of a $20 per ton carbon tax, excluding the federal portion of the tax.
More significantly, Texas has long imposed a severance tax on oil and gas production. Natural gas produced in Texas is subject to a 7.5 percent tax based on the market value of the gas sold. Crude oil produced in Texas, meanwhile, is subject to a 4.6 percent tax based on the value of the gas sold. As with many carbon tax proposals, these taxes are imposed at the point of production, and while not intended as a carbon tax, one can do a rough calculation showing the implied carbon tax equivalent for the severance tax. For gas, at current prices of approximately $2.7 per million BTUs, Texas’ severance tax on natural gas is equivalent to a carbon tax of $3.44 per ton. The equivalent carbon tax rate for crude oil, at current prices of approximately $70 a barrel for West Texas Intermediate crude (WTI), is $10.14 per ton.
Admittedly, these taxes do differ from a standard carbon tax in a couple of key respects. One important difference is that the gas and severance taxes are not called carbon taxes, and were not implemented with the purpose of reducing emissions. This, however, is less of a practical difference than one might think. The basic laws of economics apply regardless of the intent of the legislature, and among these is the fact that when you tax something, you tend to get less of it. Taxes on oil and gas production will therefore tend to reduce oil and gas production (and hence emissions) below what they would have been had an equivalent tax been imposed. The same is true for the gas tax.
Granted, even setting aside issues of intent, there are some practical differences between Texas’ current tax system and a carbon tax. The severance tax on oil and gas is calculated not based on the carbon content of the fuel, but based on a percentage of the overall price. That means that the equivalent carbon tax rate will fluctuate depending on the price of oil and gas. When oil and gas prices are high, the equivalent carbon tax rate will be higher (because the amount of tax paid for each ton of CO2 produced will be higher). When oil and gas prices are low, the amount of revenue generated (and hence the carbon tax rate equivalent) will be correspondingly lower.
Over the last ten years, the price per million BTUs for natural gas has ranged from $2.21 to $12.69. This translates into a carbon tax equivalent of between $1.35 and $16.52 a ton. The average price for natural gas over the last ten years has been $4.13 per million BTUs, or which translates to a carbon tax equivalent of $5.27 a ton. Over the past ten years, the price of a barrel of WTI crude oil has ranged from a low $29.05 to a high of $145.31. This translates into a carbon tax equivalent from Texas’ severance tax of between $4.347 and $15.94 a ton. The average price of oil over the past decade has been $79.24, which translates to a carbon tax of $11.23 a ton.
Under a full carbon tax system, the tax rate would not change based on the price of the product, and hence would not be so volatile. Revenue generated from the tax would also be more stable.
The bigger difference between a standard carbon tax and Texas’ current system of fuel taxes is that the latter only covers some sources of emissions. Take auto emissions. Under the current system, a person who drives a gasoline vehicle pays the equivalent of a $20 per ton carbon tax (or $38.4 a ton, if the federal portion is included). By contrast, his electric vehicle owning neighbor may have an equivalent carbon tax rate of zero, even if the electricity used to power his EV comes from burning coal. Likewise, many other activities that generate carbon emissions are not subject to any tax.
Were Texas to replace its current fuel taxes with a broader fee based on the carbon content of fuels, it could achieve the same emissions reduction effects of its current system but at a lower cost. Whether Texas would move to such a system remains to be seen. But it is important to recognize that Texas’ current tax system does involve significant taxes on fossil fuel production, which broadly function as a somewhat kludgy emissions fee.
