Personally I think we should be increasing the excise. It represents the many negative externalities that car use in our society creates: carbon emissions, use of space for (larger) roads; materials, construction and maintenance of (larger) roads; particulate pollution; deaths and injuries from road accidents, and so on, all of which scale with mileage and hence fuel use. And our understanding of all these factors is moving in the direction of increased disutility. Hence the charges should be increased.
I’ve been thinking about petrol and carbon emissions a bit over the last few weeks, so this is as good a prompt as any to put down my thoughts here on the Mule. I should also point out that I have Mark to thank for the back of the envelope calculation that I’ll discuss here.
When there is no cost to polluting, the result is a market failure and the two main approaches to addressing this failure are taxation and “cap and trade” schemes. Under a tax scheme, a fixed price is imposed per unit of pollution. While this should decrease the amount of pollution, the extent of the reduction cannot be known ahead of time. Over time, if reductions are insufficient, prices can be increased. In the case of a cap and trade scheme, a cap is set on the amount of pollution allowed each year and permits are created that entitle the bearer to emit a share of this cap. These permits can then be traded and so the price of a permit is set by the market. In this case, the amount of pollution reduction is known in advance, but the price is not.
Current Australian Government policy for dealing with carbon dioxide emissions is the introduction a cap and trade scheme. The details of the scheme are yet to be finalised. For example, it has not yet been decided how the scheme will be applied to petrol: will it apply to drivers, car manufacturers, refiners or retailers? And, of course, the price of carbon dioxide emissions is not yet known. Estimates range from $5 to $50 per tonne of carbon dioxide. One price indication was given by a recent Westpac and AGL transaction for emissions at $19 per tonne. The question then is, given this range of emissions prices, what would the impact on petrol prices be?
Petrol is a mixture of hydrocarbons, mostly octane, and so is mostly made up of carbon and hydrogen. In a combustion engine, the carbon in petrol combines with oxygen in the air, producing carbon dioxide emissions. Here are the key facts for Mark’s back of the envelope calculation:
- the density of petrol is 0.74 kg/litre
- octane has 8 carbon atoms and 12 hydrogen atoms
- the atomic weights of hydrogen, carbon and oxygen are 1, 12 and 16 respectively
So, the atomic weight of octane is 8 x 12 + 12 x 1 = 108 and so carbon makes up approximately 8 x 12 / 108 = 89% of petrol by weight. Also, the atomic weight of carbon dioxide is 12 + 2 x 16 = 44 and so every kilogram of carbon combusted produces 44 / 12 = 3.7 kilograms of carbon dioxide. Putting it all together, this means that burning 1 litre of petrol produces 0.74 x 0.89 x 3.7 = 2.4 kilograms of carbon dioxide emissions. Armed with this information, we can now calculate the increase in petrol prices that would result for different prices for carbon dioxide emissions, assuming the cost of emissions was passed on to petrol.
So, the AGL/Westpac price would imply an increase of almost 5 cents per litre and unless the price of carbon emissions comes in very low, we can expect the increase in prices to be bigger than any savings that may arise from the FuelWatch scheme. Of course, the current excise is 38 cents/litre but explanations of the purpose the excise generally focus on the wear and tear caused by road use rather than the cost of carbon emissions.