Carbon Fee Fail-safe and Safeguard (worldwide solution?)
A sufficiently steep carbon fee ensuring carbon reduction targets are definitely met on schedule along
with a corresponding carbon dividend minimizing the transition burden to the public. The dividend
would aim for the average person to break-even throughout the whole transition process.
The fail-safe makes sure the fee is high enough to meet carbon emission reduction targets. The
safeguard keeps the fee from getting any higher than needed.
Accounting for the unpredictability of the price elasticity of demand for carbon by providing a
FAILSAFE to ensuring that we definitely stay on the required carbon reduction schedule. The Energy
Innovation Act (HR 763) would scale up its annual carbon fee increase by Number-of-Years-Behind-
Schedule * 0.15.
We really cannot afford to have the HR 763 five year pause before the scale up takes effect. We must
take the lead and be the shining example to the world. The more quickly we prove that this system
works the more quickly other nations will adopt it.
To make sure that this system is not too harsh we put in a SAFEGUARD in the other direction. For
any year that we are more than a year ahead of schedule the Carbon fee remains the same and it not
Examining Energy Innovation Act (HR 763) carbon pricing:
If we assume that:
(a) The long term price elasticity of demand (PEOD) for gasoline is 0.58
(b) The PEOD for gasoline is a reasonable proxy for the PEOD of carbon.
(c) A carbon fee of $10 per ton equates to a 10 cent per gallon increase of the price of gasoline.
Reducing carbon emissions to 90% of current levels by 2050 requires a carbon fee of $43 per
Carbon Fee and Dividend Price Elasticity of Demand Analysis:
Long term price elasticity of demand for gasoline estimated at 0.58
Initial quantity: 11 gallons per week (14,000 miles / 25 MPG)
Long term price elasticity of demand: -0.58
Final Quantity: 5.50 (50% of original) Final Price: $9.85
Final Quantity: 4.95 (45% of original) Final Price: $12.71
Final Quantity: 4.40 (40% of original) Final Price: $17.72
Final Quantity: 3.85 (35% of original) Final Price: $28.66
Final Quantity: 3.63 (33% of original) Final Price: $37.81
Final Quantity: 3.30 (30% of original) Final Price: $71.62
The above table indicates that additional price increases have disproportionately less impact on
quantity of gasoline demanded. As carbon-free transportation becomes increasingly more cost
effective additional reductions in the demand for gasoline will naturally occur.
(28.66 – 2.66) / 30 = Annual gasoline price increment: $0.87 derives annual $87 per ton Carbon fee.
The carbon fee safeguard will make sure that the total carbon fee does not rise too quickly.