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A report by EY’s QUEST practice examines potential industry impacts of an illustrative carbon tax on all US energy-related CO2 emissions.
Taxing carbon is one option receiving attention as a way to reduce CO2 emissions in the United States, fund spending and tax policy priorities, and address the federal fiscal imbalance. Such a tax is estimated to raise $1.1 trillion in tax revenue over 10 years.
Nearly all taxpayers would be affected by a carbon tax. Here, we look at the potential industry impacts of a $25/ton carbon tax on all energy-related CO2 emissions in the United States, analyzing direct and indirect production costs and changes in consumer prices.
We find that the impact of such a tax varies widely – from as high as 11.8% for electric power generation to as low as 0.1% for information and other utilities. Impacts also vary within industries.
Sources of carbon emissions
Carbon emissions are primarily concentrated in a few types of economic activities, with the transportation sector accounting for 36% of CO2 emissions, electric power accounting for 34% and industrial activity for 19%. Residential activity only accounts for 6% and commercial activity for 5%.
Direct vs. indirect costs
The cost increases from a carbon tax include both direct and indirect costs, meaning both the costs that a carbon tax would impose on CO2-emitting industries and the costs a business would incur through inputs or processes subject to the tax in the production stage. As a result, industries not directly subject to a carbon tax might still experience significant overall cost increases depending on the carbon intensity of their inputs and processes.
For some industries, the bulk of the production cost impact of a carbon tax would be direct. The electric power industry, for example, has 11.6% of its 11.8% overall cost impact coming from direct added production costs. For petroleum and coal products, the breakdown is 1.2% of direct impact vs. 0.6% indirect impact.
The indirect impact would be a much higher percentage of the overall cost increase for other industries. For example, most industries rely on electric power and transportation in some way, even if the industries themselves are not directly heavy users of carbon-based fuels.
If businesses pass on the costs of a carbon tax to consumers by increasing prices, this increase could affect consumers’ purchasing power, which could have larger effects on the economy. According to our analysis, the largest consumer price increases from a carbon tax would be in the natural gas, electricity, fuel oil and gasoline and other motor fuel categories. How policymakers discuss these consumer impacts may affect popular perceptions about carbon tax proposals and those proposals’ chances of enactment.
Action steps
Ultimately, businesses need to understand how a carbon tax would apply to their specific situations, as well as those of their employees, competitors and consumers. As proposals evolve and legislators develop or sign onto plans that may involve carbon taxes, businesses need to pay attention and determine what such policies would mean for them going forward. Financial modeling can help determine a company’s CO2 emissions to better measure direct impacts, as well as the more elusive indirect impacts that companies might not readily anticipate. From there, companies can better plan for potential changes and determine whether and how to discuss these impacts with policymakers.
Summary
Calls to address climate issues are growing. Tax policies that aim to curtail CO2 emissions are already in place in many countries, and several US policymakers are putting forth proposals. What’s the potential impact of a tax on carbon? An EY report finds that a carbon tax would increase production costs by 0.7% across key US industries, reflecting increases in production costs and costs passed along by suppliers, although the impact varies widely by industry.
