Letting GDP growth pay for decarbonizing the economy

Carbon Taxes will cause increased prices of gasoline and other oil products which will reduce the consumption of for instance gasoline. For a 10% price increase empirical data show we can expect a 2.5% fall in consumption within a year growing to a total of 6% after a few years. Neat. But what would happen if we increased the price indefinitely?

Using a steadily rising Carbon Tax to decarbonize the economy – an example
If changes are introduced slowly and predictably they are easy to adjust to. Let’s ¬†assume that an economy is growing by 2% pr year (GDP growth) and 10% of GDP is spent on energy (a pretty high number). Let us now levy a Carbon Tax on the energy usage. This Carbon Tax is set to increase so much pr. year that half the GDP growth is eaten by the Carbon Tax. As you can see, this means that the cost of energy – including tax – can be made to go up by 10% every year, and still only eat up half the GDP growth.
(100%*1,02 = 102; 10 + 2*1/2 = 11 ūüôā )

After 10 years of this regime Рprovided we have not made any switch to renewables Рthe carbon tax take would be ~10% of GDP, meaning that 10% of GDP is spent on energy (fossil fuels) and 10% is collected in Carbon Tax on this energy usage.

Eventually, emitting CO2 just becomes too expensive
At this rate, renewable energies would be profitable if they costed twice as much as fossil fuels or less. There are plenty of renewables that are profitable at that rate, and were this tax policy to continue for yet another decade then it is hard to see how it could still be profitable to emit greenhouse gases. (Imagine where we would have been if world leaders had agreed upon this principle back in the early 1990s).

The slow but steady growth to a very high tax works around the primary concerns with carbon taxes – that they’re either too feeble to bite or so tough they’ll kill the economy.

Letting living standards rise while phasing out CO2
While all this is going on, people would still have increased their standard of living by around 10% after the first decade. We are consequently not talking about putting on the hair-shirt and going crazy-green to deal with the problem – and GDP growth is actually the key to the solution.

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