The most exciting phrase to hear in science, the one that heralds new discoveries, is not Eureka! (I found it!) but rather, "hmm.... that's funny...." Isaac Asimov

Friday, December 19, 2014

GDP and the cost of fuel

Year-over-year percent change in real GDP and percent GDP spent on fuel

I’m happy to report that an article I had the honor to co-write with Charles Hall has recently been published.  It’s titled “Does a Change in Price of Fuel Affect GDP Growth? An Examination of the U.S. Data from 1950–2013.”  It’s an open source document, available at

We gathered U.S. data on fuel consumption and costs for 1950 through 2013.  We then compared the percent of U.S. gross domestic product (GDP) spent each year on fuels, including fossil fuels and nuclear ore, and the year-over-year change in GDP.  As shown in the chart above, we found that these variables are inversely correlated. (In the chart, "per." represents "period."  The periods are years;
"5 per. Mov. Avg." is a 5-year moving average.)  Since 1970, the 5-year moving averages of the percent of GDP spent on fuel and the year-over-year change in GDP are close to mirror images of each other. 

This correlation argues that the availability and cost of energy is a significant determinant of economic performance. Further, we found that a threshold exists in the vicinity of 4%.  If the percent of GDP spent on fuels is greater than this, poorer economic performance appears likely; if the cost of fuels to the economy is less than 4% of GDP, the economy seems to do well.  

An implication of our study is that the cost of fuels has a major impact on the economy.  Others have made this point as well, but it is frequently argued by economists that because energy costs are small compared to other expenditures that make up GDP (e.g., consumer spending, which makes up about 70%), that energy costs are unlikely to be significant.  But energy appears to be different.  It exerts a multiplier effect.   If the price of energy goes up, almost everything costs more, and these costs propagate through the economy.  Nitrogen fertilizer may be a useful analogy.  Adding 50 kg of nitrogen per hectare can change the yield of corn by several tons per hectare, a multiplier effect of 50 or more. This is because nitrogen is typically a limiting nutrient.  It may be that energy is the limiting nutrient of the economy.

Recently, with the dramatic drop in the price of crude oil, the overall percent of GDP spent on fuels has declined significantly.  It is very likely now below the 4% threshold we identified.   And not surprisingly, the economy seems to be rebounding from the recession that began when oil prices spiked in 2008.

Will better economic conditions continue?  Our study argues that it depends in no small degree on whether energy prices remain relatively low.  And this in turn depends on whether the recent, surprising, boom in unconventional oil (and gas) production continues, on whether renewable sources (PV and wind) truly have what it takes to grow to be major energy suppliers, and on whether next-generation nuclear power gains acceptance.  

The view that energy costs are key leads to a prediction that I don't think many economists would make:  This prediction is that, as long as the price of crude oil stays in its current range (i.e., around $50 per barrel), the economies of the EU and of Japan will improve, no matter what fiscal policy (e.g., stimulus or austerity) they pursue. 

Thursday, June 26, 2014

Revenue-neutral Carbon Tax Gaining Support

In late June, 2014, with over 600 other members of the Citizens’ Climate Lobby (CCL),  I was in DC to lobby Congress to support a steadily increasing revenue-neutral carbon tax.   We met with over 500 Congressional offices.  
A revenue-neutral carbon tax meshes with both liberal and conservative agendas.  For an example of recent Republican support, see 

CCL just released a report of a major study that explains why the concept is gaining traction; it can drastically cut carbon dioxide emissions without harming the economy.  For more, see 

Wednesday, May 28, 2014

Climate Change: Seeing Through the Nonsense; Getting Beyond the Hopelessness

I gave a talk the other night on climate change and what we can do to keep it from being worse.  The talk started with this picture, because on earth, it's mostly about the ocean. 

Here's a link to the youtube:

Sunday, April 27, 2014

VMT Trend Continues Flat in the Face of High Gasoline Prices; Update

This is an update of a chart from two earlier posts.  Although there was a slight uptick in 2013, the VMT (vehicle miles traveled) trend continues to be essentially flat.  From the 1930s until recently, with a few interruptions, VMT in the U.S. grew consistently.  The inflection point in the curve appears to be around 2004, when the price of gasoline rose above $2.00 per gallon. The current period of flat VMT is the longest since WW II, when gasoline was rationed.  VMT are strongly correlated with economic activity.  For more on the economic aspects of the recent VMT trend, and a discussion of the likelihood that constraints on the global supply of petroleum are involved, see a recent presentation at Columbia University by energy analyst Steven Kopits.   

Sunday, April 20, 2014

Fuel Cost as a Percentage of Gross Domestic Product: 2013 Update

This is an update of a chart in earlier posts.  It is clear that the U.S. economy still faces the drag of significant energy cost, with about 5% of GDP spent on fossil fuels.  In earlier periods of prosperity, fuel cost was consistently well below four percent.  It is likely that this continued high cost has a lot to do with the current economic doldrums; money spent for energy cannot be spent on other things.  Petroleum is by far the largest contributor to the total cost of fuels.  Despite recent increases in U.S. production, the cost per barrel remains in the range of $100, far above historical levels, indicating that the global supply of petroleum is not meeting the full breadth of demand.   Coal and gas have significantly lower cost per energy unit.  The two together contributed, in 2012, about 43% of the U.S. energy use total, while their combined cost as a percent of GDP is less than one percent. Nuclear power is by far the cheapest on a fuel cost basis; it provides about 8% of U.S. energy use, but its fuel cost is only about 0.02% of GDP.  (Solar, wind, hydro, and geothermal, which have no fuel cost as such, contributed about 0.2%, 1.4%, 2.7%, and 0.2% respectively in 2012.  Biomass, which is primarily wood, contributed about 4.3%.  Fuel cost is not the only cost of an energy source; there are construction, maintenance, and infrastructure costs as well.) 


  (1) Petroleum cost data have been revised slightly for the years 1995 through 2013.  The cost now represents what EIA terms "Refiner Average Acquisition Cost."  This has been over $100 per barrel since 2011. 

Friday, July 5, 2013

Hope for cutting carbon emissions

I am feeling more optimistic about the chances of slowing and eventually halting emissions of carbon dioxide than I have for a long time.  This is because of an idea and an organization.  The idea is a revenue-neutral carbon tax.  The organization is Citizens Climate Lobby. 

A carbon tax makes huge sense.  See my previous post, and for more.  Making a carbon tax revenue neutral means many in Congress who are opposed in principle to new taxes could still vote for it.

Citizens Climate Lobby is a rapidly-growing grass-roots organization whose goal is to promote legislation that puts a fee on carbon based fuels and returns the revenue to households.  The Lobby held its annual meeting June 23-25, 2013, in Washington DC.  (See picture above.)  I was privileged to attend.  On the 25th and later that week, Lobby members met with about 400 members of Congress or their staffs.  In these meetings, the Lobby pushed for legislation that would:

·         Tax carbon-based fuels upstream, at the first point of sale (well, mine, or port of entry).

·         Start the tax at $15 per ton of fossil CO2 emitted, and increase it by $10 per ton per year so that it reaches at least $100 per ton of CO2 within ten years, making renewable energy less expensive than fossil fuel.

·         Protect American households from increased energy costs associated with the carbon tax by returning the revenue to them.

·         Protect American businesses with border adjustment tariffs that also encourage other nations to adopt equivalent carbon pricing.

Under this plan, a majority of households would break even or get more money back than they paid in carbon tax, protecting the poor and middle class.  A predictably increasing carbon price would send a clear market signal, unleashing development of a clean-energy economy.   

Sunday, May 26, 2013

It's Time for a Carbon Tax

A tax on the carbon content of fossil fuels has gained little traction so far. Few politicians have been courageous enough to propose or seriously work for implementing such a tax.  But support for a carbon tax is growing, and is coming from across the political spectrum. (1)(2)(3)  Why?  There are three obvious reasons:
First, it’s now incontrovertible that climate change is real, is driven by human emissions of greenhouse gases, primarily carbon dioxide, and is potentially disastrous for the environment and the future of civilization.

Second, none of the efforts so far to limit the buildup of carbon dioxide in the atmosphere have worked.  Yes, there have been gradual improvements in energy efficiency and carbon intensity of industry, and there has been a recent lowering of carbon emissions in the U.S. (4) But humanity continues to dump carbon dioxide freely into the atmosphere, and the levels are building (see chart).

Third, of the various methods under consideration to cut back these emissions, a carbon tax is the simplest, fairest, and most direct.   Some of the reasons why this is so are listed below:  (Much of this material has been adapted from essays available from the Carbon Tax Center (5) and from the book, The Case for a Carbon Tax, by Shi-Ling Hsu (6).)   
Some reasons why a carbon tax is the best approach

1)  A carbon tax is more economically efficient than other approaches.  Other approaches include cap-and-trade (establishing a carbon emissions cap and emissions allowances, portions of the total allowed emission, that can be traded), and command-and-control (limiting carbon emissions for specific emission sources).  Each of these two would target and control emissions from a subset of all emitting sources.  A third approach, subsidies, would target for encouragement specific technologies or industries.   Proponents of these other approaches often seem to believe that these approaches would not impose costs on anyone but the entities directly regulated.  But in the long run, it is inevitable that virtually all of the costs of other approaches to cut carbon emissions will be passed on to consumers.  However, because the imposition of costs would be selective, the course of the passing on of the costs could be torturous and rife with possibilities for poor investments and corruption.
But a carbon tax, levied on all fuels based on their carbon content, and ideally, including methane as well, (7) would affect all processes and products that are made with the combustion of fossil fuels. It would send a clear and uniform price signal to a vast variety of carbon dioxide-emitting sources.

An important aspect of economic efficiency is the avoidance of excessive formation of capital that can become “stranded.”  Excessive capital asset formation is a risk when the government picks winners by subsidizing certain industries.  For example, recently, before the poor net energy of ethanol produced from corn was widely understood, ethanol production enjoyed large subsidies.  A number of ethanol production plants were built that today appear likely to have a poor economic future.  If these plants become of little value, they will be stranded assets; capital that is lost to the economic system.   Because it would send a direct and immediate price signal to all users of fossil fuels, a carbon tax is less likely than other approaches to lead to stranded assets. 
2) A carbon tax would not interfere with other regulatory instruments or jurisdictions.  Besides the other major types of carbon control that have been tried, as discussed above, additional methods of cutting carbon emissions and developing renewable sources of energy are likely to be developed.  A carbon tax could co-exist with these other approaches without causing conflicts or confusions.

3) A carbon tax would be relatively easy to administer.  Levying a tax is something that governments have traditionally done.  Administrative agencies are already in place that collect taxes on fuels.  Fuel taxes could be adapted to a broader tax on the carbon content of fuels, and should include a tax, weighted by global warming potential, on direct releases of unburned fuel (e.g. methane leaks, oil spills) to the environment.  Implementing a carbon tax would essentially require only the setting of tax levels and establishment of a phase-in schedule. 
4) A carbon tax will encourage innovation across all sectors of the economy.  As discussed above, a carbon tax will send a steady and predictable price signal to all users of fossil fuels.  Every user will have an incentive to cut carbon emissions by becoming more efficient in use of these fuels.  The power of the market to stimulate innovation will apply not just to a few large regulated entities, such as would be the case with a cap-and-trade program and with a command-and-control system, but to all users of fossil fuels.

5) A carbon tax appears more amenable to international coordination than other pricing mechanisms.  So far, efforts at such coordination have been stymied by opposing positions of important nations.  For example, China and India have balked at the idea of establishing a cap on carbon emissions that would apply to them.  But, there seems no reason why they might not impose carbon taxes of their own.  Another aspect of international coordination that could be problematic is the incentive to nations without carbon pricing to become “free riders.”   If, for example, goods manufactured in the U.S. rise in cost because fuel costs increase due to a carbon tax (or other carbon pricing mechanism), goods produced in countries that do not have such a tax could enjoy a competitive advantage.  However, such inequalities could be adjusted with border tax adjustments.  Although legal thinking is still evolving on the issue, it appears that such adjustments, e.g., fees levied on imports from nations without a carbon tax, would be legal under the rules of the General Agreement on Trade and Tariffs. Also, adjustments based on a carbon tax appear much more likely to be acceptable under World Trade Organization than adjustments based on a cap-and-trade program.(8)
6) A carbon tax will raise revenue.  (This is also true with a cap-and-trade program that auctions its allowances, with the important difference that fluctuations in the prices of cap-and-trade allowances make it impossible to predict, and count on, those revenues.)  This revenue could be used to offset other taxes, such as payroll taxes, and thus could make a carbon tax system revenue-neutral.  Much of the recent support of a carbon tax has focused on a revenue-neutral approach.  Given the palpable need for reform of the current tax code, a carbon tax could be the centerpiece of a new approach to taxation that would have many advantages over the current system.  If revenue neutrality was not insisted upon, some of the revenues of a carbon tax could be used for other purposes, such as reducing budget deficits, subsidizing research and development of low-carbon and renewable energy sources, and developing capabilities to adapt to climate change.

What about the cost of a carbon tax?
Despite the arguments of proponents of cap-and-trade, command-and control, and subsidy programs that these approaches would affect only the regulated, or supported, entities, it is certain that virtually all of the costs would eventually be passed on to consumers in some form, such as in higher electricity rates.  Subsidy programs are not immune; the money spent has to come from somewhere.   But, especially at the outset, costs of these other approaches are not as apparent, and can be hidden or disguised enough to make them seem innocuous.  A carbon tax, however, is up front and unmistakable.  Yes, it is a cost.  Yes, it will raise the price of gas, of heating oil, of food, of products and processes that are made with or otherwise involved with the combustion of fossil fuels, which includes just about everything in the 21st century industrialized world.

Yet this apparent weakness of a carbon tax is its fundamental strength. A carbon tax will put a price on carbon that is readily apparent and will propagate to every corner of the fossil fuel-using system. Unfortunately, the directness of a carbon tax plays into the naiveté and reactive aspects of human nature, and often stimulates knee-jerk negative reactions.  For example, carbon taxes are typically and summarily branded as “regressive.”  In fact any tax on consumption of essentials is capable of being regressive, because people with lesser incomes usually spend comparatively more of their money on essentials than the wealthy.  Payroll taxes, for example, are regressive.  Property taxes and sales taxes are regressive.  The regressive aspect of sales taxes is ameliorated to a degree by the exemptions of food and clothing.  It is by no means clear that a carbon tax would be more regressive than other ways of controlling carbon emissions.  And, there are many ways of minimizing the effects of a carbon tax on those least able to pay for it, for example, by a flat distribution of pro-rata shares of the revenue to every taxpayer (9). 
It must be stressed that the cost of a carbon tax is a cost on a pollutant that is already on its way to imposing a huge cost on all of humanity: the cost of potentially catastrophic climate change that cannot be remediated.   The costs of a carbon tax can be avoided by conserving fuel use and by developing ways to produce energy without using fossil fuels.  A carbon tax, more so than other approaches of controlling carbon emissions because of its directness and broadness, can unleash the innovative forces of the market.  And, to the extent that the costs of a carbon tax are avoided, the threat of irreversible climate change will be pushed back and possibly eliminated.  

When enough of us awaken to the real and present danger of climate change, and to the need to put a price on carbon emissions, we will realize that a carbon tax is the answer. There are signs that this is starting to happen. Some countries and jurisdictions already have a carbon tax, including Sweden, Australia, and British Columbia.  Several carbon tax bills have recently been introduced in the U.S. Congress. (10)

1) See 

2) Shultz, George, and Gary Becker, 2013, Why We Support a Revenue-Neutral Carbon Tax, Wall Street Journal, April 7, 2013 (on line), April 8, p. A19 (print);  
3) Gore, Al, 2013, The Future: Six Drivers of Global Change, Random House, New York

4) Some of this is because many coal-burning power plants have shifted to natural gas, which releases less carbon to produce a given amount of energy.  The sluggish economy and higher prices for gasoline, which have limited driving somewhat, have also played a role. 
5) See

6) Hsu, Shi-Ling, 2011, The Case for a Carbon Tax, Island Press, Washington, DC
7) Methane, the main ingredient of natural gas, is a potent greenhouse gas, with a global warming potential (GWP) 25 times greater than carbon dioxide when looked at over a 100-year time frame, and a higher GWP on shorter time scales.  Estimates of the percentage of natural gas that leaks during extraction and distribution activities vary widely.  If leaks are sufficiently high, natural gas has no advantage over coal in terms of greenhouse gas emissions, and could even be worse.  See  
8) Hsu, Shi-Ling, 2011, The Case for a Carbon Tax, Island Press, Washington, DC

9) Hansen, James, 2012, Storms of My Grandchildren’s Opa,
10) See

Thanks to Charles Komanoff of the Carbon Tax Center for helpful comments