What is a carbon tax worth?

California has begun a historic cap and trade market in carbon, completing the first auction, with permits going for $10.09 per metric ton.  I’m not sure cap and trade and the offsets it allows are the right way to go. But when I read this, I wanted to understand what such a program might mean for an average Minnesota energy consumer (after all, California is a distant and foreign land).

Xcel Energy, the electricity provider for most of the Twin Cities metro, produced 0.5266 metric tons of CO2e per MWh in 2011.  At $10 per mt, that’s about $5.31 per MWh, or roughly half a cent per kWh.  The EIA says the average Minnesota residential consumption is 813 kWh per month.  This seems awfully high, but we’ll go with it.  At that rate, the average residential customer would pay an extra $4 per month on their electricity bill.

Natural gas is trickier to estimate an average for, although some 2005 data says perhaps 650 therms per year, per household, using metro assumptions about people per household.  That seems low.  We used over 1,000 therms the last two years, but our house is old.  At 0.005 mt of CO2e per therm, the tax would increase the price of natural gas 5 cents per therm.  If you use 1,000 therms per year, that’s about $4.50 more per month.

So if something like $10 per metric ton was imposed in Minnesota, residential customers might see a utility bill increase of $8 per month, or $96 per year.  The California Public Utilities Commission has proposed a means to eliminate that cost.  Residential customers would actually be paid a dividend from the revenue generated by the auctions, which they say would more than offset the cost of the carbon tax.  Commercial and industrial users are a whole other ball of wax I haven’t touched here, and higher energy prices probably means higher product prices.

All this is not to say that a carbon tax or cap and trade system is appropriate for Minnesota (or the US).  $10 per ton is likely too low, their could be serious equity issues with offsets and increasing energy prices, and other tricky stuff.  But at $10/ton, direct energy costs to residents probably wouldn’t break the bank.

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