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1/9 There’s a lot of talk lately about oil majors committing to a carbon price. Remember, the transportation sector is mostly immune to a carbon price.
2/9 Each $1 in carbon price equates to about a 1 cent per gallon increase. So even a modest $50/ton tax results in $0.50 increase in gas prices. That is well within the normal level of variation with crude oil prices.
3/9 Empirically, there is only a very small elasticity between the cost of transportation and demand, especially when there are few alternative options. So, even a $50 per ton tax is likely to have a very small impact on demand for gasoline (and diesel).
4/9 As an example, the gas tax in the EU is equivalent to about a $400/ton carbon tax, yet the EU still needs (and has) very strong fuel economy standards in order to lower fuel consumption.
5/9 In return for committing to carbon pricing, oil majors want limited liability for past actions, and in some cases, elimination of past and future regulation.
6/9 Remember too that the oil majors are big gas producers, which stands to benefit from a power sector carbon price in the near term.
7/9 So it’s no surprise they support a carbon price. There would be limited impact to oil demand, natural gas will benefit in the short term, and they are freed from liability and regulations.
8/9 This is why we cannot trade away other regulation for a carbon price, and why strong sectoral performance standards are critical policies even with carbon pricing.
9/9 Without them, the lack of substitutes, inelasticity of certain sectors, and market failures (eg split incentive), means they will not drive deep decarbonization. Plus, performance standards can help capture cost saving reductions that are foregone due to market failures.
