Paying for Carbon

It’s fashionable in some circles to promote placing a price on carbon. For example, Mayor Bloomberg, of New York City, and Al Gore, are two prominent politicians who believe CO2 emissions should be cut – the UN says 80% by 2050.

Bloomberg [the company] reported on November 7, “Barack Obama may consider introducing a tax on carbon emissions to help cut the U.S. budget deficit after winning a second term as president.”

And the Center for Climate and Energy Solutions in Arlington, Virginia, said, “Obama and the U.S. Congress should consider a carbon tax to help meet the government’s looming need for revenue.”

There are a significant number in Congress who believe a price should be placed on CO2 emissions. Among this group, the debate is about price: Should it initially be $15 or $35?

Of course, they don’t really address who would pay. They mostly believe it’s corporations who will pay – especially power companies who use dirty coal.

Let’s examine who actually pays by using 2011 data from two of America’s largest utilities, American Electric Power (AEP) and the Southern Company.


Revenues = $15,116,000,000

CO2 emissions = 136,000,000 tons

If the price on CO2 emissions was set at $35 per ton, AEP would have to pay the government $4,760,000,000 for permits. This is roughly a third of revenues.

But where does AEP get the money to pay for these permits?

Here’s AEP’s cash and long term debt situation.

Cash = $221,000,000

Long term debt = $16,516,000,000

Obviously, AEP doesn’t have enough cash to buy the permits and it already has $16 billion of debt, or 50% of total capitalization, so it can’t borrow much money either.

The only way in which AEP can obtain the money it needs to pay the government for permits, is to get it from its customers.

AEP would have to increase its rates by over 31% in order to buy the permits from the government.

But wait: Why not eliminate dividends paid to share holders?

While this amounts to confiscating private property, something the government has done in the recent past, AEP only paid $896,000,000 in dividends – and this is less than 20% of what AEP has to pay for its CO2 permits.

Obviously AEP is a special case. Or is it?

Southern Company

Revenues = $15,071,000,000

CO2 emissions = 176,000,000 tons

At $35 per ton, the cost to the Southern Company for CO2 permits would be $6,160,000,000.

Here’s the Sothern Company’s cash and long term debt situation as of 2011.

Cash = $1,315,000,000

Long term debt = $18,647,000,000

Obviously, the Southern Company doesn’t have enough cash to pay for the permits. It also isn’t in a position to borrow money in order to pay for the permits.

So once again, the Southern Company would have to raise its rates – in this case by nearly 41%.

And, eliminating dividend payments of $1,656,000,000 would only produce 27% of the amount needed to buy the CO2 permits.

These examples are only part of the impact of putting a price on carbon.

Refineries and all of industry would also have to buy permits, and these costs would also be passed onto consumers with higher prices. A single refinery in California emits 4.5 million tons. At $35, permits would cost $157,000,000. How will that affect the price of gasoline?

Those who promoted the idea of putting a price on carbon when the Waxman – Markey cap & trade bill was being debated said that free-permits would initially be given to companies. If they are free, they don’t result in fewer CO2 emissions and merely delay the impact on the consumer.

Free permits are obviously a ruse to fool the public.

Finally, the entire idea of putting a price on carbon is foolhardy for several fundamental reasons.

There’s no way to get rid of CO2 through sequestration underground, there’s no way to generate the required amounts of electricity or produce the products we need, such as chemicals and gasoline, or heat our homes without producing CO2, and the entire concept that CO2 causes global warming and must be cut 80% by 2050 is highly suspect, if not an outright sham.

As these two examples demonstrate, AEP and the Southern Company, a price on carbon hurts the economy and hurts people.

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