Sean asks, “If you put a price on GHG emissions, will it raise the cost of energy?” and answers, “Mostly, no.” I wish he were right, because I really dislike carbon taxes and was only gradually convinced to support them by overwhelming evidence.
But pretty much every empirical study that has ever been done about sales tax and other broad-based taxes on gross revenue shows that such costs do get passed along.
A fairly typical survey of such studies would be this article (PDF) in the National Tax Journal. The pass-along ranges from two-thirds of the cost (during depressions) to more than 100 percent of the cost. (The reason businesses sometimes pass along more than 100 percent of a sales tax is that demand curves sometimes act more like step-functions. There may be no significant difference between lost sales at a price of x and a price of x+n, so if you have to raise prices by x, you may as well get the extra revenue from a rise of x+n.)
If you look at your own experience, gasoline prices have certainly followed oil prices in their rate of increase. Products of oil-intensive manufacturing processes have passed along the increased cost. Coal-based electricity producers have passed along their costs, as did natural gas based electricity producers some years back. All airline ticket prices increased as oil prices rose. Yes, long-notice booking remained cheaper than short-notice booking, but both kinds increased in price.
Why do broad-based taxes act differently than costs like labor? Because they are broad-based. If a sales tax hits your product, it hits your competition’s products too — including alternatives you normally don’t think of as competition. So pass-through is restricted only by demand curve, not by a competitive market. In short, the division of cost between the producer (including workers) and the consumer is similar to the pass-through of costs in a monopoly situation. Quite often the producer can pass along almost all costs, and certainly can almost always pass along the majority of costs.
Bottom line: Conventional economic theory here is supported by the facts. Emissions taxes do get passed along. Of course, emission prices being passed along does not mean raising prices is all we need to do. That will be a future post.
