Energy Economic Example Regressive Effects of an Energy

Concern with global warming, energy security, and pollution strongly implies that fossil energy is too cheap to compensate for its drawbacks. Energy taxes of various sorts have been proposed to stimulate more efficient use and to fund alternatives. In the debate, equity issues quickly surface. Because direct energy is a larger fraction of the total for less affluent households, regressive impacts

Asset gain 6.8%

Other 19.6%

Health care 5.9%

Food/alc./tobacco 12.5%

Apparel 2.5%

Public trans. 0.8%

Auto purch. maint, 13.8%

Health care 5.9%

Food/alc./tobacco 12.5%

Apparel 2.5%

Asset gain 6.8%

Other 19.6%

Housing 30.7%

Auto fuel 2.9%

Residential energy 3.5%

Housing 30.7%

Auto fuel 2.9%

Residential energy 3.5%

Asset gain Health care Other 2.5% 1.0%

Auto fuel 22.9%

Residential energy 40.3%

Figure 14 For the average American household in 2003: (a) expenditures, which total $49300; (b) energy impacts, which totaled 604 million Btu. Source: Unpublished calculations by R. Shammin, R. A. Herendeen, M. Hanson, and E. Wilson.

Food/alc./tobacco 6.3%

Apparel 1.4%

Infrastructure

Auto fuel 22.9%

Residential energy 40.3%

Figure 14 For the average American household in 2003: (a) expenditures, which total $49300; (b) energy impacts, which totaled 604 million Btu. Source: Unpublished calculations by R. Shammin, R. A. Herendeen, M. Hanson, and E. Wilson.

of an energy price increase would be expected if one ignored the indirect portion.

However, because the total energy curve in Figure 16 bends down, some regressiveness is still expected. To compensate, one could design an income tax rebate to even out the impacts over income classes. Figure 16 is the key, as follows.

Suppose that fossil energy at the wellhead or mine mouth is taxed at rate of p dollars per Btu. Assume that economic sectors maintain their patterns of using inputs to produce inputs, that is to say, technology is constant. Assume further that each sector can successfully pass on its increased costs to the consumers of its output. Then a household's market basket, if unchanged, will now cost an additional amount = p x ECOL. The fractional increase is this quantity divided by the total market basket's original cost, denoted by Y. then

Fract:incr:in mkt: basket cost p*ECOL

Residential energy 63.4%

Total expenditure in 1000 US $/yr

Figure 16 Household energy impact vs. total expenditures. Direct energy is auto and residential fuel and electricity. Total energy = direct energy plus energy impact of all other purchases. Source: Unpublished calculations by R. Shammin, R. A. Herendeen, M. Hanson, and E. Wilson.

Residential energy 63.4%

Figure 15 2003 household energy impacts for (a) lowest income decile ($11 500; 241 million Btu), (b) highest income decile ($140 200; 1233 million Btu). Source: Unpublished calculations by R. Shammin, R. A. Herendeen, M. Hanson, and E. Wilson.

where (e) is the average energy intensity of the market basket. The average is just energy/expenditure at the appropriate point on Figure 16; it is the slope of a straight line connecting the origin and the point.

As an example, consider a tax of $0.50 per gallon of gasoline equivalent. This is about $4/million Btu, or $24/ barrel of oil. The latter is about 25% of the world crude oil price as of 7 November 2007.

Using Figures 14-16, we perform the calculation in Table 6. The increase in market basket price ranges from 3.5% for the highest expenditure decile to 8.9% for the lowest. For full equity, income tax rebates, or other measures, could address this differential.

Needless to say, a proper calculation is much more involved than this one, but the idea of indirectness will pervade it.

Total expenditure in 1000 US $/yr

Figure 16 Household energy impact vs. total expenditures. Direct energy is auto and residential fuel and electricity. Total energy = direct energy plus energy impact of all other purchases. Source: Unpublished calculations by R. Shammin, R. A. Herendeen, M. Hanson, and E. Wilson.

Table 6 Consequences of a $4 per million Btu mine mouth fossil energy tax, based on assumptions in text

Expenditure level

Lowest Highest

Table 6 Consequences of a $4 per million Btu mine mouth fossil energy tax, based on assumptions in text

Lowest Highest

decile

Average

decile

Market basket expenditure

11.5

49.3

140.2

(thousand $/yr)

Total energy (million Btu/yr)

241

604

1233

(e) (thousand Btu/$)

21.0

12.3

8.8

Market basket price

964

2416

4932

increase ($/yr)

Market basket price

8.4

4.9

See also: Bioaccumulation; Cycling and Cycling Indices;

Ecological Efficiency; Ecological Models, Optimization;

Ecological Network Analysis, Ascendency; Ecological

Network Analysis, Environ Analysis; Emergy and Network

Analysis; Food Chains and Food Webs; Indirect Effects in

Ecology; Life-Cycle Assessment; Trophic Structure.

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