There Already Is A Price On Carbon

Six leading European companies in the oil and gas business have sent an open letter where they call for a world wide “price on carbon”.

They are of course talking about something like the European Emission Trade System (ETS).

But actually there already is a price on burning carbon. Oil, gas, and coal all cost money to buy.

And it is an interesting question how much exactly the existing European system adds to that price.

To find out, we need to look at the present price of one ton of CO2 emission. EEX says it is at 7.23 Euro right now.

Next we need to find out how much CO2 is emitted by burning one barrel of oil. The American EPA says that’s 0.48 tons per barrel.

So at present prices, we get an extra price of 0.43 x 7.23 Euro, which is about 3.11 Euro, or $3.39 at a rate of $1.09 for one Euro right now.

Brent Crude Oil is quoted at $64.88 right now. $3.39 works out to around 5.2% of that.

That’s not exactly a rounding error. But it is also rather far from what would be required to significantly speed up the transition to electric vehicles.

Now comes the fun part. We do the same for coal.

Again, we need to find out how much CO2 emissions come from the heating energy equivalent of one barrel of oil.

We can use the same American EPA page for that we already used for finding out the amount of CO2 emitted from one barrel of oil.

It gives the energy value of one barrel of oil as 5.8 mmbtu. It also says that one metric ton of coal delivers 21,48 mmbtu.

If follows that you need 5.8/21.48 or 0.27 tons of coal to get 5.8 mmbtu from coal.

What are the CO2 emissions from that?

Again, the page at the American EPA (link omitted this time) gives around 2.05 tons of CO2 emissions per ton of coal. So the equivalent of one barrel of oil comes at a CO2 cost of 0.27 x 2.05 or around 0.55 tons.

Coal is quoted at $45.6 per ton right now.

So our 0.27 tons would cost 0.27 x 45.6, which is around $12.31.

And the price of 0.55 tons of CO2 emitted from that is 0.55 x 7.23 Euro, which is around 3.98 Euro, or about $4.33.

That is around 35% of the coal price of $12.31.

So, to sum up, with oil we get a price hike of about 5%, but with coal of about 35%. In other words, if the oil and gas companies find support for their call for a “carbon price”, their competitive position in relation to coal improves strongly. That’s even more so when compared to gas, which most of these companies sell as well. Natural gas comes with the least CO2 cost of all fossil fuels, at only 117 pounds of CO2 per million of btu. The various kinds of coal clock in at about double of that.

So, to sum up, it makes a lot of sense for a oil and gas company to call for a price on carbon, even if they are not motivated by concerns for global warming.

Of course, it would make even more sense for them to call for a cap on oil imports to the EU. That would raise the other 95% of the price on carbon. Those which go into their pocket and directly raise their profits.

Published by kflenz

Professor at Aoyama Gakuin University, Tokyo. Author of Lenz Blog (since 2003, lenzblog.com).

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: