One More Reason for a Carbon Tax

A better strategy for stopping the flow.

The shale revolution is over, says Astenbeck Capital Management LLC's Andrew J. Hall, the so-called god of crude oil trading. And the coming supply shortage will push the price of oil as high as $150 a barrel within five years. Or maybe not: The shale revolution is really just getting started, others argue, and oil prices will stay at about $100 a barrel for years or decades to come.

Both sides of this debate base their predictions on reams of data, as two articles in Bloomberg Markets explain. But the disagreement reflects great uncertainty about how much accessible shale oil and gas remains underground -- and how much that supply will influence prices in the years ahead.

This uncertainty affects more than just the fortunes of drillers and traders. It can also hinder the development of renewable power. Investors find it hard to look ahead to see whether green power sources will be squeezed out by cheap oil and gas or be in great demand because the price of oil and gas is so high.

QuickTake Carbon Markets 2.0

Price uncertainty in the energy sector isn't new. From 2008 to 2009, the average spot price for Brent crude, a benchmark for the price of oil, fell 40 percent -- and, along with it, so did U.S. investment in clean energy. What's new, as the level of carbon dioxide in the atmosphere continues to rise and the effects of this rise become more pronounced, is the urgency of switching to renewable power.

So how to encourage, in the face of uncertainty over the price of fossil fuels, the development of advanced biofuels and electric vehicles, as well as wind, solar and geothermal power? Tax incentives and government mandates can help a little. But the most efficient strategy is to put a predictable, long-term price on carbon, through a national carbon tax.

Ideally, such a tax would make sure the price for emitting a ton of carbon was equal to society's cost of dealing with that carbon. With the environmental costs of greenhouse-gas pollution thus factored into the cost of oil and gas, the market can better determine which renewable-energy projects make sense.

Hall and his opponents make good arguments about whether oil and gas prices are headed up or down. This difference of opinion matters to investors, of course, but it is only part of the larger discussion about how to best deal with climate change. A carbon tax would help to clarify both debates.

--Editors: Christopher Flavelle, Mary Duenwald.

To contact the editor on this story:
David Shipley at davidshipley@bloomberg.net