1. Coal and Taxes
The supply curve for coal in the U.S. is essentially horizontal (perfectly elastic), while the demand curve has the usual shape. In 2015, the U.S. used 890 million tons of coal at an average price of $45 per ton.
(a). Graph this situation, labeling the curves and axes carefully.
(b). Although there is little consensus on the issue, the average social cost per ton of carbon emitted into the atmosphere is, according to academic researchers, about $40. A molecule of CO2 contains one atom of carbon (atomic number 6) and two of oxygen (atomic number 8). When a ton of coal is burned, it emits about two tons of CO2. Calculate how high the tax would need to be, per ton of coal, if there were a carbon tax that charged coal users for the social cost of carbon emissions. Show the result on your diagram. Hint: Calculate how much carbon is released when a ton of coal is burned, and multiply this by $40.
(c). Someone now suggests that the quantity of coal should be limited to no more than 800 million tons per year. Create a new diagram, starting with the situation in a., that shows the effect of this on the price of coal.
(d). A friend points out that most of the coal burned in the U.S. is used to generate electricity (747 million short tons in 2015), and suggests that instead of taxing coal it would be just as good to tax electricity
(assuming that the goal is to reduce carbon emissions). Do you agree? Explain.
2. Energy Prices
Graph the price of either crude oil, or gasoline, for every year since 1980. Indicate clearly the units used, and the type of product (e.g. WTI, Brent, MA retail). Why do you think the price of oil (or gasoline) has fallen over the past two years?
1. Coal and Taxes