Many governments worldwide have turned to a carbon tax in an effort to reduce emissions, with the US looking like the latest country to adopt one. This has led consumers and companies to wonder: will the carbon tax increase fuel prices?
It’s becoming increasingly difficult to ignore the reality of climate change, and people in all industries see the need for change before it’s too late. While most people can now agree that the problem exists, finding the solution is no easy task.
The short answer is yes; a carbon tax will increase fuel prices. But the impact of a potential carbon tax will look different depending on many factors.
For example, wholesalers often face unique challenges when it comes to purchasing fuel – many of which are minimized with the help of one of the fuel buyer solutions DTN offers.
Let’s take a closer look at a carbon tax: how it works, its effect, and how your business can continue to be profitable despite one.
How does the carbon tax work?
In 2016, the Paris Agreement came into force; a legally binding international treaty designed to tackle climate change on a global scale. Countries have turned to a number of tactics to achieve emissions reduction targets, one notably being a carbon tax.
A carbon tax is a fee for each metric ton of CO2 and other greenhouse gases released. While there is not currently a carbon tax in effect in the US, Canada and many European countries already have one. For example, in Canada, the carbon tax increased to CAN$50 per metric ton in 2022.
Here is a sample of the effects a carbon tax of US$20 per metric ton would have on different types of fuel:
- Gasoline: $0.18/gallon
- Natural gas: $1.06/cubic foot
- Propane: $0.12/gallon
- Home heating and diesel fuel: $0.20/gallon
It’s no surprise that the biggest offenders in greenhouse gas emissions aren’t everyday consumers driving to work and school. Industries produce the vast majority of emissions.
An effective carbon tax should hit these offenders where it hurts the most: the pocketbook. The intent is to encourage the implementation of more environmentally sustainable business practices.
The impact of a federal carbon tax on consumers
A rise in fuel prices is felt at more places than just the pump for everyday consumers. Not only does the cost of gas increase, but many other household items get more expensive, too. For example, electricity and other utility prices are likely to rise, as fossil fuel consumption is the most common source of power generation.
With an increase in fuel price, goods and services that rely on transportation will also increase in price as it becomes more expensive to convey them by air or road. The biggest question surrounding a carbon tax is – where does that money go?
To be effective, the tax needs to provide a monetary incentive for corporations to reduce emissions and then put the money back into the economy in a sustainable way. Another concern is that a carbon tax could push lower- and middle-income families further away from prosperity.
To fix this issue, many proponents of a carbon tax also promote the implementation of tax cuts or rebates for individual consumers to offset increased gas prices. For example, in Canada, where the carbon tax is already in effect, an average family of four in Ontario is expected to pay approximately CAN$550 per year in carbon tax but receive a rebate of nearly CAN$700.
Federal carbon tax and its impact on businesses
For businesses, the outlook is a bit different. As the most significant contributor to CO2 emissions, petroleum industries heavily reliant on fossil fuels should bear the brunt of the carbon tax.
True, some of the carbon tax cost is expected to make its way down the line to individual consumers. However, simply passing the cost along is not the goal. Instead, businesses must look for ways to remain profitable while implementing sustainable business practices.
Sectors that are expected to be most impacted by a carbon tax include:
- Power. The addition of a carbon tax would make cleaner energy sources more competitive when compared with burning fossil fuels, a method that generates a large amount of greenhouse gas emissions. Because of this, the power sector is expected to be very responsive to a carbon tax, leading to a reduction in coal-fired generation and an increase in natural gas or renewable sources.
- Transportation. The transportation sector releases high levels of CO2. Everyday drivers are not likely to make huge changes in their fuel use, despite rising prices. After all, people must still commute the same distance to work, school, and other daily activities. But shipping fleets, planes, and other industries will feel the effect of rising fuel prices and see the incentive to increase efficiencies and move towards sustainable methods to protect their bottom line.
- Industry. The largest industries contributing to greenhouse gas emissions include iron and steel, chemicals, plastics, and aluminum. Like businesses involved in transportation, these industries are more likely to respond to a carbon tax by implementing more sustainable methods of production. This might be seen by substituting high-carbon-emission fuels for low-emission alternatives.
Fuel purchasers must adapt and improve their fuel-buying strategy
For companies in the oil and gas industry—or those heavily reliant on it—changes are needed sooner than later. Adapting to current and future climate sustainability needs will be the difference between businesses that get left behind and those that not only survive but thrive in the years to come.
For those tasked with purchasing wholesale fuel, using the right tools available to you is more important now than ever.
Our industry-leading fuel-buying solutions can help your company automate and streamline your purchasing processes to boost productivity while continuing to grow your profits. Despite a competitive and highly volatile market, you can gain the edge you need with DTN.
The increasingly complex energy market has made it more difficult than ever to make successful fuel-buying decisions. Prices often change multiple times each day due to the varying supply of fuel products and/or changes to supplier policies. To help with this challenging and unpredictable market, DTN has many solutions available for wholesale fuel purchasers.
Contact our team today to learn more about the multiple solutions available for you and your business.