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U Chicago, MIT study suggests ongoing use of fossil fuels absent new carbon taxes

A paper by a team from the University of Chicago and MIT suggests that technology-driven cost reductions in fossil fuels will lead to the continued use of fossil fuels—oil, gas, and coal—unless governments pass new taxes on carbon emissions. Their analysis is published in the Journal of Economic Perspectives.

While renewable energy has made promising gains in just the last few years—the cost of solar dropped by about two-thirds from 2009 to 2014—new drilling and extraction techniques have made fossil fuels cheaper and markedly increased the amount of oil and gas available. In the US alone, oil reserves have expanded 59% between 2000 and 2014, and natural gas reserves have expanded 94% in the same time.

The authors of the paper are Christopher Knittel, MIT’s William Barton Rogers Professor in Energy; Michael Greenstone, the Milton Friedman Professor in Economics and the College at the University of Chicago; and Thomas Covert, an assistant professor at the Booth School of Business at the University of Chicago.

The team examined costs over a time frame of five to 10 years, stating that further forecasts would be quite speculative, although the trend of cheaper fossil fuels could continue longer.

At least two technological advances have helped lower fossil fuel prices and expanded reserves: hydraulic fracturing, or fracking, which has unlocked abundant natural gas supplies, and production from oilsands. While some energy analysts once thought the apparently limited amount of oil reserves would make the price of oil unfeasibly high at some point, that dynamic seems less likely now.

The probability of an exploratory oil well being successful was 20% in 1949 and just 16% in the late 1960s, but by 2007 that figure had risen to 69%; today it’s around 50%, according to the US Energy Information Administration.

As a result of these improved oil and gas extraction techniques, the world has consistently had about 50 years’ worth of accessible oil and natural gas reserves in the ground over the last 30 years, the authors noted.

All told, global consumption of fossil fuels rose significantly from 2005 through 2014: about 7.5% for oil, 24% for coal, and 20% for natural gas. About 65% of global greenhouse gas emissions are derived from fossil fuels, according to the US Environmental Protection Agency. Of those emissions, coal generates about 45%, oil around 35%, and natural gas about 20%.

You often hear, when fossil fuel prices are going up, that if we just leave the market alone we’ll wean ourselves off fossil fuels. But the message from the data is clear: That’s not going to happen any time soon.

If we don’t adopt new policies, we’re not going to be leaving fossil fuels in the ground. We need both a policy like a carbon tax and to put more R&D money into renewables.

—Christopher Knittel

Although renewable energy has seen an impressive decline in its prices within the last decade, looking at the “levelized” cost of energy (which accounts for its long-term production and costs), solar is still about twice as expensive as natural gas. The need to handle sharp evening increases in power consumption—what energy analysts call the “duck curve” of demand—also means power suppliers, already wary of solar power’s potential to reduce their revenues, may continue to invest in fossil fuel-based power plants.

The development of better battery technology for storing electricity, is vital for increased use of renewables in both electricity and transportation, where electric vehicles can be plugged into the grid for charging. But the example of electric vehicles also shows how far battery technology must progress to make a large environmental impact. Currently only 12% of fossil fuel-based power plants are sufficiently green that electric vehicles powered by them are responsible for fewer emissions than a Toyota Prius.

Currently battery costs for an electric vehicle are about $325 per kWh. At that cost, the authors calculated, the price of oil would need to exceed $350 per barrel to make an electric vehicle cheaper to operate. But in 2015, the average price of oil was about $49 per barrel.

New solar techniques such as thin-film layers that integrate solar arrays into windows may lead to even steeper reductions in the price of renewables, especially as they could help reduce installation costs, a significant part of the solar price tag. Still, the immediate problem of accumulating carbon emissions means some form of carbon tax is necessary, Knittel says—especially given what we now know about declining fossil fuel costs.

What are the consequences of a continued reliance on fossil fuels? We conducted some back-of-the-envelope calculations of the potential warming associated with using all available fossil fuels. This requires estimates of total reserves and resources of each fossil fuel, carbon conversion factors, estimates of historical emissions, and a model to convert carbon dioxide emissions into temperature changes. It is important to note that this exercise is based on high levels of green- house gas emissions for many decades beyond 2100. For example, our calculations are based on total carbon emissions ranging from 12,744 to 17,407 gigatons of CO2. For comparison, the business-as-usual scenario from IPCC (2013) has cumulative emissions of 6,180 gigatons of CO2 between 2012 and 2100. … Our headline finding is that the combustion of currently known fossil fuels would increase global average temperatures by 10°F to 15°F, depending on the choice of carbon conversion factors and model. … Further, these estimates do not account for advances in fossil fuel extraction techniques that could make other deposits economically accessible; for example, the use of oil shale and methane hydrate deposits would add another 1.5°F to 6.2°F of warming.

What are the prospects for avoiding this dystopian future? At a high level, there are two market failures—greenhouse gas emissions are not priced adequately, and basic or appropriable research and development is too often underfunded— and the corresponding solutions of pricing emissions and subsidizing basic research and development are easy to identify. However, the politics of implementing such policies are complex, particularly because energy consumption is projected to grow the most in low- and middle-income countries during the coming decades, and thus the majority of emissions cuts would need to take place in those countries. Without direct compensation, global emissions cuts will require the poorer countries to use and pay for more expensive energy sources. The last several decades have seen limited global progress in tackling these policy problems.

The Conference of Parties (COP21) climate conference in Paris in December 2015 has set out the broad outlines of what could constitute a dramatic change in global climate policy. Whether this high-level voluntary agreement leads to the climate policies necessary to correct the market failures related to greenhouse gases around the globe will be determined in the coming years and decades. Ultimately, their enactment would greatly reduce the probability that the world will have to contend with disruptive climate change. The alternative is to hope that the fickle finger of fate will point the way to low-carbon energy sources that rapidly become cheaper than the abundant fossil fuels on their own. But hope is too infrequently a successful strategy.

—Covert et al.


  • Covert, Thomas, Michael Greenstone, and Christopher R. Knittel. (2016) “Will We Ever Stop Using Fossil Fuels?” Journal of Economic Perspectives, 30(1): 117-38 doi: 10.1257/jep.30.1.117



People burning fossil and bio fuels (directly and indirectly) should pay for the GHG and pollution created.

Should it be a progressive carbon tax ($10/tonne to $100+/tonne) or progressive sale taxes on CPPs and NGPPs produced electricity and liquid fossil & bio fuels. Both could give the desired effects over 5 to 10 years.

Goods from countries not doing enough should be taxed to level the commercial playing field.


"Currently battery costs for an electric vehicle are about $325 per kWh. At that cost, the authors calculated, the price of oil would need to exceed $350 per barrel to make an electric vehicle cheaper to operate."

At $350 per barrel the price of gasoline would have to be at least $10 per gallon. A small car would probably burn 5500 gallons in its 200,000 mile lifetime so the lifetime cost of gasoline would be be $55,000 compared to the comparable electric car that might use 65,000 kwh or $6500 at 10 cents per kwh. Road taxes vary from jurisdiction, but here in Alberta its about 4 cents mile or $8000 over lifetime.

It seems to me the Bolt EV at 37000 and range of 200 miles would be competitive at much lower oil prices. Only big question is the life of the batteries? Bonuses might be lower maintenance costs. 30 oil changes at $50 each is $1500

Electric vehicles will also likely enjoy the deferral of the road taxes for a number of years.

Also I wouldn't worry about current electrical generating capabilities being too reliant on fossil fuels. Success of electric cars will help the expansion of renewable energy. Typical car averages only a few hours of use every day and can be charging the rest of the time. Suitable charging infrastructure can evolve.


Battery life extends more readily on smaller battery packs, PHEV 5kwh vs Tesla 85kwh. Consider capacity to power more than 10x the number PHEV households than BEV households. Rooftop solar arrays matched to smaller PHEV packs vs Tesla and justifiably high-power BEVs per household, etc.
Complementary grid match questions.

BEVs have their place. The Car2go BMW 'Smart Car' is designed for short distance and low speed, thus its smallest battery pack ALSO encourages short drives. Whereas the sport coupe Tesla is too sexy to drive
without it driving itself while the woman/man thing
can go on in the back seat on the skyline freeway.


Those who imagine as some analysts have suggested that Tesla is well below the $325 kwh indicated here should note that the Tesla Powerwall comes in at around $350 kwh, and Tesla are not known for making huge profits, or any profits at all for that matter.


A good reason for a carbon tax. Renewable fuels emit bio carbon NOT fossil carbon. Synthetic fuels with renewable hydrogen and carbon emit bio carbon, synthetic fuels made with renewable hydrogen and sequestered carbon would reuse and recycle the carbon.


Don't need carbon taxes; remove oil/gas subsides and have people pay what the fuel really cost to produce, a 37.5 billion gift to U.S. oil companies alone in subsides in 2015. That's taxpayer money that could be used for infrastructure project jobs instead of additive to oil industry profits.

We gotta get the oil politicians out of Congress, mostly Republicans BTW.


Personally, I like the idea of a carbon tax. However, my politically incorrect thought for the day is that maybe what we really need is procreation tax.

Roger Pham

The simplest and most effect course of action is for governments all over the world to start mandating a gradual increase in Renewable -Energy (RE) content of ALL forms of energy.
For example, 0.5% increase in RE content yearly initially, going to 1% annual increase in RE content after 5 years, then to 1.5% annual increase in RE content after 5 more years...and so on.

Why this is better than a carbon tax? Politician lawmakers don't operate in a vacuum. Tax is a dirty word in politics. The energy industry has massive political power to render any tax increase on their products unrealizable.

Furthermore, when the price differences between synthetic fuels, battery electricity, and fossil fuels are so vast, for example, synthetic gasoline is not cost competitive until crude oil are around $90 per barrel, while crude oil are now selling for $30 per barrel, obviously costing only a few $dollars per barrel to produce in Saudi and Iraq.
It would not be politically palatable to have a $60-per-barrel tax on $30-per-barrel crude oil to raise the price of crude oil to $90 per barrel in order for RE-synfuel, waste biomass, RE-Battery, and RE-H2 to become cost-competitive.

However, a RE mandate is a different thing. A gradual RE-content-increase mandate is not a tax, and will not have major effect on the consumers' fuel costs in the near future because it is very gradual, only 0.5% increase annually initially, going to 1% annually after 5 years...and so on.

A gradual RE mandate will set in motion the production of increasing RE electricity, battery, synfuels, etc... that will cost less and less in the future, due to economy of scale, experience, technological innovations etc.
The RE mandate will break the chicken and the egg problem of economy of scale necessary for low cost in order to be competitive, however, initial high cost due to small production volume cannot result in economy of scale to become cost-competitive to gain market share...

The Energy industry will less likely be objecting to the RE mandate, because they realize that fossil fuels will not last forever. Waiting for near exhaustion of fossil fuel before meaningful deployment of RE will be too late, and will result in major economic and political disruptions, major suffering and hardship world wide. Yet, the energy companies must be provided with a guaranteed demand for RE, right NOW, in order to start ramping up production of initially-non-cost-competitive RE forms (Battery, H2, synfuels, waste biomass etc). They cannot economically justify making RE forms right now without such a RE market guarantee, because they will lose big money on those...However, with a RE mandate, they will gladly be making RE forms and pass down the initially-increase cost of RE forms to the customers.

Even if you don't believe in man-made Global Warming, you would still want to see this very gradual Renewable Energy mandate to give us relief from pollution AND to give us Energy Security as a hedge against future economic shocks, due to geopolitical disruption in the supply of fossil-fuel energy.


We have loads of taxes on petrol and diesel in Europe (and have had for decades) and there are very few electric cars over here.
Everyone went to diesel for low fuel consumption and all was rosy until the VW affair blew up.
This was caused by an obsession of the greens on CO2 rathr than a broad spectrum approach to pollution (NOX, CO, particulates, etc.)
Thus, the city air quality was (and remains) very poor.
It will take a while to turn the diesel juggernaut around, but all you have to do is add in other pollutants to your "pollution number" and the system will sort itself out very quickly. You need to give enough notice so the car companies aren't left with millions of unsaleable diesels (by switching to gasoline or electric in time).

* and you have to have realistic testing.


A carbon tax of $100 would increase the cost of a kwh generated from coal by about 8 cents. I suspect that would pretty much kill off coal as an energy source. I n many cases natural gas would be used to substitute as it is about half as carbon intense. Producers of natural gas would probably be quite pleased with the demise of coal.

The 80 cent a gallon increase from a $100 carbon tax would probably not impact consumption much until prices went above $3.50/gallon. So if the O&G companies envision a long term oversupply of oil then they'll probably settle for a carbon tax easier than most would expect.


I think it is right to pay ALL the costs of burning fossil fuels. It is also right to offset that damage done with renewable fuels and hybrids.

Dr. Strange Love

Rescind all current taxes including personal property, reg. and tags.

Implement 1 Vehicle weight tax, say $1000/ton/year. Does not matter if the vehicle is never driven.

People who don't need to drive will not drive or own a vehicle.

Price it like it should be priced.

Stop babbling about Carbon, Solar, Nuclear, Wind, Hydro. Who Cares.

You will have more time to Pick you Guitar.

Dr. Strange Love

Maybe $1000 is too soft. $4000/ton/year is more effective.

Also. Get rid of green credits unless you can prove all your vehicle energy use is from Solar, Wind, Hydro, whatever.


When I hear the name Milton Freedman in any context I get the strong urge to reach for my side arm.


$20 per ton of CO2 might be a start, the average gasoline user might pay 10 cents per gallon more. We could use the money to actually fix and build road instead of playing games with the highway bill.


For decades, the Oil and Coal industries have received many thousand $B, in direct and indirect subsidies, from various government levels. Those people have go be held responsible for increased GHG and pollution together with al the harmful effects on our health and curative cost.

The tobacco industry is currently paying XXX$B in partial damages in many countries and so should the Oil, Coal, ICEVs and Electricity industries, but at much higher rates. A few trillion dollars should be claimed.

As the culprits will be very reluctant to pay for damages created, a progressive (GHG, pollution, Health Care, Carbon) fees or taxes will have to be used.

The new revenues could be used to finance the cost of transition to REs, BEVs and FCEVs including the cost of refill stations and the relevant health care cost.


Progressive REs usage standards would work with enough honest inspectors to impose them and special courts to fine the culprits. Look how easily VW (and many others) got around the pollution standards for their diesel and gasoline units. The same can be said about USA's CAFE.

Progressive GHG/pollution/carbon sale taxes may be less politically correct but are much easier to apply and collect.

If and where in doubt, both systems could be applied.

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