What would the consequences of an economy-wide 500EUR/tonne carbon tax be? I recently calculated that Finnish car owners effectively pay 500 EUR per every tonne of carbon dioxide emitted from the tailpipe of a car. This payment is caused by three taxes that are in practice proportional to the emissions of a car:


Tax when buying a vehicle (it's practically proportional to the stated emissions)
Yearly tax when owning a vehicle (it's also practically proportional to the stated emissions)
Tax when refueling a vehicle (it's directly proportional to the real emissions)


A comment stated that it would be interesting to speculate what the consequences of economy-wide 500 EUR / tonne carbon tax would be. (Sorry @gerrit, I stole your question.)

So, what would the effects of such a tax be?

My understanding is that it would cause a massive transition to either nuclear or renewables. Power would be created by either nuclear power, or wind power and solar power, complementing each other. The very-short-term variability of wind power (wind can suddenly stop) would be balanced by massive lithium-ion batteries. The long-term variability of wind power and the variability of solar power would most likely be balanced by power-to-gas technology, where the gas can either be synthetic methane or synthetic hydrogen. If hydrogen, it would be stored to underground reservoirs. If methane, the carbon dioxide required to create it and emitted by burning it would not be a waste but rather something to be recycled, also stored to underground reservoirs separately from the methane.

The price of electricity would become extremely variable: sometimes, it's free (when there's lots of wind and/or sunshine), at other times it's so expensive that it makes sense to construct grid energy storage based on power-to-gas.

Fossil natural gas would no longer be treated as a clean fuel. Instead, synthetic methane created from water electrolysis and Sabatier reaction would be used.

Steel production would shift to using hydrogen (created by electrolysis of water) instead of using carbon. In areas that require heating, heat would be created from seawater or ground source, using massive heat pumps.

New cars would most likely be either based on electricity (passenger cars) and hydrogen (long-haul vehicles). The electric cars could be used to balance the short-term variability of wind power, using vehicle-to-grid (so the separate grid-connected batteries might not be needed). Old cars could be still used, as evidenced by the massive Finnish car fleet running mostly on gasoline and diesel, even though there is an effective 500 EUR per tonne carbon tax.

Aviation would use biofuels, the production of which would not be enough to displace all current oil uses, but would be enough to displace all current aviation oil use.

Forest owners would let the forest grow to a very high density, and when forest is chopped eventually after ending its growth, there would be lots of sawlogs that can be used to construct buildings in a manner that retains the carbon. The forest-based carbon sequestration could offset the emissions of cement production, which would still be necessary for a functioning world economy.

Thus, I believe it would not be a major disaster to world economy. In fact, it might be a good thing: it would cause a rapid mitigation of dangerous climate change.

It could be a disaster, however, to nations where the entire economy is built on export of fossil fuels.

Is my understanding correct? Or, would some of the technologies I listed be so expensive that it could still be a worldwide disaster?
My sense is that €500 / t CO2 is on the low side. It would change behaviour but it would not substantially alter the economy.

Here are some sample calculations how the tax would affect prices in the transport, food and electricity. This is of course before producers and consumers have adapted their behaviour.

Plane trip London-Paris return 0.244 t CO2 = tax €122 (244% of ~€50 lowest available fare)
Eurostar London-Paris return 0.022 t CO2 = tax €11 (18% of €66 lowest available price)
(Source1, Source2)

Carbon intensity of food consumption in Germany (Source)
1.9763 t x 1.2 (20% carbon intensity of last mile as per report) = 2.372 t
2.372 t / year x €500 = tax €1,186 / year
The proposed tax would add 27% to the average consumer spending on food in Germany of €4.320 / year (Source)

Carbon intensity of electricity generation in EU: 300 g CO2eq / kWh = 0.0003 t / kWh (Source)
Tax / kWh @ €500 t CO2: 0.0003 x €500 = €0.15 / kWh

Average price of domestic electricity in EU: €0.22, of which €0.09 taxes (Source)
The €500 / t CO2 tax would increase the electricity price in Finland (€0.17 incl taxes) to about the level in Denmark (€0.30 incl taxes): €0.17+ €0.15 = €0.32.

In sum, while the tax would likely change behaviour the proposed level appears to be in the range of other existing taxes for many products (VAT in EU is 17-27%). Arguably credits would have to be given to some households for them to be able to effort this new tax on basic necessities (these are typically VAT exempt today). That said, certain carbon-intense sectors that are not currently taxed at all would experience an important impact. Aviation is an obvious one. It would be important to identify them and their potential substitutes to determine the qualitative impact that the proposed tax would have.