A Real Energy Policy

Meanwhile, back in the reality-based community, Rob Stavins outlines what a real energy policy might be:

Environmental Economics: Rob Stavins on the gas tax: A gas tax increase — coupled with an offsetting reduction in other taxes, such as the Social Security tax on wages — could make most American households better off, while reducing oil imports (read dependence on Middle Eastern regimes), local pollution, urban congestion, road accidents, and global climate change. This revenue-neutral tax reform would exemplify the market-based approaches to environmental protection and resource management I examined in previous columns.

Such a change need not constitute a new tax, but a reform of existing ones. It is well known — both from economic theory and numerous empirical studies — that taxes tend to reduce the extent to which people undertake the taxed activity. In the United States, most tax revenues are raised by levies on labor and investment; the resulting reduction in these fundamentally desirable activities is viewed as an unfortunate but unavoidable side-effect of the need to raise revenue for government operations. Would it not make more sense to raise the revenue we need by taxing undesirable activities, instead of desirable ones?

Combustion of gasoline in motor vehicles produces local air pollution as well as carbon dioxide that contributes to global climate change, increases imports of oil, and exacerbates urban highway congestion. Can anyone really claim that — given a choice between discouraging work and discouraging gasoline consumption — it is better to discourage work?

According to the U.S. Department of Energy, a 50-cent gas tax increase could eventually reduce gasoline consumption by 10 to 15 percent, reduce oil imports by perhaps 500,000 barrels per day, and generate about $40 billion per year in revenue. Furthermore, this approach would be far more effective than ongoing proposals to increase the Corporate Average Fuel Economy standards, which affect only new cars (not trucks or other vehicles) and lead to serious safety problems by encouraging automakers to produce lighter vehicles. Remember that a major effect of CAFE standards has been to accelerate the shift from cars to SUVs and light trucks (so that overall fuel efficiency of new vehicles sold is no better than it was a decade ago, despite the great strides that have taken place in fuel efficiency technologies). As my Harvard colleague Martin Feldstein pointed out in The Wall Street Journal in 2001, the conventional approach “does nothing to encourage individuals to drive less, to use their cars more efficiently, or to shift sooner to new and more fuel efficient [and cleaner] vehicles.” A more enlightened approach — a marketbased approach — would reward consumers who economize on gasoline use. And that is what a revenue-neutral gas tax is all about.

The revenue from the gas tax could be transferred to the Social Security Trust Fund and credited to current workers. If $40 billion per year from new gas tax revenues were transferred to Social Security, the payroll tax — the employee contribution to Social Security — could be cut by perhaps a third: a worker with annual wages of $30,000 would take home an additional $750 per year! The extra income would more than offset the cost of the gas tax, unless the worker drove over 35,000 miles per year in a car getting 25 miles or less per gallon. Rebating the gas tax in this way addresses the greatest concern about higher gas taxes — that they can hit hardest those workers who drive to their jobs. Further, a tax of this magnitude could be phased in gradually, perhaps no more than 10 cents per year over 5 years, allowing individuals and firms to adjust their consuming and producing behavior.

Proposals for gasoline tax increases in the last Congress would have dedicated the revenue to public spending (for transportation and other programs). A key difference is that the proposal I have outlined here is for a revenue-neutral change in which the gas tax revenue would be returned to Americans through reduced payroll taxes. To adopt some of the language I developed in my previous columns, such a change can be both efficient and equitable, and — for those reasons — perhaps even politically feasible...

Comments

[jong]

If there was a 10 cent increase every year through a gas tax, why wouldn't people continue to consume the same quantity of gas? After all, even when Gas prices temporarily went up in early September, how many people shifted to mass transportation? Instead they lined up at gas stations fearing more increases in prices. That may be an entirely incorrect example, but in the last 5 years, if we looked at gas prices (US city average) they were approximately $1.50 in 2000 and about $1.80 in January 2005. That is a phased 30 cent increase in 5 years, Has the demand for gasoline dropped? I suspect not. The gas tax may be a nice recommendation to improve the government's tax revenue, I do not see this reducing demand for gasoline and all of the other things mentioned.

[norton]

Cranking up the gas tax - in America? Better luck running Bin Ladin for office. Someone recently proposed dropping the federal gas tax for a month just to help folks out. Wasn't it John Anderson who got run out of the Republican primaries in 1980 for proposing a 50-cent-a-gallon increase in the gas tax. Maybe it'd work in Berkeley, not in the rest of the USA. Let's be reality-based!

[Michael Cain]

Just out of curiosity... as there appears to be no "means test" in this, so the payroll tax reduction is applied uniformly to all workers, including those who don't buy gasoline. Is it appropriate to split the payroll tax reduction between the employee and the employer? Many employers as well as employees will be hit with the higher gas tax. Or do we assume that they can easily pass that tax along to their customers?

[Hal Varian]

http://www.sims.berkeley.edu/%7Ehal/people/hal/NYTimes/2000-10-19.html

[CapitalistImperialistPig]

Good idea - hard to sell. We might have to wait for the catastrophe, when it will be too late.

[Movie Guy]

And this benefits retirees in what manner?

[Redshift]

It seems to me that the big problem with this proposal (aside from the political feasibility) is that those with the lowest income, who are least able to absorb an increase in gas prices, also get the least benefit from a payroll tax decrease. It may be revenue-neutral overall, but it's yet another transfer of tax burden from the middle class (not the wealthy, due to the cap on SS earnings) to the poor.

[piotr]

I am all for it. My formula would be: 5c for each lb of fossil carbon, doubled fossil hydrocarbons to account for scarcity.

Selling argument: no more regressive than a national sales tax, and unlike the national sales tax it adresses some actual problems. Of course, offsetting tax cut would bbe needed in a manner to remove most of regressive effect.

About the taxation to spur beneficial activities and hinder the harmful ones: numerous studies showed that poverty is bad for health, and being rich is good. It stands to reason that the unhealthy behavior of being poor should be taxed more than the healthy habit of being rich.

[Julian Elson]

Conservatives have a gambit where they assert that the previous environmental problems solved (usually with government help) shows that we don't need to worry about the environment, because problems go away with economic progress, while the next environmental problem (currently mostly global warming, though one might also add eutrophication of the Gulf of Mexico or depletion of the Oglala aquifer, for instance) cannot be addressed because it will send us back to the dark ages and leave us all starving and unemployed.

It's a neat trick. If someone tries to get the government to abate an environmental problem, you say that it will cause mass unemployment and misery. If you lose that debate, and the government actually DOES create a successful abatement policy, then you say that the reduction in the problem that follows conclusively demonstrates that the environment is getting better thanks to free markets in action and we needn't worry about it.

Hal Varian's article brings up a good point. The economic rents from oil are going to be collected by someone. Who? Uncle Sam or Hugo Chavez and King Abdullah?

[Julian Elson]

A question: it seems clear to me that we ought to tax petrofuels at a higher rate than fuels produced by, say, thermal depolymerization of pig manure or switchgrass-based biodiesel. My question is, should we put a special tax on foreign fuel? I.e., should be tax Nigerian oil at a higher rate than we tax Texan oil or Fischer-Tropsched Montana coal, merely for the sake of energy security/independence, even if there are no environmental benefits?

I don't like the idea. I'm a free trader, and the justification for "energy independence" seems no stronger to me than the arguments for "food supply independence" rolled out by ADM or "automobile independence" told be Ford.

Perhaps, though, we should, for nationalistic reasons, mandate that certain "strategic commodities" be at least partially domestic? Like steel, energy, etc, and use a combination of tariffs and subsidies to keep such commodities at least, say, 50% net domestic?

This argument doesn't smell good to me. In fact, it smells positively awful. It seems like a lot of people are calling for "energy independence," though, even those usually supportive of free trade. Does someone want to clarify the argument for me?

[A. Zarkov]

Surely the “reality based community” can understand that if we consume less oil then we have to consume more of something else, have more fuel efficient vehicles, or drive less. Hybrids are a good idea when the price of gas exceeds about $5.00 per gallon, but hybrids get their extra gas mileage from being smaller and lighter, and using regenerative braking. All the proceeding represents a decrease in standard of living except for regenerative braking. But if you don’t do a lot of stop-and-go type driving, then you’re going end up with a net loss in that you have a less desirable vehicle in terms of comfort and cargo. What the “reality based community” needs to do (among other things) is stop suing the Nuclear Regulatory Commission and the nuclear power industry, so we can get a real long-term solution to our energy needs. These lawsuits do hurt. My daughter worked in the legal department of the NRC this summer helping them deal with these frivolous suits. Even the liberal members of the staff (almost everyone!) realize these people are harmful. Moreover, if you are afraid of the combustion of fossil fuels then you should support nuclear energy all the more.

[wcw]

Barry, my man, you were asleep during the lecture on externalities in Econ 101, weren't you?

It's okay. I slept through vector spaces in sophomore math at Berkeley. It was an 8AM class and the professor was visiting from Argentina.

Who could blame us?

[trevelyan]

i.e., should be tax Nigerian oil at a higher rate than we tax Texan oil or Fischer-Tropsched Montana coal, merely for the sake of energy security/independence, even if there are no environmental benefits?

Julian,

If energy security/independence are really pressing issues, the last thing one would want is to create incentives for draining domestic reserves. The goal would be to exhaust foreign suppliers before tapping domestic reserves.

That this possibility never surfaced in either 2000 or 2004 during discussions on the reserves in Alaska seems to suggest well enough that energy policy is not being framed with national security in mind. That is probably a good thing.

[John Owens]

Zarkov: Since when does smaller/lighter necessarily signify a lower standard of living? The only realms in which it seems relevant to me, would be if one actually uses a large proportion of that capacity on at least a semi-regular basis, or in terms of safety, in which case it's offset by the extra risk presented to other drivers who don't drive the huge monstrosities. And then, of course, there's the "compensating for something" standard of living, I suppose....
On the other hand, I think the nuclear issue may be my first time yet agreeing with you. I'm not sure whether to be reassured or terrified. ;)

[meno]

Amazing! Americans seriously discussing this!

Here in New Zealand our Green Party (who took 5% of the vote in our national election just last week and look to be coalition partners in our new govt) are pushing to lower the income tax rate to 0% for the first $5000 earned by every tax-payer. But they would make that revenue-neutral by introducing taxes on pollution and resource use - with a carbon tax on coal and oil high on the list. Of course with only 5% of the seats in parliament they won't get all that... but they'll push things in that general direction.

[realist]

tax vehicles according to their gas milage. if people had to pay $3,000 per year in taxes to drive a ford expedition but paid no taxes to drive a toyota prius, they might make better choices. we'd also be using a lot less steel and doing less damage to our roads.

[mimsong]

The best way to increase the gas tax is by ratcheting. That is, when the price of gas goes up and then goes down a bit, you reduce the price dropoff by adding a few pennies to the tax.

Let's say gas moves from 3.00 to 3.25, and would then settle back to 3.00. Instead, we add 2 cents to the tax and it settles to 3.02.

It's less painless because it occurs on the price drop side, and occurs because of a pre-decided formula, not immediate legislative action.

Enough fluctuations and we have added significant tax.

[A. Zarkov]

John Owens:

A smaller/lighter car has less headroom, legroom and (especially in hybrids) less trunk space. I have driven Honda Accords since 1982, and I have a much more comfortable car than any of the Toyota or Honda hybrids I’ve ridden in. My friend’s daughter sold her SAAB 99 (not a big car) for a hybrid about a year ago. I found it amusing that after getting her new car, she asked to borrow dad’s *compact* car for a trip because she needed the room. When I ride in another friend’s Toyota SUV, I am more comfortable with room to stretch out. As a big guy my friend really needs a larger car than a hybrid. His head hits the ceiling on most cars and his wide girth requires a big seat. I agree that most of the time the average person can get along fine with an Accord-sized car. On those occasions where I really need to haul stuff I rent a truck. But Civic-sized cars with cramped trunks really are a step down in the standard of living. A reduction in mass does mean increased risk of injury, although advanced designs might over come this problem.

“I'm not sure whether to be reassured or terrified.”

You should be terrified.

[realist]

the europeans seem to be able to get by without suv's. the u.s. has, maybe, 6% of the world's population and uses about 25% of the world's oil. this is unsustainable. our government subsidises the auto makers and the oil companies by giving massive tax write-offs to people who buy vechicles with gross weights over 6,000 lbs. this behavior is unsustainable. can't we agree that it's o.k. to sacrifice a little head and leg room for a more sustainable energy policy?

[bakho]

There are some interesting assumptions built into the idea that a gas tax will decrease fuel consumption. Using price to drive conservation works to a point. People will reduce their driving, but because of the lack of infrastructure, a certain amount of driving in American is unavoidable.

Who says that people figure the cost of gasoline when making their transportation calculations? If a 40 mpg car costs $25,000, but someone could buy a used 20 mpg car for $10,000, how high would gasoline have to be to make up the difference? On the back of the envelope, at 100,000 miles 20 mpg would be 5000 gallons. A 40 mpg car would save half that or 2500 gallons. Since the high mileage car costs $15,000 more, gas would have to be more than $6/gallon ($15000/2500) for the high mileage vehicle to make sense. I question whether a 50 cent tax would do the job.

There are other considerations for people to drive. Many commute to cities because the suburbs have better public schools. Private school tuition can run over $10,000 per year. So factor in $10,000 PER CHILD savings to the additional miles driven. In addition, urban properties are often more expensive. Tack on additional savings to the transportation costs.

A drop in demand would lead to a drop in price and less incentive to drive less or buy a more efficient car. Effectively, a gas tax would reduce driving by the less well off and be meaningless to the wealthy. 20,000 miles in a 20 mpg car is 1000 gallons of fuel. Even at $10/gallon, it would amount to only 1/5 the cost of a luxury car.

American car mfg make money on large gas guzzlers. They cannot compete on the more fuel efficient cars. So American MFG are always sinking to the lowest denominator. The ONLY way to encourage American MFG to produce high mileage cars is with CAFE standards.

Modern business practices are built on the advantages of "just in time inventories" and adjusting capacity to demand. A BIG problem for the US is lack of refining capacity. Since the CAFE standards were enacted in the late 1970s, the US has dropped from over 300 refineries in 1980 to only 149 today. In this gas tax scheme, where is the money to pay for excess refining capacity?

IMHO, a gas tax could increase public support for a new round of CAFE standards, but a gas tax is a poor way of getting to higher mileage vehicles. If you go to the White House web site on energy policy you will find:

"Increasing The Efficiency Of Appliances And Commercial Products. The energy bill sets new minimum energy efficiency standards for a range of consumer and commercial products, including heaters, refrigerators, and lighting units. "

http://www.whitehouse.gov/infocus/energy/

This is our policy for appliances, because without it, the manufacturers sink to the lowest common denominator. If this is the way we treat other appliances, why not cars? Isn't a car just another appliance?

[blackfish]

Umm. I thought this administration was all excited about firing up some effort for moving toward a CONSUMPTION-based tax platform. Why not call them on it and start with taxing gasoline consumption?

[pfc]

Why don't we tax gas like we tax other commodities? Why is the gas tax a fixed amount per gallon and not a percentage of the price of the gallon?

[trr]

Can anyone really claim that — given a choice between discouraging work and discouraging gasoline consumption — it is better to discourage work?

No, but this is a false dilemma.

[Dano]

It's true that our household trips have increased lately, but much of our driving is inelastic - we drive 'til we qualify. And low-density 'burbs often lack reliable transit.

So what to do? Our infrastructure was created to serve the automobile...

D

[Matt Austern]

If gas consumption really is inelastic, then that's a strong argument that raising CAFE standards is better policy than raising gas taxes. Probably it's easier politically, too.

[W. Raymond Mills]

Higher gasoline taxes in any form is a good idea.

Yes, the public hates the idea. Does the public like continuing to be dependent upon Mr. Chavez or the Saudia Royal family? I see the trade - off between taxes and freedom and I choose taxes.

Please stop hiding behind that concern for the poor people who can't afford higher gasoline taxes. We all have choices. The extremely poor cannot afford automobiles. Those next up the ladder will have to make do somehow, just like they always do. Poor people get punished because they are poor. In a society based on purchasing power, the poor are victims most of the time. Being deprived of cheap gasoline is no worse than being deprived of medical care, good schools, good housing or anything else we value. If we are so concerned for the poor, why don't we adopt the medical care system like Canada or most of Europe?

Concern for the poor is a hide-behind to maintain cheap gas for folks that can afford to pay more taxes

[Oskar Shapley]

My educated guess is that such a tax would increase unemployment.

Many people are long range commuters and cars give them the ability to accept a job far away from home. Instead of having to rely on bus fares to a local clerk job, it increases their 'job search area' to ca. pi*40^2 squaremiles.

[Pancho Villa]

http://www.pkarchive.org/column/91700.html
http://www.pkarchive.org/column/041803.html
http://www.pkarchive.org/column/112900.html

[a different chris]

A. Zarkov: the point was that excess room is not a "higher standard of living". You proved by your discomfort that an Accord was a "higher standard" than a Civic hybrid, but that says nothing about the value of the extra room of, say, an Explorer to you. America buy 50% trucks, not Honda Accords.

But I commend you for your realization that it's a zillion times more sensible to rent a truck when you need one for people (most of Suburbia) who don't need trucks very often.

Realist, the problem with your taxing is people like me, whose best option is a decent used truck (too necessary to rent) *and* a car. Car for commuting, truck for moving the horsies about. How are you going to tax me? On the truck would be way unfair to me, on the car way unfair to everybody else.

>My educated guess is that such a tax would increase unemployment.

Yeah, and that an $3 will buy a latte. It may just shift employment elsewhere - if you choke off an economy it will, yes, choke. But if you restrain it in one direction is it not likely to, like a trained vine, grow with good vigor elsewhere? A lot of working class people are employed in public transport and other activities that a strong urban economy provides.

[A. Zarkov]

A different cris:

I thought I made it clear that for most people an Accord-sized car is perfectly adequate. But some people do need the extra room and cargo space of an SUV. My large-sized friend would simply not fit into a Civic-sized car. He barely fits into my Accord. For him a small hybrid would be a decrease in his standard of living. A large hybrid might do for him, but that would be less fuel-efficient. But in the main, I completely agree that a lot of people out there are driving inefficient super-sized vehicles simply for the “feel” of a truck ride. If they want that, they should pay for it, including the externals. I have seen people actually commute to my place of work in campers! You get that when fuel is ridiculously cheap. But let’s face it, we are the land of super-sized everything and that includes super-sized diets that lead to obesity and the degenerative health problems that “the reality based community” wants me to pay for. I want a tax on the sodium content of food so Americans will get less excess sodium in their diets. Our bodies evolved in a sodium scarce world (the world before salt mines) and we don’t purge sodium well.

[Nate Edel ("Cubicle Hermit")]

Strikes me as a good idea... as far as it goes, and as long as the tax was phased in slowly.

Eliminating the loophole of a separate CAFE standard for light trucks, or in other ways discouraging people from buying non-fuel efficient vehicles, strikes me as a good thing. I do not at all buy the argument that lighter, more fuel-efficient vehicles represent a standard-of-living loss: we can build a ~3200lb minivan with vastly more storage space than a ~4000 SUV, and we've already done the same thing with passenger cars (compare today's modern unibody sedans to the body-on-frame monstrosities of the 1970s and earlier).

[kharris]

Realist,

One principle of using tax policy to control externalities is to impose the tax as close to the source of the externality as possible. Taxing the purchase of vehicles according to size is appropriate if what you are worried about is how much space they take up. Taxing them according to posted average gasoline mileage is better, but tells us nothing about usage. A Mustang driven at 85 mph 3 hours a day 7 days a week will use more gasoline than a Suburban driven to the mall twice a week at 40 mph. Taxing energy consumption directly is the closest you can come to imposing the tax on the externality, be it environmental or geopolitical. Energy tax is the way to go in this case.

A Zarkov,

Large sized friends are still imposing environmental, health and geopolitical externalities on the rest of us when they drive low mpg vehicles, same as little people would. The point is to internalize the cost of externalities, not to punish big people. Big people also need more food, but we don't subsidize their grocery shopping. When we don't impose the cost of externalities on those who generate them, we are subsidizing their behavior.

Oh, and most of us purge sodium just fine. It is, as far as I know, only a small portion of hypertensives who suffer from sodium. But I take your point. People who eat too many calories impose a burden on the rest of us, and we ought to arrange incentives to discourage that.

Arguments here that taxes won't change outcomes are massively counterintuitive. What we know is that energy use patterns change slowly. Buying a new car that gets better mileage is not a realistic proposition for most of us, until it is pretty nearly time to buy a new car without regard to gasoline prices. Then, however, if we have suffered with high gasoline prices for long, we are likely to opt for the better mileage vehicle. Till then, behavior changes are the bigger impact. Really long term – arrange your life to be closer to school, work, family, recreation.

[bakho]

Higher gas prices already result in higher taxes or fewer services. Most school systems have huge transportation costs made worse by high gas prices. The same is true for police, fire, garbage collection, the Post Office and the like. Everything we buy that is transported will have a higher cost that reflects the higher fuel prices. None of these problems are adequately addressed by a tax on gasoline. Personally, I favor a combination of higher gas taxes and new CAFE standards as the best way to address our energy problems. But I don't make policy.

[Tim Worstall]

I’ve been arguing for this rise in gas taxes for years. Ditch CAFE and the absurd patchwork of gas blends and simply make it more expensive. That’ll reduce pollution as people use less.

Things like police and school transportation are easliy addressed. Rebates for those users. Farmers? Why not thte UK system of a special blend of diesel at reduced tax (yes, there is smuggling but it’s not all that bad).

But why stop at 50 cents? Gas has risen a dollar at least in the US in recent months. Civilisation hasn’t collapsed.

But why to Social Security? I thought one of the major points about this program was that it was divorced from the general tax revenue? You know, it’s not a "tax" it’s an insurance payment? An inter generational compact didn’t someone call it?

Why not a rise in hte personal allowance?

(I’m an opponent of the hypothecation of taxes anyway but that’s another matter).

[Barry P.]

Brad:

Why was my previous post in this thread deleted?

[bakho]

Ditching CAFE would be a bad idea. CAFE is the only thing keeping mileage in the US as high as it is. Compare mileage in the US (around 25) to Europe (over 40). The problem with CAFE is the SUV loophole. Why one or the other? Why not both a gas tax and CAFE?