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Is 2015 the year for a carbon tax?

David Zilberman, professor, agriculture and resource economics | January 5, 2015

Last year, during the holiday season the price of gasoline was at $3.57/gallon, which restricted the financial choices of everyday Americans. Actually from 2005 we consumers gradually adjusted to higher prices of oil. The adjustment wasn’t easy. Many lower-income individuals who purchased new homes far from work realized that they could not pay their mortgages, and their fuel costs and high-energy prices contributed to the financial crisis. But the high-energy prices led to huge investments in new sources of fossil fuels as well as helped to establish the renewable fuel industry. This and new CAFÉ standards, as well as a stagnating economy, reduced demand for fuels and now I found myself paying $2.60/gallon as I drove to pick up my kids from the airport last week.

Some people see this ‘miraculous’ decline in the price of oil as a gift. I feel that the concerns about climate change in the general public might have subsided and the recent statement that climate change is going through a hiatus has also reduced the sense of urgency. But climate change still remains an immense risk facing humanity that requires a response. One lesson of the last few years is that high fuel taxes are not necessarily good for reducing greenhouse gases in the long run. It may lead consumers to consume less gasoline, but it can also lead producers to pursue more, sometimes ‘dirtier’, sources of fuels. Once they invest in the capacity to deliver the fuels, they will continue to sell it, even at low prices. If energy companies would receive low prices for fossil fuel and high prices on renewables, then they will shift from ‘drill, baby drill’ and force them to think outside the barrel. We need to develop a larger wedge between the price of received by the producer of a fossil fuel and the price paid by the consumer, and received by the producer of renewables.

It is common sense that the price of carbon can slow the human contribution to climate change. Politically, it is near impossible to think about this when energy prices are increasing as they were in recent years. As I recall, during the 2008 presidential campaigns, both Hillary and McCain advocated for the elimination of gasoline taxes, regardless of climate change and infrastructure needs. One reason that I liked Obama is that he did not share in this opinion. Now that prices are trending down, we have a good opportunity to prevent people shifting back to bigger cars, to sustain the biofuel industries and continue to search for alternative energy.

I speak here about a fuel tax as an example of a carbon tax. In the US, we have a federal tax of 18.4 cents/gallon for gasoline and 24.4 cents/gallon for diesel. The federal tax has not risen since 1993 when the price of gasoline at the pump was $1.11/gallon. Together with state taxes, consumers pay on average around 50 cents/gallon for fuel. Raising this average tax to $1.00 will, to a large extent, allow us to ‘catch up’ with the rising cost of fuels. I feel that a $1/gallon, which is below the recent decline in gasoline, would be quite reasonable. Renewable fuels will pay less, based on carbon emission so corn ethanol would have 40% less extra tax and sugarcane would have 60% less.

I know that politically this is not likely to fly. We are nearing a big election in 2016, and I don’t see any politician that is likely to approach the American people, who generally are averse to taxation, with such a proposal. But if we tax fuel, we could reduce other taxes and create jobs. In 2013, Americans consumed around 170 billion gallons of gasoline and diesel for transportation and if we taxed even 50cents/gallon, we have about 85 billion dollars. Of course, the tax revenue can be recycled. Part of it can go to towards tax relief but if it reduced income tax, it might be regressive, benefiting mostly the rich. An alternative use for the money is for infrastructure, an area where we have an ongoing crisis. The American Society of Civil Engineers estimate we need 3.6 trillion dollars of investment by 2020 to sustain our infrastructure. Let us suppose that they are self-serving and only half is actually required, then that is close to two trillion dollars. The extra gasoline tax might be a useful start towards making this investment.

A short blogpost can’t outline the exact design of the policy. For me, a tax on carbon emitting sources that is equivalent to about 50-75 cents/gallon on liquid fossil fuels can be a great start. I am sure that the extra revenue could be distributed among tax relief, infrastructure, developing renewable energy sources and other needs. Thus far, the people fighting to introduce incentives against greenhouse gas emissions faced a tough battle because they were working against rising energy prices. Now that prices are declining, we can take advantage and push for bold moves while the wind is on our back.

 

 

Comments to “Is 2015 the year for a carbon tax?

  1. Fuel price are going up everywhere in the world and government should think about how to fix the price for long time so that the people should not suffer a middle class family member can not work on daily hiking price of fuels.

    The low fuel consumption vehicles are on the road, but still we have to fix the fuel prices for improving the living as we can earn a lot but the expenditure will come down us and the transportation plays the main role for increase the prices of any material. The Carbon tax will play a good role in tax field.

    The Mona Township is dealing in infrastructure sector and working on very much low fuel consuming machines and which will effect the final cost of the finished apartments for middle class family.

  2. David, See Steven Landsburg’s blog on “What is Larry Summers thinking?” in regards to whether tax should increase because of lower gas prices. He shows it is not at all that obvious.

    Best regards, Mike

  3. The tragedy is that this is such a good idea that politicians won’t accept it. Pity, because Europe pays more for petrol and people have smaller vehicles.

    There is one policy that Cal could institute: launch a variable parking fee. Most of the spaces in the campus garages are marked ‘COMPACT’ but are filled with an ever growing number of SUVs. So, unless you are handicapped and need a special vehicle, why not charge for parking places by the size of the vehicle?

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