Gas Prices Are Too Low

By :: March 13th, 2012

GOP presidential candidates are blasting President Obama for not lowering the price of gasoline. Rep. Steve Scalise (R-LA) doesn’t stop there. He claims Obama is deliberately driving prices to $4 a gallon.

He’s not. But he should. 

In an election year, Obama may be the last guy who wants gas prices to rise. However, if  we want to reduce our need for foreign oil, slow climate change (yes, Virginia, the planet is warming), and encourage development of new energy technology, we ought to be raising taxes on fossil fuels. A lot.

I know that this sounds like elitist left-wing heresy. But in the dim past (2008), GOP presidential candidate John McCain embraced the system known as cap-and-trade, which was effectively a tax on carbon-based fuels. Greg Mankiw, a former top economic aide to  President George W. Bush and now an adviser to Mitt Romney, says its reasonable to boost the 18.4 cent a gallon tax to $2. As Mankiw recently wrote, “by taxing bad things more, we could tax good things less.”

Newt Gingrich used to support cap-and-trade. So did both presidents Bush. As governor of Massachusetts, Mitt Romney initially backed the idea though he eventually abandoned it.

Carbon taxes, in any form, have become exceedingly politically incorrect. But they were a good idea when McCain and Gingrich supported them. And they still are.

Sensible energy policy goes beyond just taxing fossil fuels. It also means dumping competing subsidies for oil and gas on one hand and alternative energy on the other. As it is, these tax preferences reflect a policy chasing its own tail: Congress first subsidizes fossil fuels. Then, in an effort to make alternatives cost competitive, it subsidizes windmills, solar panels, and the like. When all is said and done, the relative cost may not change very much but the deficit does. And not in a good way.  

Ditching all these tax subsidies would have two other advantages.

It would allow government to eliminate mandates and other regulations that would be unnecessary in a well-functioning energy marketplace. For instance, there would be no need for complex, costly, and easily manipulated fuel economy standards. The high price of gasoline alone would encourage many consumers to buy fuel efficient cars instead of gas-guzzlers.

As Ted Gayer, co-director of the Brookings Institution’s economic studies program, notes, higher prices for fossil fuels also would get government out of the business of providing grants and other direct assistance to favored industries or businesses. The Solyndra mess is strong evidence of what goes wrong when government tries to pick winners and losers.  

The left often complains that carbon taxes are regressive. And so they are. But a well-designed tax (or cap and trade program) can generate enough revenue so some could be used to assist low income households.

Interestingly, carbon taxes enjoy the support of nearly all mainstream economists, regardless of ideology. But most Americans, who seemingly love their cars more than their spouses, are unconvinced. For them, fuel, like healthcare, ought to be plentiful and cheap.   

As Gayer writes, the next administration will have a chance to consider a carbon tax, perhaps in the context of broad-based tax reform.

He might be right. But, first, politicians of both parties are going to have to stop their pandering.   

 

13Comments

  1. Gas Prices Are Too Low | Tax Information  ::  4:48 pm on March 13th, 2012:

    […] original here: Gas Prices Are Too Low Posted in News Tags: advantages, business, cap-and-trade, energy, energy taxes, gas tax, […]

  2. Michael Bindner  ::  4:49 pm on March 13th, 2012:

    I would rather sink money into Helium3 fusion and switch to electric cars with covered overhead wires and computer control, owned and operated by a consortium of local government, employers and energy providers. Barring that, simply raising the gas tax enough to fund adequate infrastructure would be a nice start, with differening regional rates, as well as a regional VAT and VAT-like net business receipts tax. The great thing about consumption taxes is that offsets for research and development don’t make any sense under them, since they are most likely replacing the income tax paid by the people who do the research.

  3. AMTbuff  ::  10:32 pm on March 13th, 2012:

    Carbon consumption will be inelastic until viable alternative technologies are invented, especially for transportation. Enacting a carbon tax now will give government a large financial interest in maximizing carbon use. Once again, an unintended consequence.

    If the tax were high enough to change behavior, today’s most cost-effective alternative to carbon use would be to stop moving. That would severely damage the economy.

    When someone invents a viable alternative energy source within striking distance of being cost-effective for transportation, carbon taxes will make sense. They will then have the desired result of fueling change, even in developing countries where carbon consumption is increasing the most.

    Until realistic alternatives are feasible, carbon taxes will be viewed as what they are: a money grab.

    I’m with Michael: spend some serious money on fusion energy. Add genetic engineering of electricity-generating (photosynthetic) organisms. As soon as something gets within spitting distance of being cost-effective, ramp up the carbon tax. But not until then.

  4. Vivian Darkbloom  ::  3:04 am on March 14th, 2012:

    “If the tax were high enough to change behavior, today’s most cost-effective alternative to carbon use would be to stop moving. That would severely damage the economy.”

    That’s not an argument. The most cost-effective alternative to carbon use is to “stop moving” even at current gas prices. But, there are certainly less drastic alternatives that would be the first choice. First, US consumers would start driving more energy efficient vehicles. The energy efficiency of the European fleet is almost twice that of US vehicles. Many would find other more efficient means of transport, including public transport. Some would move closer to work. And, yes, non-essential moving, such as driving 20 miles for a loaf of bread or just to cruise around might be diminished somewhat. That would not harm the economy.

    Actually, the Obama administration policy to aggressively increase CAFE standards is one of the few bright policy choices it has made. Howard is right. If only this administration (or any other) had the courage to introduce a significant phased-in carbon tax, particularly at the pump. It would help solve the fiscal gap. And, Pigou was right–it would reduce consumption of fossil fuels that we know is bad for a variety of reasons.

    And, it is not clear who should spend the “serious money” on fusion energy, genetic engineering, etc. It would be wrong to think the government should be the one to decide these two possibilities are the best places to invest. If carbon is taxed significantly, private industry will step in and invest in those alternatives that are likely to acheive the greatest return on investment. Fusion and genetic engineering might be among them, but so might many other alternatives that we have not yet identified.

  5. Advocates of Reason: 14 March 2012 | Economic Thought  ::  10:02 am on March 14th, 2012:

    […] elements of both of these explanations.  On this note, Howard Gleckman believes (“Gas Prices are Too Low“) that gas prices ought to be higher (private costs ought to equal social […]

  6. Ralph H  ::  12:08 pm on March 14th, 2012:

    I hate to say it but I bet you are someone who takes the Washington Metro to work. I could agree that we should increase the gas tax, but only to raise monewy for infrastructure and to slowly promote a change in driving patterns. I doubt even Obama will advocate for increased taxes in this campaign though.

  7. Ken Moon  ::  12:48 pm on March 15th, 2012:

    You say that “First, US consumers would start driving more energy efficient vehicles”.

    I disagree.

    First, people would cut other expenses, such as eating out, and would drive less.

    The average car lasts over 11 years. If the owners of these older cars could afford a new one, wouldn’t they have bought it already?

    A portion of those who are barely getting by today will simply give up, because they will no longer be able to afford to drive to work. And you can’t be serious if you think most people can simply choose to move closer to work every time they change jobs.

    Tradesmen also need trucks to transport their personal tools and protective gear. They will have to cut other expenses to pay for higher gas costs, or find another profession.

    My point is that “pain” is what will, eventually, not “first”, but as a desperate last resort, force some people to buy a new fuel-efficient car, and take on a car payment that is likely to put them even further into financial peril.

    The sticking point for me is that the government is the one who is causing all the pain, all in the name of “higher purposes”.

  8. Josh  ::  3:12 pm on March 23rd, 2012:

    You say carbon taxes are a good idea. Have you read the Skeptical Environmentalist? Global Warming is only a western problem where we’ve figured out things like education and healthcare for our citizens.

    The ROI on cap and trade to actually help the environment is non-existent. There are much larger bang for the buck policies that can be implemented besides cap and trade. I’m glad it died.

  9. racing  ::  8:33 am on March 27th, 2012:

    Those holes in the bottom of the seats aren’t for seawater, they’re for when you pee your pants while piloting a tiny, wooden, 1860hp boat of sheer awesomeness.

  10. rob  ::  12:28 am on April 18th, 2012:

    Driving a car is freedom. I really enjoy driving my V8 powered Mustang and it does get good fuel economy. It gets 25 mpg and 18 mpg on the street I believe. For a 320 HP car it does great. Anyways, yes I like alternative fuels. But I can’t agree with the idea of a carbon tax and I do think gas is expensive and is going up. It is going up do to the wars and inflation. The government bailout too much. The Iran thing is still going on. So prices are higher. People don’t like it when gas is more than $2 a gallon let alone near $4 a gallon. In Europe their gas is more expensive but they get free healthcare so I think that is in the pricing of the gas.

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  12. Tracey Swem  ::  11:09 am on January 11th, 2013:

    I hope that in less than 30 years from now they would stop using nucelar weapons in every country for ever .

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