Carrots and Sticks

It's a small thing, but the recent decision by the New York Times to end their Times Select subscription service and provide open access to their op-eds and other content is very welcome. Among other things, it means I can resume citing and critiquing the op-eds of my favorite Times columnist, Tom Friedman, without worrying that most of my readers won't be able to see them. In an op-ed last week, Mr. Friedman lamented the lack of a strong American example on climate change, and how that has influenced countries such as China, which will account for the largest increment of new emissions in the years ahead, unless we can help them find another path. The chicken-and-egg dilemma involving the US and large developing countries remains a major obstacle to an effective response to global warming, and breaking out of that loop is going to require some deft moves, indeed.

While looking for information on China's stance at last week's climate meeting in DC, I ran across a related development that surprised me. The meeting itself wasn't anticipated to produce any breakthroughs and apparently lived up to that expectation. However, it seems we are already considering how to penalize other countries that aren't working to reduce their emissions, even though the US still has essentially no federal response beyond R&D and voluntary measures. This provision would apply to the offshore emissions associated with energy-intensive imports, since domestic producers would otherwise be at a competitive disadvantage under a US cap & trade plan or carbon tax . That strikes me as excellent politics and sound economics, but questionable foreign trade policy, and quite possibly disastrous climate policy.

Just imagine we were back in early-to-mid 2001, when it became clear that the US was never going to implement the Kyoto Protocol on climate change. At that point Europe was just gearing up for emissions trading (an American idea) and European companies were complaining that it would put them at a competitive disadvantage versus US firms that could emit without penalty, at least at home. What if the EU parliament had proposed a compensatory tariff--called something else, of course--to ensure that US products sold in the EU met the same emissions standards? Would that have catalyzed a consensus on this side of the Atlantic towards passing our own emissions regulations, or would it have inflamed US attitudes towards Europe and triggered trade reprisals? I can't be certain, but I don't think it would have gone down very smoothly. Why then should we expect such a policy to be welcomed now in Beijing, Delhi, or Brasilia, even if it's not intended to kick in before 2020?

Although I can appreciate the practical and legitimate reasons for such a measure, the idea of someone as late to the party as we are threatening those who are still later--for what they regard are better reasons than ours--strikes me as counter-productive. If this is going to come down to carrots and sticks, the carrots had better be fat and juicy to make up for sticks like that. By contrast, Mr. Friedman's approach focuses on having the US lead by example, as the proper first step. (His recent op-ed on the spread of American-style energy consumption shows how the counter-example works.) The conversation about what to do with those who don't follow our lead on climate would seem a lot more appropriate, once we've actually implemented some real cuts of our own.

A Better Floor

Does Tom Friedman of the New York Times read my blog? After reading his column on Wednesday (Times Select required) I have to wonder. Last month, he proposed instituting a $45/barrel floor price for crude oil, as a way to stimulate alternative energy investment and reduce US reliance on oil imports, especially from the Middle East. I posted a lengthy critique (1/18/07) of this idea, concluding that it would be too difficult to administer and do little to promote conservation. Now, Mr. Friedman has apparently switched from a floor price for crude oil to a $3.50/gallon floor price for gasoline. Although it would probably be even harder to achieve politically, the latter doesn't have nearly as many drawbacks as a crude price floor, and it would probably contribute more--and more quickly--to our energy security than any other single idea currently under consideration.

Why would a floor price on gasoline work differently from one on crude oil? First and foremost, it would spare US businesses an increase in their energy and raw material costs that their international competitors wouldn't face. It would give consumers an incentive to be more efficient, without disrupting the international markets and flows of oil and its products, which trade on a pre-tax basis and are essential for responding to sudden changes in supply, such as after Hurricane Katrina. In addition, although many different formulations of gasoline are sold across the US, because of differences in local environmental regulations and regional "attainment" status under the Clean Air Act, these distinctions are not nearly as great as those between crude oil grades. Once you set a floor price for conventional unleaded regular gasoline, the market will sort out the relative value of costlier grades and formulations.

Like any idea of this type, a gasoline floor price doesn't lack for complications. For example, how should it apply to imported gasoline--of which we buy more each year--as a tariff, or when it leaves the blender's terminal? Even thornier, should the same floor price apply across the entire US, or should it take into account the differences in regional markets and state taxes? If we were to impose such a tax this week, prices on the East Coast would rise by $1.33/gallon, while those in California would go up by $0.97. Finally, a floor price is still a form of gasoline tax, and just as regressive as a flat per-gallon tax. Buffering its impact on low-income Americans would be tricky, because the level of the tax would vary continuously with fluctuations in the wholesale markets, which reflect crude prices, refining margins and many other factors. Unlike a flat-rate tax, however, it would make consumer fuel prices much more predictable and stable (see Tuesday's posting,) reducing the uncertainty involved in the decision to buy a hybrid or some other fuel-efficient car.

The prerequisite for any substantial new tax on gasoline, however, is the recognition that all of our technology options for improving vehicle efficiency and producing oil substitutes will take more than a decade to reverse the current trend of our oil imports. We would also have to conclude that that timeframe is not adequate--or exceeds our patience--to address the energy security or climate change risks that lead us to want to reduce gasoline consumption in the first place. Combining those realizations would lead us to conclude that we must tackle the consumption of today's entire vehicle fleet. Only then would a gas tax rise to the top of the list of options. Now compare that sequence of events to the current state of play concerning Corporate Average Fuel Economy standards. What external events would we have to see, before Congress and the Administration would be ready to take on something as radical as Mr. Friedman's floor price?