I don't know if the Speaker of Virginia's House of Delegates intended a double entendre when he referred to the state gasoline tax that Governor Bob McDonnell (R) just proposed eliminating as a "dinosaur tax". He was certainly correct that this tax is rapidly becoming outmoded as its capacity to keep pace with necessary infrastructure investment fades with every EV, hybrid, or other efficient car that's sold. In the Governor's remarks, he referred to the gas tax as a "stagnant revenue source." In a low-tax state like the Commonwealth, shifting the tax burden for transportation away from fuel taxes and toward registration fees and a higher general sales tax represents an innovative, though also controversial answer to a challenge that has concerned me for some time.
The scope of the underlying problem should be uncontroversial: Like most states, Virginia's $0.175 per gallon gasoline tax is a holdover from an era in which fuel sales grew in tandem with road use, and both expanded steadily year after year. I can personally vouch for Northern Virginia's traffic congestion, cited in this morning's Washington Post story on this issue. As in most states, Virginia's gasoline sales have been flat to declining since the recession that began in 2008, while the value of the fixed fuel tax has been further eroded by inflation. These trends seem likely to continue for years, with recent new-car fuel economy improving sharply. The gas tax simply can't cover the cost of repairing and extending Virginia's highways without a large increase now, followed by periodic increases as future fuel sales fall.
A key aspect of Governor McDonnell's proposal that appeals to me is that it doesn't rely on high-tech monitoring or low-tech inspections of actual miles driven, like many of the other solutions I've examined. Instead of trying to fix the fuel-tied tax, he would eliminate it entirely and shift revenue generation to a combination of higher annual fees, especially for alternative fuel vehicles that currently pay little or no road tax, and an increase in the Commonwealth's 5% sales tax to 5.8%. 0.5% of the current sales tax is already dedicated to transportation. The proposed shift exchanges one regressive tax for another, in a manner that recognizes that all Virginians stand to benefit from improved transportation networks, whether they personally use them or not.
The current Virginia gas tax costs an average motorist around $100 per year, based on 12,000 miles of annual driving. The rise in the sales tax would generate comparable revenue from $12,000 of annual spending subject to the sales tax. That likely equates to little or no tax increase for low-income drivers, and an increase of up to a few hundred dollars a year for the better-off, while still leaving Virginia's sales tax slightly lower than those in Maryland and the District of Columbia. Motorists would continue to pay the federal gasoline tax, currently set at $0.184/gal.
I can envision various objections to the Governor's proposal, including concerns that cutting the gas tax might increase gasoline demand--and emissions--and reduce the incentives for higher fuel efficiency. That seems unlikely in the current context for at least two reasons. First, eliminating the Virginia gas tax involves a reduction in pump prices of less than 5% of last year's average price in the region, and more importantly represents less than a quarter of the total range of gas-price volatility we experienced in 2012. Moreover, fuel economy improvements are already mandated under the new federal Corporate Average Fuel Economy regulations that will increase fleet-average miles per gallon to 54.5 mpg by 2025. Cars will continue to become more efficient, no matter what gasoline costs.
It will be interesting to watch how this proposal fares in Richmond. The Governor's party may control the House of Delegates and effectively the Senate, by virtue of a tie-breaking Lieutenant Governor, but 2013 is an election year, and Mr. McDonnell is barred by term limits from seeking reelection. I wish him luck with this idea, even though its enactment would probably result in a small net tax increase for my household. I'm sure other states will be watching, too.
Showing posts with label gas tax. Show all posts
Showing posts with label gas tax. Show all posts
Wednesday, January 09, 2013
Thursday, November 29, 2012
Does the Gas Tax Belong in the Fiscal Cliff Fix?
Recently I've seen several articles along the lines of this one from CNN, suggesting that an increase in the federal gasoline tax might be included in negotiations to avert the impending US "fiscal cliff". While the gap between the gas tax, which was last raised in 1993, and highway repair costs grows each year, that's not just because past Congresses and administrations have been reluctant to hike it again. As I've discussed in previous posts, gas tax revenue is declining for structural reasons related to curtailed driving, rising fuel economy and alternative fuel vehicles. Simply adding another 10-15 ¢ per gallon to the current 18.4 ¢ tax wouldn't solve the long-term problem, although it would raise enough revenue to allow us to continue to ignore these growing challenges for a few years. For that and other reasons, changing the gas tax deserves closer scrutiny than the waning hours of a preoccupied lame-duck Congress can provide.
Yesterday I attended another excellent event held by Resources for the Future in Washington, DC. This one was devoted to "The Future of Fuel." The panel discussion began with a presentation of the current energy forecast of the Energy Information Agency (EIA) highlighting the shifting energy mix the agency expects between now and 2035. Although the slide deck didn't include the chart below, taken from EIA's 2012 Annual Energy Outlook, I couldn't help thinking of it in the context of both yesterday's meeting and the question of future fuel tax revenues.
The EIA forecasts US gasoline demand to decline by about 8% from current levels by 2035 as cars meeting the new federal fuel economy standard enter the fleet, along with small but growing numbers of vehicles running on electricity and other non-petroleum fuels. An 8% drop in gasoline sales--and thus gas tax revenues--doesn't sound large until you realize that the current gas tax system was predicated on consistently rising gasoline sales as a means of expanding revenues. That's crucial, because highway construction and maintenance costs rise each year, too. If gasoline sales were still growing at the 1% annual rate typical when the gas tax was last increased, gas tax revenues would be at least 37% higher by 2035 than the level the EIA would now project.
Stepping back from the details, the government faces a fundamental disconnect between its need to raise sufficient funds from the gas tax to cover the cost of maintaining the nation's road network and explicit federal policies aimed at reducing our consumption of the fuels being taxed. Another one-time bump in the gas tax, whether of 5¢, 10¢ or 15¢ per gallon, will again be overtaken by the combined forces of inflation and declining volumes. Fortunately, this problem is well-understood and a number of solutions are under consideration. Inconveniently, many of them involve basic and controversial changes in how the road tax would be collected, such as shifting to a mileage-based tax assessed via annual inspections or real-time GPS monitoring.
No one should expect or desire the 112th Congress to resolve these issues between now and the end of its term in January, particularly when the money at stake represents such a tiny fraction of either the fiscal cliff's package of tax increases and spending cuts or of the entire federal deficit. I'm also not sure that reforming the gas tax belongs within the larger federal tax reform effort that should be undertaken next year, because the issues involved are so different from those associated with revamping the business, income, and payroll taxes. Even a temporary fuel surtax would likely encounter strong opposition, due to its regressive nature and coincidence with gasoline prices that, despite recent declines, remain at or near seasonal record highs. Unlike the rest of the fiscal cliff, this might just be one can that would benefit from being kicked down the road, at least past the current crisis.
Yesterday I attended another excellent event held by Resources for the Future in Washington, DC. This one was devoted to "The Future of Fuel." The panel discussion began with a presentation of the current energy forecast of the Energy Information Agency (EIA) highlighting the shifting energy mix the agency expects between now and 2035. Although the slide deck didn't include the chart below, taken from EIA's 2012 Annual Energy Outlook, I couldn't help thinking of it in the context of both yesterday's meeting and the question of future fuel tax revenues.
The EIA forecasts US gasoline demand to decline by about 8% from current levels by 2035 as cars meeting the new federal fuel economy standard enter the fleet, along with small but growing numbers of vehicles running on electricity and other non-petroleum fuels. An 8% drop in gasoline sales--and thus gas tax revenues--doesn't sound large until you realize that the current gas tax system was predicated on consistently rising gasoline sales as a means of expanding revenues. That's crucial, because highway construction and maintenance costs rise each year, too. If gasoline sales were still growing at the 1% annual rate typical when the gas tax was last increased, gas tax revenues would be at least 37% higher by 2035 than the level the EIA would now project.
Stepping back from the details, the government faces a fundamental disconnect between its need to raise sufficient funds from the gas tax to cover the cost of maintaining the nation's road network and explicit federal policies aimed at reducing our consumption of the fuels being taxed. Another one-time bump in the gas tax, whether of 5¢, 10¢ or 15¢ per gallon, will again be overtaken by the combined forces of inflation and declining volumes. Fortunately, this problem is well-understood and a number of solutions are under consideration. Inconveniently, many of them involve basic and controversial changes in how the road tax would be collected, such as shifting to a mileage-based tax assessed via annual inspections or real-time GPS monitoring.
No one should expect or desire the 112th Congress to resolve these issues between now and the end of its term in January, particularly when the money at stake represents such a tiny fraction of either the fiscal cliff's package of tax increases and spending cuts or of the entire federal deficit. I'm also not sure that reforming the gas tax belongs within the larger federal tax reform effort that should be undertaken next year, because the issues involved are so different from those associated with revamping the business, income, and payroll taxes. Even a temporary fuel surtax would likely encounter strong opposition, due to its regressive nature and coincidence with gasoline prices that, despite recent declines, remain at or near seasonal record highs. Unlike the rest of the fiscal cliff, this might just be one can that would benefit from being kicked down the road, at least past the current crisis.
Thursday, May 12, 2011
Collecting Road Taxes After Peak Gasoline
On Monday I was interviewed on Chicago's WGN Radio on the subject of switching the collection of federal highway taxes from the current assessment on motor fuel sales to a fee on vehicle miles traveled (VMT). The gas tax is always a hot-button subject, and when it's combined with potential concerns about privacy it becomes even more controversial. However, the path we're on is a slow-motion train wreck, for multiple reasons, and I'm relieved to see that with so much attention focused on other, larger aspects of the budget deficit and taxation, this relatively small yet important corner of the tax system hasn't been forgotten. It's high time to plan for how we will pay for the upkeep of our highways as sales of gasoline begin to decline.
The interview was prompted by some comments I made on this subject to Tom Curry of MSNBC. Since my conversation with him and then with Mr. McConnell of WGN I've been doing some more thinking about the problem, which I've discussed here since 2005. For some time it's been apparent that we have a disconnect between federal energy policies explicitly aimed at reducing our consumption of petroleum products and a road tax system that depends on the stability and growth of those sales. With gas prices again near their 2008 maximum and the auto industry required to sell consumers a more efficient mix of cars each year, it appears that US gasoline demand might have peaked in July 2007 and won't reach that level again. Lower gasoline sales mean lower gas tax collections, unless the tax rate is steadily increased, encroaching on one of the third-rail issues of US politics.
This is the long-term part of the gas tax problem. It's true that it takes decades to turn over the US passenger car fleet. Nevertheless, the more highly efficient cars are sold, including this year's crop of 40 mpg non-hybrids, plus hybrids, clean diesels, and a tiny but growing number of EVs and other cars using no liquid fuels at all, the harder it will become to fund the cost of road maintenance from its traditional source at the gas pump.
The problem has a more immediate dimension, too, because gas tax collections haven't been sufficient to balance the Federal Highway Trust Fund (HTF) for some time. According to a recent study by the Congressional Budget Office the taxes on gasoline and diesel fuel brought in about $32 billion last year, but between 2008 and 2010 an additional $30 billion had to be transferred from the general fund to the HTF to keep it in the black and avoid canceling or delaying projects. Given the deficit, such transfers add directly to the national debt. Nor is the current level of expenditures adequate to address the decay of many of our roads, as assessed by the American Society of Civil Engineers. This issue received a lot of attention in the aftermath of the 2007 collapse of the I-35W bridge in Minneapolis-St.Paul, but it faded after a few news cycles.
So we need to come up with more money to keep federally-funded highways in good repair, despite the principal funding mechanism being on a gradual but inexorable downward slope. States face a similar dilemma. Solving this problem requires creativity and most likely a new funding mechanism for all or part of a gap that is expected to grow in the years ahead. Simply extending the status quo will require steadily larger transfers from the general fund, exacerbating the deficit. It would also create growing inequities by weakening the long-established link between usage and financial responsibility, compounded by EVs and other vehicles that pay no road taxes at all under the current system. Unless you think EVs will never expand beyond a tiny niche of early adopters, that's unsustainable. (Some might argue that EVs should escape this tax as a further stimulus to sales, but in my view $7,500 per car ought to be inducement enough for anyone interested in buying one.)
There are several possible remedies for shrinking gas tax revenue, with partial or total conversion to a mileage-based system topping the list. It retains the fairness of "user pays" and encompasses all cars, whatever their energy source. It might also trade off a lower tax burden for the drivers of older, less-efficient cars for a slightly steeper bill for newer, more frugal cars. However, considering that the annual federal gas tax bill for someone driving an average car 12,000 miles per year is currently only about $100, any differences between the gas tax and a replacement VMT tax--not to be confused with a VAT tax--would be unlikely to influence car choice one way or the other.
If a VMT tax is the answer, the question of how to assess and collect it looms large. As I noted in the interview I worry about a tendency to rush to a technology solution, even though other options might do the job without requiring GPS-based tracking that a significant number of Americans would consider unacceptably intrusive. If you doubt that, consider the controversy over alleged smartphone tracking by Apple and Google. I would not dismiss low-tech methods such as odometer readings at vehicle inspections, or even self-reported odometer readings where such inspections aren't required. This might introduce new opportunities for fraud, but I'm willing to be that a GPS tracker could be spoofed, and all of these potential loopholes pale compared to the current problem of fuel tax evasion by organized crime and unscrupulous distributors and dealers.
I like the idea of testing this concept in a few locations, particularly if the tests include a wide variety of approaches. The slow uptake of EVs and the gradual shift of total fleet fuel economy give us enough time to find the best solution, if we start now. But lawmakers should ensure that such tests are finite and designed for quick evaluation, so that the window of opportunity presented by the broader tax reform discussions between now and the next presidential inauguration isn't missed.
The interview was prompted by some comments I made on this subject to Tom Curry of MSNBC. Since my conversation with him and then with Mr. McConnell of WGN I've been doing some more thinking about the problem, which I've discussed here since 2005. For some time it's been apparent that we have a disconnect between federal energy policies explicitly aimed at reducing our consumption of petroleum products and a road tax system that depends on the stability and growth of those sales. With gas prices again near their 2008 maximum and the auto industry required to sell consumers a more efficient mix of cars each year, it appears that US gasoline demand might have peaked in July 2007 and won't reach that level again. Lower gasoline sales mean lower gas tax collections, unless the tax rate is steadily increased, encroaching on one of the third-rail issues of US politics.
This is the long-term part of the gas tax problem. It's true that it takes decades to turn over the US passenger car fleet. Nevertheless, the more highly efficient cars are sold, including this year's crop of 40 mpg non-hybrids, plus hybrids, clean diesels, and a tiny but growing number of EVs and other cars using no liquid fuels at all, the harder it will become to fund the cost of road maintenance from its traditional source at the gas pump.
The problem has a more immediate dimension, too, because gas tax collections haven't been sufficient to balance the Federal Highway Trust Fund (HTF) for some time. According to a recent study by the Congressional Budget Office the taxes on gasoline and diesel fuel brought in about $32 billion last year, but between 2008 and 2010 an additional $30 billion had to be transferred from the general fund to the HTF to keep it in the black and avoid canceling or delaying projects. Given the deficit, such transfers add directly to the national debt. Nor is the current level of expenditures adequate to address the decay of many of our roads, as assessed by the American Society of Civil Engineers. This issue received a lot of attention in the aftermath of the 2007 collapse of the I-35W bridge in Minneapolis-St.Paul, but it faded after a few news cycles.
So we need to come up with more money to keep federally-funded highways in good repair, despite the principal funding mechanism being on a gradual but inexorable downward slope. States face a similar dilemma. Solving this problem requires creativity and most likely a new funding mechanism for all or part of a gap that is expected to grow in the years ahead. Simply extending the status quo will require steadily larger transfers from the general fund, exacerbating the deficit. It would also create growing inequities by weakening the long-established link between usage and financial responsibility, compounded by EVs and other vehicles that pay no road taxes at all under the current system. Unless you think EVs will never expand beyond a tiny niche of early adopters, that's unsustainable. (Some might argue that EVs should escape this tax as a further stimulus to sales, but in my view $7,500 per car ought to be inducement enough for anyone interested in buying one.)
There are several possible remedies for shrinking gas tax revenue, with partial or total conversion to a mileage-based system topping the list. It retains the fairness of "user pays" and encompasses all cars, whatever their energy source. It might also trade off a lower tax burden for the drivers of older, less-efficient cars for a slightly steeper bill for newer, more frugal cars. However, considering that the annual federal gas tax bill for someone driving an average car 12,000 miles per year is currently only about $100, any differences between the gas tax and a replacement VMT tax--not to be confused with a VAT tax--would be unlikely to influence car choice one way or the other.
If a VMT tax is the answer, the question of how to assess and collect it looms large. As I noted in the interview I worry about a tendency to rush to a technology solution, even though other options might do the job without requiring GPS-based tracking that a significant number of Americans would consider unacceptably intrusive. If you doubt that, consider the controversy over alleged smartphone tracking by Apple and Google. I would not dismiss low-tech methods such as odometer readings at vehicle inspections, or even self-reported odometer readings where such inspections aren't required. This might introduce new opportunities for fraud, but I'm willing to be that a GPS tracker could be spoofed, and all of these potential loopholes pale compared to the current problem of fuel tax evasion by organized crime and unscrupulous distributors and dealers.
I like the idea of testing this concept in a few locations, particularly if the tests include a wide variety of approaches. The slow uptake of EVs and the gradual shift of total fleet fuel economy give us enough time to find the best solution, if we start now. But lawmakers should ensure that such tests are finite and designed for quick evaluation, so that the window of opportunity presented by the broader tax reform discussions between now and the next presidential inauguration isn't missed.
Monday, April 25, 2011
Gas Taxes and Price Divergence
Rising gasoline prices got my attention pretty forcefully this weekend when I filled up our rental car in South San Francisco, at the end of a short holiday trip to California. I expected to pay a bit more than usual near the SFO airport, but $4.439 per gallon for unleaded regular was a jolt, because prices in Northern Virginia, where I live, have been hovering at or under the $4 mark. This served as a reminder that while I have tended to focus in my writing on the average US gasoline price, local and regional variations can be significant, and their effect can amplify the economic impact of high oil prices in markets like California, where the unemployment rate is still in double digits. Most of these differences in gas prices can be attributed to taxes, which some would like to see increased further, to promote energy security.
As in so many other aspects of life, California provides a laboratory for testing the effect of higher gasoline taxes, for which I've been seeing a growing number of calls, lately. As of January 2011, the Golden State's gas tax was 18 ¢/gal. higher than the national average and 28 ¢/gal. higher than I pay in Virginia. However, that's not the whole story, because California effectively taxes gasoline twice: once by means of the state and local taxes collected at the pump and again via regulations that make it difficult for refiners to blend gasoline to the state's strict fuel specifications, and even harder for local refiners to expand output. The combination of these explicit and implicit taxes cost Californians on average an extra 29 ¢/gal., compared to the national average gas price over the last five years. That works out to about an additional $140 a year per car based on typical usage and fuel economy. That's not enough to provide a big incentive to buy hybrid or electric vehicles, but it surely puts a dent in the purchasing power of low-to-middle income residents.
Nor have alternative fuels been of much assistance in reducing this premium. If anything, the economics of ethanol have contributed to higher gas prices in California. That's because the state's few ethanol plants are capable of producing only about 16% of the roughly 1.5 billion gallons of ethanol blended into California's gasoline annually, based on 10% of sales. The rest must be shipped in by rail, mainly from the Midwest, with significant freight costs.
The key question in terms of supporting a higher national gasoline tax is whether California's higher existing gas tax has actually reduced fuel consumption, compared to the rest of the country. Based on Energy Information Agency statistics, 2010 gasoline sales in the state were 7% lower than in the peak year of 2006. That's more than twice the 3.3% reduction the entire US experienced in the same interval. Of course there are many other factors at work in that comparison besides gas taxes, including the large difference in unemployment cited above, the disproportionate exposure of California consumers to falling home prices, as well as variations in population growth and other demographic factors. Teasing apart all those influences is beyond the scope of this blog. But even if we attributed half of the additional reduction to fuel taxes, I question whether the result is large enough to justify the resulting drag on the economy, if conservation were the only goal.
Based on this simple analysis, California's higher gasoline taxes appear to have at least contributed to reducing gasoline consumption, although they also increase the financial burden on the state's consumers, especially at times of high gas prices such as we are currently experiencing. That was noticeable even from a single fill-up of my relatively thrifty rental car. What they don't seem to have done, despite raising billions of dollars for state and local government, is to have had a discernable impact on the state's financial health or the condition of its roads, compared to other states with lower gas taxes.
As in so many other aspects of life, California provides a laboratory for testing the effect of higher gasoline taxes, for which I've been seeing a growing number of calls, lately. As of January 2011, the Golden State's gas tax was 18 ¢/gal. higher than the national average and 28 ¢/gal. higher than I pay in Virginia. However, that's not the whole story, because California effectively taxes gasoline twice: once by means of the state and local taxes collected at the pump and again via regulations that make it difficult for refiners to blend gasoline to the state's strict fuel specifications, and even harder for local refiners to expand output. The combination of these explicit and implicit taxes cost Californians on average an extra 29 ¢/gal., compared to the national average gas price over the last five years. That works out to about an additional $140 a year per car based on typical usage and fuel economy. That's not enough to provide a big incentive to buy hybrid or electric vehicles, but it surely puts a dent in the purchasing power of low-to-middle income residents.
Nor have alternative fuels been of much assistance in reducing this premium. If anything, the economics of ethanol have contributed to higher gas prices in California. That's because the state's few ethanol plants are capable of producing only about 16% of the roughly 1.5 billion gallons of ethanol blended into California's gasoline annually, based on 10% of sales. The rest must be shipped in by rail, mainly from the Midwest, with significant freight costs.
The key question in terms of supporting a higher national gasoline tax is whether California's higher existing gas tax has actually reduced fuel consumption, compared to the rest of the country. Based on Energy Information Agency statistics, 2010 gasoline sales in the state were 7% lower than in the peak year of 2006. That's more than twice the 3.3% reduction the entire US experienced in the same interval. Of course there are many other factors at work in that comparison besides gas taxes, including the large difference in unemployment cited above, the disproportionate exposure of California consumers to falling home prices, as well as variations in population growth and other demographic factors. Teasing apart all those influences is beyond the scope of this blog. But even if we attributed half of the additional reduction to fuel taxes, I question whether the result is large enough to justify the resulting drag on the economy, if conservation were the only goal.
Based on this simple analysis, California's higher gasoline taxes appear to have at least contributed to reducing gasoline consumption, although they also increase the financial burden on the state's consumers, especially at times of high gas prices such as we are currently experiencing. That was noticeable even from a single fill-up of my relatively thrifty rental car. What they don't seem to have done, despite raising billions of dollars for state and local government, is to have had a discernable impact on the state's financial health or the condition of its roads, compared to other states with lower gas taxes.
Friday, November 19, 2010
Energy Implications of Tax Reform
I've been thinking about the implications for energy of a major deficit reduction effort along the lines suggested by the co-chairs of the President's fiscal responsibility and reform commission. Our present approach to providing incentives for various energy sources and technologies, new and old, is embedded in a tax code and taxation philosophy that might not survive the upheaval required to bring the US deficit and resulting federal debt back into a manageable range. This goes far beyond the comparatively minor question of extending expiring grants and tax credits that I discussed the other day; under the most stringent of the proposals from Mr. Bowles and Senator Simpson, such things wouldn't even exist. It's not clear how the Administration or Congress would promote favored energy technologies and strategies without these well-established but costly tools.
Start with renewable energy. We currently promote renewable fuels and electricity generation with a combination of mandates--policies such as the federal Renewable Fuels Standard (RFS) and state Renewable Portfolio Standards--and subsidy payments. Until last year's stimulus bill established the Treasury renewable energy grants, for which eligibility is due to expire in a few weeks, most of those subsidy payments have come in the form of reductions in federal taxes, via either an investment tax credit (ITC) based on the cost of a project or a production tax credit (PTC) for actual energy generated. Both of these measures, which have had a checkered history of expirations and extensions, fall into the broad category of "tax expenditures". The Zero Option proposed by Messrs. Bowles and Simpson would permanently eliminate over $1 trillion of such tax expenditures, in exchange for much lower tax rates.
Even if the renewable energy tax credits were reloaded into a streamlined tax code under the "Wyden-Gregg-style" reform presented as Option 2 from the co-chairs, the value of those credits would be reduced--or at least rendered harder to extract--because the corporate tax rate would be reduced from the current 35% to 26%. That means that a higher proportion of companies would likely not pay large enough taxes to take full advantage of the renewable energy tax credits--or have as much appetite for others' credits via "tax equity" swaps. Compounding that, the likelihood of enacting cash grants to get around this restriction would probably be much lower in an environment in which entire herds of sacred cows were being slaughtered in the cause of averting a looming national deficit and debt crisis.
In the absence of such tax credits, renewable energy developers and manufacturers would be forced to rely even more on state-level mandates or a proposed federal renewable electricity standard. The first test of such a mandates-only approach might come in a few weeks, if the ethanol blenders' credit is allowed to expire, while the annual RFS mandate continues to ratchet up. Or companies might simply conclude that without generous tax subsidies for renewable energy deployment here, their best opportunities would be found in markets that are growing much faster than ours, based on actual energy demand, rather than better incentives. Developing Asia comes to mind. That shift might not be the worst outcome, in terms of both the US trade deficit and global emissions reductions.
Conventional energy firms wouldn't escape unscathed, either. They stand to lose significant tax expenditures as well, in the form of oil & gas depletion allowances, the Section 199 manufacturing deduction, and other benefits. However, the oil and gas industry has been paying an effective corporate tax rate above 40% even after all these credits and deductions. A drop to 26% might more than offset the loss of the other benefits, while more importantly bridging the competitive gap between US firms and foreign competitors that operate under lower tax rates and a territorial tax system, rather than being taxed on worldwide earnings, as US companies are today. Bowles/Simpson also proposed increasing the federal gasoline tax by 15¢ per gallon to restore the Highway Trust Fund to solvency. That's a worthy goal, but as I've pointed out previously the Highway fund faces complex challenges as the US car fleet becomes steadily more fuel efficient and increasingly moves away from liquid fuels taxed at the pump. Raising the gas tax is a stop-gap measure, at best, on the way to a different means of collecting road taxes.
With regard to climate policy, tax reform that eliminated tax credits or reduced their value would also tend to nudge the debate back in the direction of putting an explicit price on carbon, either via cap & trade or with an outright tax. Might that prospect suddenly look more attractive as an adjunct to a fairer and simpler income tax system, than it seemed when it would have come as a further complication to an already enormously convoluted tax system that is widely viewed as unfair by both liberals and conservatives? My guess is not, without something else that motivates us to tackle climate change on a much more urgent basis.
Now let's come back to reality. The proposals of the commission's co-chairs have already received a frosty reception or outright hostility from both sides of the aisle, and they haven't yet gotten the buy-in of the rest of their team; the final report requires the consent of 14 of the 18 members. Their ideas must also compete with a growing number of deficit-reduction alternatives, including a widely-reported plan from another bi-partisan group, plus at least one solo proposal from another member of the President's commission. The chances are low for any of these proposals to gain enough traction to be enacted without first being significantly watered down. However, it is starting to look just as risky to assume that the present tax system--and its cornucopia of energy incentives--will continue unchanged indefinitely. A quick glance at the US debt clock ought to make that abundantly clear.
Start with renewable energy. We currently promote renewable fuels and electricity generation with a combination of mandates--policies such as the federal Renewable Fuels Standard (RFS) and state Renewable Portfolio Standards--and subsidy payments. Until last year's stimulus bill established the Treasury renewable energy grants, for which eligibility is due to expire in a few weeks, most of those subsidy payments have come in the form of reductions in federal taxes, via either an investment tax credit (ITC) based on the cost of a project or a production tax credit (PTC) for actual energy generated. Both of these measures, which have had a checkered history of expirations and extensions, fall into the broad category of "tax expenditures". The Zero Option proposed by Messrs. Bowles and Simpson would permanently eliminate over $1 trillion of such tax expenditures, in exchange for much lower tax rates.
Even if the renewable energy tax credits were reloaded into a streamlined tax code under the "Wyden-Gregg-style" reform presented as Option 2 from the co-chairs, the value of those credits would be reduced--or at least rendered harder to extract--because the corporate tax rate would be reduced from the current 35% to 26%. That means that a higher proportion of companies would likely not pay large enough taxes to take full advantage of the renewable energy tax credits--or have as much appetite for others' credits via "tax equity" swaps. Compounding that, the likelihood of enacting cash grants to get around this restriction would probably be much lower in an environment in which entire herds of sacred cows were being slaughtered in the cause of averting a looming national deficit and debt crisis.
In the absence of such tax credits, renewable energy developers and manufacturers would be forced to rely even more on state-level mandates or a proposed federal renewable electricity standard. The first test of such a mandates-only approach might come in a few weeks, if the ethanol blenders' credit is allowed to expire, while the annual RFS mandate continues to ratchet up. Or companies might simply conclude that without generous tax subsidies for renewable energy deployment here, their best opportunities would be found in markets that are growing much faster than ours, based on actual energy demand, rather than better incentives. Developing Asia comes to mind. That shift might not be the worst outcome, in terms of both the US trade deficit and global emissions reductions.
Conventional energy firms wouldn't escape unscathed, either. They stand to lose significant tax expenditures as well, in the form of oil & gas depletion allowances, the Section 199 manufacturing deduction, and other benefits. However, the oil and gas industry has been paying an effective corporate tax rate above 40% even after all these credits and deductions. A drop to 26% might more than offset the loss of the other benefits, while more importantly bridging the competitive gap between US firms and foreign competitors that operate under lower tax rates and a territorial tax system, rather than being taxed on worldwide earnings, as US companies are today. Bowles/Simpson also proposed increasing the federal gasoline tax by 15¢ per gallon to restore the Highway Trust Fund to solvency. That's a worthy goal, but as I've pointed out previously the Highway fund faces complex challenges as the US car fleet becomes steadily more fuel efficient and increasingly moves away from liquid fuels taxed at the pump. Raising the gas tax is a stop-gap measure, at best, on the way to a different means of collecting road taxes.
With regard to climate policy, tax reform that eliminated tax credits or reduced their value would also tend to nudge the debate back in the direction of putting an explicit price on carbon, either via cap & trade or with an outright tax. Might that prospect suddenly look more attractive as an adjunct to a fairer and simpler income tax system, than it seemed when it would have come as a further complication to an already enormously convoluted tax system that is widely viewed as unfair by both liberals and conservatives? My guess is not, without something else that motivates us to tackle climate change on a much more urgent basis.
Now let's come back to reality. The proposals of the commission's co-chairs have already received a frosty reception or outright hostility from both sides of the aisle, and they haven't yet gotten the buy-in of the rest of their team; the final report requires the consent of 14 of the 18 members. Their ideas must also compete with a growing number of deficit-reduction alternatives, including a widely-reported plan from another bi-partisan group, plus at least one solo proposal from another member of the President's commission. The chances are low for any of these proposals to gain enough traction to be enacted without first being significantly watered down. However, it is starting to look just as risky to assume that the present tax system--and its cornucopia of energy incentives--will continue unchanged indefinitely. A quick glance at the US debt clock ought to make that abundantly clear.
Friday, September 24, 2010
Is Gasoline Too Cheap?
It's an article of faith among many observers of the oil industry that gasoline is too cheap in the US. Environmentalists and economists point to various externalities that aren't included in the price consumers pay, while carmakers and alternative energy developers need a (much) higher price to make advanced vehicle technologies and substitute fuels competitive without subsidies. When someone asks, "Too low compared to what?" the response usually draws a comparison to prices in Europe and elsewhere. Yet while perusing a clever historical price comparison tool on the Energy Information Agency's website, I was struck by how high today's gas prices are, when adjusted for inflation, compared to those that prevailed for most of my life--other than during energy crises. That's surely a factor in current weak US gasoline demand, which has been running slightly below last year's, and a full 3% less than the record levels of 2007.
In the course of searching for a standard table of historical gasoline prices, I recently ran across a handy new feature (or merely one I hadn't seen before) of the EIA's Short-Term Energy Outlook report. It allows the public to compare the nominal and real prices for crude oil, gasoline and other fuels, and electricity, over a flexible interval adjusted with a slider control. The first thing I noticed was that although today's price for West Texas Intermediate crude oil of $76 per barrel seems pretty low compared to its $145/bbl high in July 2008, it's actually higher than the inflation-adjusted price for most of the period from 1973-2006, with the exception of the aftermath of the second 1970s oil shock. Now, the Consumer Price Index might not be the most appropriate measure of inflation for crude oil, as I've described in some detail before, but it is perfectly reasonable to apply it to gasoline prices.
On that basis, this week's national average of $2.72 per gallon--$0.17/gal. more than one year ago--is higher than the $0.53/gal. average (equivalent to $2.32/gal. today) for 1974, following the Arab Oil Embargo that helped trigger a severe global recession. It's higher than the $1.17/gal. average ($2.37/gal.) for 1985, before a flood of new production from the North Slope, North Sea and elsewhere broke OPEC's pricing power for more than a decade. It's even higher the $1.35/gal ($2.20) that we paid in the final lead-up to the first Gulf War in late 1990. In fact, it's almost a full dollar higher than the $1.75/gal. inflation-adjusted average for 1986-2005.
When gas prices dipped below $2.00/gal. in late 2008 and early 2009, that provided a significant stimulus to an economy suffering from the combination of a recession and financial crisis. At today's level, however, not only are gas prices not stimulating the economy, but they must be a significant drag on it. Our consumer psychology may be anchored for the time being on $4 as the gauge of what constitutes a high gas price, but compared to the prices that were in effect when our current patterns of mobility and employment were set and the vast majority of the US vehicle fleet was purchased, $2.70 seems more than sufficiently high to inflict economic pain.
Don't get me wrong. I understand full well that a realistic assessment of the cost of greenhouse gas emissions would add at least another $0.10-0.20/gal. to gas prices, and that the current level of US motor fuel taxes is inadequate to pay for the proper maintenance of our highway infrastructure, let alone all the other transportation priorities we'd like to pursue. Other economies have adjusted to much higher gas prices, though these do not prevent the European Union from being a larger net oil importer, in aggregate, than the US is. If OPEC can keep crude oil above $70/bbl when global demand is slack, it's anyone's guess how high it will go when the global economy is actually growing strongly, again. Yet while higher gas prices may well be in our future for many reasons, we should recognize that today's prices remain at oil-crisis levels, and the view of them as "too low" is very much in the eye of the beholder.
In the course of searching for a standard table of historical gasoline prices, I recently ran across a handy new feature (or merely one I hadn't seen before) of the EIA's Short-Term Energy Outlook report. It allows the public to compare the nominal and real prices for crude oil, gasoline and other fuels, and electricity, over a flexible interval adjusted with a slider control. The first thing I noticed was that although today's price for West Texas Intermediate crude oil of $76 per barrel seems pretty low compared to its $145/bbl high in July 2008, it's actually higher than the inflation-adjusted price for most of the period from 1973-2006, with the exception of the aftermath of the second 1970s oil shock. Now, the Consumer Price Index might not be the most appropriate measure of inflation for crude oil, as I've described in some detail before, but it is perfectly reasonable to apply it to gasoline prices.
On that basis, this week's national average of $2.72 per gallon--$0.17/gal. more than one year ago--is higher than the $0.53/gal. average (equivalent to $2.32/gal. today) for 1974, following the Arab Oil Embargo that helped trigger a severe global recession. It's higher than the $1.17/gal. average ($2.37/gal.) for 1985, before a flood of new production from the North Slope, North Sea and elsewhere broke OPEC's pricing power for more than a decade. It's even higher the $1.35/gal ($2.20) that we paid in the final lead-up to the first Gulf War in late 1990. In fact, it's almost a full dollar higher than the $1.75/gal. inflation-adjusted average for 1986-2005.
When gas prices dipped below $2.00/gal. in late 2008 and early 2009, that provided a significant stimulus to an economy suffering from the combination of a recession and financial crisis. At today's level, however, not only are gas prices not stimulating the economy, but they must be a significant drag on it. Our consumer psychology may be anchored for the time being on $4 as the gauge of what constitutes a high gas price, but compared to the prices that were in effect when our current patterns of mobility and employment were set and the vast majority of the US vehicle fleet was purchased, $2.70 seems more than sufficiently high to inflict economic pain.
Don't get me wrong. I understand full well that a realistic assessment of the cost of greenhouse gas emissions would add at least another $0.10-0.20/gal. to gas prices, and that the current level of US motor fuel taxes is inadequate to pay for the proper maintenance of our highway infrastructure, let alone all the other transportation priorities we'd like to pursue. Other economies have adjusted to much higher gas prices, though these do not prevent the European Union from being a larger net oil importer, in aggregate, than the US is. If OPEC can keep crude oil above $70/bbl when global demand is slack, it's anyone's guess how high it will go when the global economy is actually growing strongly, again. Yet while higher gas prices may well be in our future for many reasons, we should recognize that today's prices remain at oil-crisis levels, and the view of them as "too low" is very much in the eye of the beholder.
Monday, April 05, 2010
Mustangs and CAFE Standards
Over the weekend a review of Ford's new 6-cylinder Mustang in the Wall St. Journal included an interesting perspective on the contribution of stricter Corporate Average Fuel Economy (CAFE) standards to the production of a car that provides both better fuel economy and more horsepower than the preceding model, in the absence of market incentives like higher fuel prices or taxes. While I have some quibbles with the reviewer's interpretation of the sequence of events involved, he does clarify the choice we've made in pursuing vehicle efficiency gains through a mainly regulatory, rather than a more market-based route. That choice implicitly trades off obvious costs at the gas pump for hidden ones in the sticker prices of new cars, while providing nearly unlimited scope for tampering to promote specific, favored technologies, as exemplified in the joint EPA and Department of Transportation CAFE and tailpipe emissions rules that were finalized last week.
The review in question concerned the 2011 Mustang equipped with a Duratec V-6 engine developing 305 horsepower but still managing a respectable 31 highway miles per gallon, a 29% improvement over the current V-6 model and a nearly 35% improvement over the current base V-8 with which the performance of the new, more powerful six might reasonably be compared. With its 19 mpg in city driving, the effective overall 24 mpg of the new model hardly puts it into competition with efficiency leaders like the Prius or Ford's own 39 mpg Fusion hybrid, but then I'm not sure how much time the typical Mustang buyer would spend looking at such cars, even if they achieved 100 mpg. More importantly, the most cost-effective fuel savings--and thus reductions in both oil imports and greenhouse gas emissions--will for some time come from improving the fuel economy of ordinary, non-hybrid cars. Consider that the new Mustang will save the average driver 130 gallons of gasoline a year compared to the old one. Buying a hybrid Fusion instead of the regular 4-cylinder Fusion saves only 40 more gallons per year than that, though at an extra cost of at least $3,295 on the sticker price.
It's debatable whether Ford would have produced a car like the 2011 V-6 Mustang without the tougher CAFE standards set by the US Congress in late 2007 and just finalized this April 1st. While the Wall St. Journal's new car reviewer sees clear cause-and-effect and wishes to "raise a cheer for government fuel economy regulations," I can't help wondering about the impact of gasoline price volatility during the product design cycle of this car. The last time I took a serious look at the subject, car companies spent three to four years creating a new model or major redesign of an existing model, tooling up to implement it, and then starting production. In 2007 US retail gasoline prices averaged $2.84/gallon and were coming off the first-ever summer in which monthly-average prices broke the $3.00 mark and on their way to $4.00 just a year later. I see as much causality in the arrival three years later of a 31 mpg Mustang as in the much less fortuitous arrival in 2007 and 2008 of various big SUVs and pickups that would have been designed in 2004-5, when gas prices averaged $1.89 and $2.31, respectively. Although I'm sure that the impending changes in CAFE standards influenced Ford's design department to develop products like the Fusion hybrid and the new Mustang, there's also good reason to suspect that Ford responded to changing fuel prices in much the same way that consumers did, albeit with an inherent lag of several years.
As long as it remains politically suicidal to take steps to increase fuel prices and provide consumers and carmakers with some certainty that they will remain high, we can't rely on a volatile fuel market to provide consistent signals favoring higher fuel economy. There are also solid arguments for holding down fuel taxes, unless their revenues are dedicated to improved highway maintenance or returned to taxpayers via rebates or breaks on other taxes. In the absence of higher gas taxes, however, the main policy levers available for reducing national fuel consumption are high taxes on gas guzzling cars, such as those levied on engine displacement in the UK and elsewhere in Europe, or the CAFE pathway the US has followed since the 1970s--and that unintentionally helped spawn the entire SUV fad through its infamous "SUV loophole."
In its latest incarnation CAFE treats SUVs less generously but still provides manufacturers with credits for producing flexible fuel vehicles capable of burning E85 that consumers don't seem to want, by letting carmakers count them as though they used E85 half the time--1% is more like it--and then only counting the 15% gasoline content of the E85 consumed for that half. The new CAFE also treats plug-in electric vehicles as though they consume no energy at all and somehow displace two non-electric cars each. While the latter distortion might not turn out as badly as the SUV loophole, these rules--along with hefty EV subsidies for consumers--are certainly going to push carmakers in the direction of making a smaller number of full EVs at the expense of a much larger number of non-plug-in hybrids, or even modestly improved cars such as the new Mustang, which must have required a considerable investment in technology and production retooling. Stacking the deck in that manner looks like a very expensive way to reduce greenhouse gas emissions, compared to other options. I'd much rather have seen a simpler set of rules--spelled out in many fewer than 837 pages--that established the required mpg and emissions outcomes by year and left it to carmakers and consumers to work out how to achieve them.
It's easy to forget how much the fuel economy of comparable cars has improved during my lifetime. The Mustang review caught my eye because my first car was a used '65, a quintessential baby boomer car that defined its entire category. Yet even when driven conservatively, the best I could eke out of mine was about 14 mpg, and 12 wasn't an unusual result. You can run two of this year's model on the quantity of fuel my '65 consumed, and in considerably greater comfort and with about 1% of the non-greenhouse emissions. How much of that improvement should be attributed to CAFE standards, the general advance of technology over the intervening years, or because fuel prices have finally surpassed the inflation-equivalent of the $0.60/gal. or so that I was paying when I bought my first car?
The review in question concerned the 2011 Mustang equipped with a Duratec V-6 engine developing 305 horsepower but still managing a respectable 31 highway miles per gallon, a 29% improvement over the current V-6 model and a nearly 35% improvement over the current base V-8 with which the performance of the new, more powerful six might reasonably be compared. With its 19 mpg in city driving, the effective overall 24 mpg of the new model hardly puts it into competition with efficiency leaders like the Prius or Ford's own 39 mpg Fusion hybrid, but then I'm not sure how much time the typical Mustang buyer would spend looking at such cars, even if they achieved 100 mpg. More importantly, the most cost-effective fuel savings--and thus reductions in both oil imports and greenhouse gas emissions--will for some time come from improving the fuel economy of ordinary, non-hybrid cars. Consider that the new Mustang will save the average driver 130 gallons of gasoline a year compared to the old one. Buying a hybrid Fusion instead of the regular 4-cylinder Fusion saves only 40 more gallons per year than that, though at an extra cost of at least $3,295 on the sticker price.
It's debatable whether Ford would have produced a car like the 2011 V-6 Mustang without the tougher CAFE standards set by the US Congress in late 2007 and just finalized this April 1st. While the Wall St. Journal's new car reviewer sees clear cause-and-effect and wishes to "raise a cheer for government fuel economy regulations," I can't help wondering about the impact of gasoline price volatility during the product design cycle of this car. The last time I took a serious look at the subject, car companies spent three to four years creating a new model or major redesign of an existing model, tooling up to implement it, and then starting production. In 2007 US retail gasoline prices averaged $2.84/gallon and were coming off the first-ever summer in which monthly-average prices broke the $3.00 mark and on their way to $4.00 just a year later. I see as much causality in the arrival three years later of a 31 mpg Mustang as in the much less fortuitous arrival in 2007 and 2008 of various big SUVs and pickups that would have been designed in 2004-5, when gas prices averaged $1.89 and $2.31, respectively. Although I'm sure that the impending changes in CAFE standards influenced Ford's design department to develop products like the Fusion hybrid and the new Mustang, there's also good reason to suspect that Ford responded to changing fuel prices in much the same way that consumers did, albeit with an inherent lag of several years.
As long as it remains politically suicidal to take steps to increase fuel prices and provide consumers and carmakers with some certainty that they will remain high, we can't rely on a volatile fuel market to provide consistent signals favoring higher fuel economy. There are also solid arguments for holding down fuel taxes, unless their revenues are dedicated to improved highway maintenance or returned to taxpayers via rebates or breaks on other taxes. In the absence of higher gas taxes, however, the main policy levers available for reducing national fuel consumption are high taxes on gas guzzling cars, such as those levied on engine displacement in the UK and elsewhere in Europe, or the CAFE pathway the US has followed since the 1970s--and that unintentionally helped spawn the entire SUV fad through its infamous "SUV loophole."
In its latest incarnation CAFE treats SUVs less generously but still provides manufacturers with credits for producing flexible fuel vehicles capable of burning E85 that consumers don't seem to want, by letting carmakers count them as though they used E85 half the time--1% is more like it--and then only counting the 15% gasoline content of the E85 consumed for that half. The new CAFE also treats plug-in electric vehicles as though they consume no energy at all and somehow displace two non-electric cars each. While the latter distortion might not turn out as badly as the SUV loophole, these rules--along with hefty EV subsidies for consumers--are certainly going to push carmakers in the direction of making a smaller number of full EVs at the expense of a much larger number of non-plug-in hybrids, or even modestly improved cars such as the new Mustang, which must have required a considerable investment in technology and production retooling. Stacking the deck in that manner looks like a very expensive way to reduce greenhouse gas emissions, compared to other options. I'd much rather have seen a simpler set of rules--spelled out in many fewer than 837 pages--that established the required mpg and emissions outcomes by year and left it to carmakers and consumers to work out how to achieve them.
It's easy to forget how much the fuel economy of comparable cars has improved during my lifetime. The Mustang review caught my eye because my first car was a used '65, a quintessential baby boomer car that defined its entire category. Yet even when driven conservatively, the best I could eke out of mine was about 14 mpg, and 12 wasn't an unusual result. You can run two of this year's model on the quantity of fuel my '65 consumed, and in considerably greater comfort and with about 1% of the non-greenhouse emissions. How much of that improvement should be attributed to CAFE standards, the general advance of technology over the intervening years, or because fuel prices have finally surpassed the inflation-equivalent of the $0.60/gal. or so that I was paying when I bought my first car?
Tuesday, July 21, 2009
How Much Per Gallon?
A book I recently received from a publisher makes an interesting contrast with last Friday's posting on how many cars our current oil production might eventually support. Its title of "$20 Per Gallon" demands attention, though the book proves to be less of an argument for how we might get there than for what things might be like if--the author would say when--we did. Rather than providing detailed arguments for the imminent arrival of Peak Oil, Mr. Steiner essentially accepts that premise and builds on it to offer a set of scenarios describing life in the US at gasoline prices escalating steadily in $2 increments between $4 and $20 per gallon. It makes for an entertaining and sobering set of "what ifs?" Unfortunately, despite a brief author's note dated from February of this year, the book is something of a victim of the collapse of oil prices late last year. While its premise might have been accepted eagerly and unquestioningly last summer, the world looks a bit different today. The challenges he describes appear somewhat less urgent, particularly after oil's recent surge past $70 per barrel was cut short when it turned out that all that talk of "green shoots" might have been a bit premature.
In a sense "$20 Per Gallon" seems like two books, one quite interesting and the other seriously flawed, at least as a document about our energy future. The interesting part lies in the author's exploration of what successively higher energy prices might mean for different aspects of the US economy and lifestyle. True to its subtitle, it's hardly a tale of uniform woe, unless you have the misfortune of working in one of the sectors he concludes is doomed, including anything connected to commercial air travel as we now know it. He points out the environmental, health and safety benefits that might ensue from our responses to progressively dearer petroleum-derived products. Many of these benefits sound quite appealing, though I would propose that they are neither as inevitable nor as neatly tied to oil use as Mr. Steiner suggests. The book is also filled with anecdotes accumulated from his travels researching its subject. I particularly liked his description of the airplane graveyard and his rides in various energy-efficient UPS trucks. If you come to this book already convinced that we are on the precipice of Peak Oil, I suspect you would find most of this not just entertaining, but riveting.
The book is less likely to appeal to anyone who is skeptical about the inevitability of Mr. Steiner's scenario assumptions. Start with his structural choice of using gasoline prices as a proxy for underlying oil prices, despite the fact that petroleum product markets experience supply and demand fluctuations that differ--sometimes markedly--from oil's. This choice also ignores the enormous influence of taxes and other government policies on gas prices. You don't need $300/bbl oil to reach $8 gasoline, as European drivers can attest. Last week the price of the average gallon of gas in the US fell to $2.46/gal., compared to the equivalent of $6.40/gal. in the UK and $6.77/gal. in Germany. The difference is almost entirely due to taxes. Despite this, daily life in those countries is not so far beyond the pale of recent American experience as to frighten small children. The implications of a world of high fuel prices resulting from the combination of moderate oil prices and high taxation look quite different from those arising from oil prices above last summer's peak of $145/bbl.
There's an even bigger issue lurking under the surface, and it relates to the author's conviction that in the long run oil prices can only go higher--much higher--due to Peak Oil. There's at least some truth to that, and I've posted periodically on the enormous difficulties involved in attempting to increase oil production in the face of constraints on access to resources--internationally and domestically--along with high interest rates, scarce capital, chronic project delays, and the inexorable depletion of mature oil fields. But oil prices are determined by more than supply, and while he eagerly describes all of the ways in which we would have to adjust our habits to a world of higher and higher gasoline prices, I don't get the sense that Mr. Steiner has considered the ways in which these responses would tend to retard the steady price advances he describes. We have only to look at the impact that a demand reduction of less than 4% since late 2007 has had on oil prices in the last 12 months. That responsiveness to lower demand is as inherent in a commodity with a steeply-sloped short-run supply curve as were the high prices that accompanied the steadily increasing demand we saw earlier. This behavior reflects two sides of the same coin.
The complexities of the various feedback mechanisms involved would also make some of the positive outcomes that Mr. Steiner sees more uncertain. Consider the drop in traffic fatalities that he posits as a consequence of higher gas prices. While you would generally expect people to drive less if gasoline were much more expensive, that response would probably be less pronounced in the long run than in the short run, because of the other ways in which consumers would react. $4 gasoline is painful if your current automobile gets 20 mpg. However, once you've traded it in on a 50 mpg hybrid, your cost per mile--and thus your monthly fuel bill--is lower even at $6/gal. than it was before at $3.
In addition to these concerns, I noticed a few basic errors and misleading comparisons along the way. Compared to the above, they are nit-picks, but anyone who reads the book ought to bear them in mind. First, Mr. Steiner suggests a pretty dramatic impact from high gasoline prices on all the plastics we consume, without delving deeply enough to determine that most of the ethylene- and propylene-derivative plastics in North America--including Saran Wrap--aren't sourced from oil but from the liquids produced with natural gas. That's a crucial distinction, with vast new gas resources available and with the prices of oil and gas having diverged rather dramatically, at least for now. He also makes several numerical comparisons between the response to last year's oil price spike and the aftermath of the oil crisis of the 1970s without taking into account the 42% increase in US population since 1974.
I have to believe that Mr. Steiner would have written a somewhat different book, had he begun the project this year rather than last. I don't doubt that some of the outcomes he describes are waiting on the sidelines until the economy climbs out of its current trough, even if oil prices don't quite reach the stratospheric heights he expects. For example, it wouldn't take the oil-price equivalent of $8/gal. to trigger a radical restructuring of the airline business, after what's it's been through. At the same time, though, I doubt we've seen the last oil price cycle, and the relationship between the prices of oil and alternative energy sources remains complex and dynamic. In some respects proposals such as cap & trade or a carbon tax are intended to evoke some of the same responses that Mr. Steiner imagines, but on a gradual basis and without having to pay an external supplier for the privilege of motivating us. I suggest reading "$20 Per Barrel" in that spirit, rather than as a firm prediction of the inevitable future of our oil-based world.
In a sense "$20 Per Gallon" seems like two books, one quite interesting and the other seriously flawed, at least as a document about our energy future. The interesting part lies in the author's exploration of what successively higher energy prices might mean for different aspects of the US economy and lifestyle. True to its subtitle, it's hardly a tale of uniform woe, unless you have the misfortune of working in one of the sectors he concludes is doomed, including anything connected to commercial air travel as we now know it. He points out the environmental, health and safety benefits that might ensue from our responses to progressively dearer petroleum-derived products. Many of these benefits sound quite appealing, though I would propose that they are neither as inevitable nor as neatly tied to oil use as Mr. Steiner suggests. The book is also filled with anecdotes accumulated from his travels researching its subject. I particularly liked his description of the airplane graveyard and his rides in various energy-efficient UPS trucks. If you come to this book already convinced that we are on the precipice of Peak Oil, I suspect you would find most of this not just entertaining, but riveting.
The book is less likely to appeal to anyone who is skeptical about the inevitability of Mr. Steiner's scenario assumptions. Start with his structural choice of using gasoline prices as a proxy for underlying oil prices, despite the fact that petroleum product markets experience supply and demand fluctuations that differ--sometimes markedly--from oil's. This choice also ignores the enormous influence of taxes and other government policies on gas prices. You don't need $300/bbl oil to reach $8 gasoline, as European drivers can attest. Last week the price of the average gallon of gas in the US fell to $2.46/gal., compared to the equivalent of $6.40/gal. in the UK and $6.77/gal. in Germany. The difference is almost entirely due to taxes. Despite this, daily life in those countries is not so far beyond the pale of recent American experience as to frighten small children. The implications of a world of high fuel prices resulting from the combination of moderate oil prices and high taxation look quite different from those arising from oil prices above last summer's peak of $145/bbl.
There's an even bigger issue lurking under the surface, and it relates to the author's conviction that in the long run oil prices can only go higher--much higher--due to Peak Oil. There's at least some truth to that, and I've posted periodically on the enormous difficulties involved in attempting to increase oil production in the face of constraints on access to resources--internationally and domestically--along with high interest rates, scarce capital, chronic project delays, and the inexorable depletion of mature oil fields. But oil prices are determined by more than supply, and while he eagerly describes all of the ways in which we would have to adjust our habits to a world of higher and higher gasoline prices, I don't get the sense that Mr. Steiner has considered the ways in which these responses would tend to retard the steady price advances he describes. We have only to look at the impact that a demand reduction of less than 4% since late 2007 has had on oil prices in the last 12 months. That responsiveness to lower demand is as inherent in a commodity with a steeply-sloped short-run supply curve as were the high prices that accompanied the steadily increasing demand we saw earlier. This behavior reflects two sides of the same coin.
The complexities of the various feedback mechanisms involved would also make some of the positive outcomes that Mr. Steiner sees more uncertain. Consider the drop in traffic fatalities that he posits as a consequence of higher gas prices. While you would generally expect people to drive less if gasoline were much more expensive, that response would probably be less pronounced in the long run than in the short run, because of the other ways in which consumers would react. $4 gasoline is painful if your current automobile gets 20 mpg. However, once you've traded it in on a 50 mpg hybrid, your cost per mile--and thus your monthly fuel bill--is lower even at $6/gal. than it was before at $3.
In addition to these concerns, I noticed a few basic errors and misleading comparisons along the way. Compared to the above, they are nit-picks, but anyone who reads the book ought to bear them in mind. First, Mr. Steiner suggests a pretty dramatic impact from high gasoline prices on all the plastics we consume, without delving deeply enough to determine that most of the ethylene- and propylene-derivative plastics in North America--including Saran Wrap--aren't sourced from oil but from the liquids produced with natural gas. That's a crucial distinction, with vast new gas resources available and with the prices of oil and gas having diverged rather dramatically, at least for now. He also makes several numerical comparisons between the response to last year's oil price spike and the aftermath of the oil crisis of the 1970s without taking into account the 42% increase in US population since 1974.
I have to believe that Mr. Steiner would have written a somewhat different book, had he begun the project this year rather than last. I don't doubt that some of the outcomes he describes are waiting on the sidelines until the economy climbs out of its current trough, even if oil prices don't quite reach the stratospheric heights he expects. For example, it wouldn't take the oil-price equivalent of $8/gal. to trigger a radical restructuring of the airline business, after what's it's been through. At the same time, though, I doubt we've seen the last oil price cycle, and the relationship between the prices of oil and alternative energy sources remains complex and dynamic. In some respects proposals such as cap & trade or a carbon tax are intended to evoke some of the same responses that Mr. Steiner imagines, but on a gradual basis and without having to pay an external supplier for the privilege of motivating us. I suggest reading "$20 Per Barrel" in that spirit, rather than as a firm prediction of the inevitable future of our oil-based world.
Monday, February 23, 2009
Logical Disconnect
According to a story in Saturday's Washington Post, the new Secretary of Transportation stepped out of line when he suggested that collecting the road tax based on miles traveled might be preferable to taxing sales of motor fuel. This is a complex issue, and I hope that Secretary LaHood won't let the matter drop, there. More importantly, the curt response from the White House signals a potential logical disconnect at the heart of the new administration's energy and transportation policies, which are aimed squarely at reducing oil imports and greenhouse gas emissions from the transportation sector by making cars much more efficient and shifting large numbers of them to electricity. If these measures succeed, they will surely dry up revenue for the Federal Highway Fund and leave our infrastructure in an even worse state than the "D" grade it recently received from the American Society of Civil Engineers. On the other hand, if the White House believes this funding source remains sound, they implicitly acknowledge that the vehicle efficiency and electrification transition will take a lot longer than Americans have been led to expect.
At first glance, this disconnect seems quite minor in the context of arresting a recession we are constantly told is without precedent in the post-World War II era, and of the equally daunting project of getting the country's greenhouse gas emissions and "oil addiction" under control. After all, the current federal excise tax on gasoline is only 18.4 cents per gallon, and it wouldn't take a very large increase to offset the revenue lost from annual sales declines on the order of the 3% or so the US experienced last year, which equated to about a $1 B drop in tax receipts. The problem, however, is that the energy and environmental policies on which President Obama campaigned envisioned reducing oil consumption not by a few hundred thousand barrels per day, but by millions, with most of that coming out of gasoline demand.
I don't underestimate the difficulties involved in rethinking the present system. We can't tax fuel efficiency without making it less attractive than it already is, when gasoline sells for $2 per gallon. Nor do I think consumers would be as welcoming of new "smart" electricity meters, if they thought they were opening the door to paying a tax on the power used to recharge the plug-in hybrid or electric cars they might hope someday to own. I also got a small taste of the privacy concerns entailed in taxing actual miles driven by means of GPS-based technology, in the form of some very pointed comments when I wrote favorably concerning that option several years ago. But even a purely mileage-based system might not be sufficient to avert a decline in road tax revenues, if last year's reversal of the trend in Vehicle Miles Traveled turns out to have been a true inflection point in the long-term trend.
However difficult it might ultimately be to resolve this emerging challenge, dismissing it out of hand is a mistake. Such a response risks undermining the image of an administration meant to be filled will serious people who carefully think through all the consequences of their actions. Whatever the White House thought about Secretary LaHood's comments about the road tax, it would have been far better to have acknowledged that this is something that must eventually be approached with prudence and creativity. There is still time for that, even if this issue must wait on the back burner while the nation deals with bigger, more urgent problems. If the response to low gas prices that I highlighted in last Thursday's posting persists, federal highway tax receipts might actually rise this year, though I wouldn't bank on that trend lasting long enough to negate Mr. LaHood's worries.
At first glance, this disconnect seems quite minor in the context of arresting a recession we are constantly told is without precedent in the post-World War II era, and of the equally daunting project of getting the country's greenhouse gas emissions and "oil addiction" under control. After all, the current federal excise tax on gasoline is only 18.4 cents per gallon, and it wouldn't take a very large increase to offset the revenue lost from annual sales declines on the order of the 3% or so the US experienced last year, which equated to about a $1 B drop in tax receipts. The problem, however, is that the energy and environmental policies on which President Obama campaigned envisioned reducing oil consumption not by a few hundred thousand barrels per day, but by millions, with most of that coming out of gasoline demand.
I don't underestimate the difficulties involved in rethinking the present system. We can't tax fuel efficiency without making it less attractive than it already is, when gasoline sells for $2 per gallon. Nor do I think consumers would be as welcoming of new "smart" electricity meters, if they thought they were opening the door to paying a tax on the power used to recharge the plug-in hybrid or electric cars they might hope someday to own. I also got a small taste of the privacy concerns entailed in taxing actual miles driven by means of GPS-based technology, in the form of some very pointed comments when I wrote favorably concerning that option several years ago. But even a purely mileage-based system might not be sufficient to avert a decline in road tax revenues, if last year's reversal of the trend in Vehicle Miles Traveled turns out to have been a true inflection point in the long-term trend.
However difficult it might ultimately be to resolve this emerging challenge, dismissing it out of hand is a mistake. Such a response risks undermining the image of an administration meant to be filled will serious people who carefully think through all the consequences of their actions. Whatever the White House thought about Secretary LaHood's comments about the road tax, it would have been far better to have acknowledged that this is something that must eventually be approached with prudence and creativity. There is still time for that, even if this issue must wait on the back burner while the nation deals with bigger, more urgent problems. If the response to low gas prices that I highlighted in last Thursday's posting persists, federal highway tax receipts might actually rise this year, though I wouldn't bank on that trend lasting long enough to negate Mr. LaHood's worries.
Wednesday, January 14, 2009
A Gasoline Floor Price for Hybrid Cars
The coverage of this year's Detroit Car Show has focused on hybrids and electric vehicles, with a number of high-profile launches, including the debut of the third generation Toyota Prius. However, as convinced as I am that electric-drive cars represent the future of the car industry and will make important contributions to reducing greenhouse gas emissions and oil imports, the collapse of oil prices has erected a substantial barrier to the rapid market penetration of these technologies. Nor can the answer be simply ratcheting up the nation's Corporate Average Fuel Economy (CAFE) standard, as the New York Times recently suggested. We need a practical way to bridge the gap between consumers' growing interest in electrified vehicles and the economic deterrent posed by the added cost of these complex systems. Rather than taxing fuel itself, as has been widely suggested, we should consider a new hybrid car tax credit based on the price of fuel.
Despite growing interest in hybrids, these vehicles accounted for only 2.4% of the 13.2 million light-duty vehicles sold in the US last year. Although its 2008 sales of around 160,000 units made the Prius the 15th most popular model in the US last year, it did not even make it into the top 20 for December, thanks to slumping gasoline prices and the credit crunch. For that matter, the December monthly figures showed trucks, including SUVs, outselling cars again at 53% vs. 47% of the market, essentially back to their average for 2007. For all of 2008 cars outsold trucks by 51% to 49%, though that included those summer months of $4 gas when you couldn't have given a big SUV away. Perhaps the most encouraging news in this data is that sales of "cross-over" SUVs declined much less than other light trucks to become the largest segment of that market. (Moving someone from a 15 mpg SUV to a 22 mpg crossover saves more gallons of gas than converting a Camry owner to a Prius driver.)
The lackluster hybrid sales at the end of the year shouldn't surprise anyone. Consider the Saturn VUE crossover SUV. The sticker for the hybrid version is $4,880 higher than the base model with the same 4-cylinder engine. Boosting fuel economy from an EPA-estimated combined 22 mpg to 28 mpg saves 117 gallons of gas per year, based on 12,000 miles of annual driving. Yet even if gas were still $4 per gallon, it would take 10.4 years of fuel savings to pay out the hybrid premium. With gas at $1.78/gal., that stretches to 23 years. If the savings at the pump aren't sufficient to justifying spending an extra $5k on the hybrid, a buyer must bet that the combination of higher resale value and lower maintenance costs would close the gap.
How could the government induce more consumers to buy hybrids, even when fuel costs are too low to justify the extra investment? One option is to raise the CAFE standard beyond the 35 mpg target that the industry must meet by 2020. That might force manufacturers to produce more hybrids, bringing their cost down, and sell fewer non-hybrids, which would tighten the market, reducing the effective premium from both ends. The Congress would like to impose that outcome, in any case, as a condition of financial assistance to Detroit. Unfortunately, such a command-and-control approach risks creating another disconnect between car companies and consumers, and the modest fines by which CAFE has been enforced may end up looking more attractive to Detroit than the distortions an unrealistic fuel economy standard could create in their already-strained sales channels.
Another solution would be a big increase in the gasoline tax, or a floor-price tax on gas, to boost pump prices to a level that would ensure high demand for very fuel-efficient cars. As I noted the other day, however, the gas tax looks like a much less effective way to reduce greenhouse gas emissions than a tax on carbon or emissions cap-and-trade that would create a similar disincentive for CO2. Nor does raising the gas tax during a major recession--even if a large portion of the revenue could be returned to taxpayers--look like smart economic policy, when the recent drop in fuel prices is among the few forms of relief actually reaching consumers and smaller businesses.
Perhaps the answer lies in inverting the proposition offered in those car ads we saw when gas prices were rising steadily--the ones that promised your first few years of fill-ups at some low fixed price. To make hybrids more attractive, we could replace the current, expiring hybrid tax credits with a new, fully-refundable tax credit--one that the government pays even if it exceeds your income tax liability for the year--that would create an effective gasoline floor price of $4, but only for the purchasers of hybrid cars. The amount of the credit would be set by the difference between $4 per gallon and the national average pump price for each year, applied to the EPA fuel economy rating of the hybrid purchased. This could easily be made technology-neutral by extending it to any car exceeding the actual new-vehicle CAFE for the previous year, which for the 2008 model year averaged 31.2 mpg for cars and 23.4 for trucks. Even with this modification, the bulk of the subsidy would still flow to the models that save the most fuel.
For example, if we calculated the credit on 10,000 miles of annual usage, a buyer of the new 37 mpg Ford Fusion Hybrid would receive a credit of $600 for 2009, if gasoline remained at last week's average of $1.78/gal for the entire year. Of course, that would be in addition to roughly $260 of actual fuel savings, compared to the 24 mpg non-hybrid Fusion. If gas prices averaged $3 in 2010, this taxpayer's credit would drop to $270, while fuel savings rose to $440. Once gas was back over $4, the tax credit would go to zero.
Despite growing interest in hybrids, these vehicles accounted for only 2.4% of the 13.2 million light-duty vehicles sold in the US last year. Although its 2008 sales of around 160,000 units made the Prius the 15th most popular model in the US last year, it did not even make it into the top 20 for December, thanks to slumping gasoline prices and the credit crunch. For that matter, the December monthly figures showed trucks, including SUVs, outselling cars again at 53% vs. 47% of the market, essentially back to their average for 2007. For all of 2008 cars outsold trucks by 51% to 49%, though that included those summer months of $4 gas when you couldn't have given a big SUV away. Perhaps the most encouraging news in this data is that sales of "cross-over" SUVs declined much less than other light trucks to become the largest segment of that market. (Moving someone from a 15 mpg SUV to a 22 mpg crossover saves more gallons of gas than converting a Camry owner to a Prius driver.)
The lackluster hybrid sales at the end of the year shouldn't surprise anyone. Consider the Saturn VUE crossover SUV. The sticker for the hybrid version is $4,880 higher than the base model with the same 4-cylinder engine. Boosting fuel economy from an EPA-estimated combined 22 mpg to 28 mpg saves 117 gallons of gas per year, based on 12,000 miles of annual driving. Yet even if gas were still $4 per gallon, it would take 10.4 years of fuel savings to pay out the hybrid premium. With gas at $1.78/gal., that stretches to 23 years. If the savings at the pump aren't sufficient to justifying spending an extra $5k on the hybrid, a buyer must bet that the combination of higher resale value and lower maintenance costs would close the gap.
How could the government induce more consumers to buy hybrids, even when fuel costs are too low to justify the extra investment? One option is to raise the CAFE standard beyond the 35 mpg target that the industry must meet by 2020. That might force manufacturers to produce more hybrids, bringing their cost down, and sell fewer non-hybrids, which would tighten the market, reducing the effective premium from both ends. The Congress would like to impose that outcome, in any case, as a condition of financial assistance to Detroit. Unfortunately, such a command-and-control approach risks creating another disconnect between car companies and consumers, and the modest fines by which CAFE has been enforced may end up looking more attractive to Detroit than the distortions an unrealistic fuel economy standard could create in their already-strained sales channels.
Another solution would be a big increase in the gasoline tax, or a floor-price tax on gas, to boost pump prices to a level that would ensure high demand for very fuel-efficient cars. As I noted the other day, however, the gas tax looks like a much less effective way to reduce greenhouse gas emissions than a tax on carbon or emissions cap-and-trade that would create a similar disincentive for CO2. Nor does raising the gas tax during a major recession--even if a large portion of the revenue could be returned to taxpayers--look like smart economic policy, when the recent drop in fuel prices is among the few forms of relief actually reaching consumers and smaller businesses.
Perhaps the answer lies in inverting the proposition offered in those car ads we saw when gas prices were rising steadily--the ones that promised your first few years of fill-ups at some low fixed price. To make hybrids more attractive, we could replace the current, expiring hybrid tax credits with a new, fully-refundable tax credit--one that the government pays even if it exceeds your income tax liability for the year--that would create an effective gasoline floor price of $4, but only for the purchasers of hybrid cars. The amount of the credit would be set by the difference between $4 per gallon and the national average pump price for each year, applied to the EPA fuel economy rating of the hybrid purchased. This could easily be made technology-neutral by extending it to any car exceeding the actual new-vehicle CAFE for the previous year, which for the 2008 model year averaged 31.2 mpg for cars and 23.4 for trucks. Even with this modification, the bulk of the subsidy would still flow to the models that save the most fuel.
For example, if we calculated the credit on 10,000 miles of annual usage, a buyer of the new 37 mpg Ford Fusion Hybrid would receive a credit of $600 for 2009, if gasoline remained at last week's average of $1.78/gal for the entire year. Of course, that would be in addition to roughly $260 of actual fuel savings, compared to the 24 mpg non-hybrid Fusion. If gas prices averaged $3 in 2010, this taxpayer's credit would drop to $270, while fuel savings rose to $440. Once gas was back over $4, the tax credit would go to zero.
It sounds complicated, though in practice it would merely be a hedge contract on the price of fuel--in the opposite direction from the ones typically offered to heating oil customers--conferring the equivalent of a set of annual put options on gasoline at $4. It probably would not be any more difficult to implement than a floor-price tax for all gasoline sold, even if the latter were politically feasible or economically desirable. It would also have the benefit of a built-in phaseout, as overall fleet fuel economy increases and future gas prices rise.
Perhaps someone can think of a simpler way to reduce the uncertainty of hybrid car buyers about future fuel prices than by issuing federal gasoline floor price tax credits. What we can't do is merely to hope that gas prices will recover enough to make hybrids and other advanced technology vehicles attractive on their own merits, or to assume that consumers will remain so stunned by last summer's high gas prices that they will buy the most efficient cars possible, even if they don't promise a financial return. This discussion will turn distinctly non-theoretical as soon as the government considers another round of financial assistance for a Detroit that it insists must build as many hybrids as possible.
Monday, January 05, 2009
Choosing A Priority
The new year brings no shortage of energy concerns, even though oil prices are much lower than last January. Instead of enumerating those that I think merit particular attention, for today I'd like to focus on an over-arching energy policy choice facing the US. The recent flurry of calls for a quick increase in the tax on gasoline highlights the need for us finally to decide whether energy security or climate change constitutes the higher priority for urgent action. Altered circumstances have undermined the natural linkages between these two problems, and the financial crisis and recession make it not just impractical, but undesirable to attempt to tackle both with equal vigor.
During the holidays I received emails from friends and other readers pointing out various op-eds calling for a big increase in US gas taxes. The arguments in favor of such a measure include reducing US oil imports from unfriendly nations and making fuel-efficient cars and other advanced energy technology more attractive for consumers and investors. The current low gas prices would allow such a tax to be imposed with much less pain than only a few months ago. Yet as Tom Friedman's New York Times column on the subject recognized, this entails an explicit choice between taxing gasoline and taxing the greenhouse gas emissions linked to climate change. Friedman has been a consistent supporter of higher gas taxes, and he still comes down on that side of the argument. For many reasons, I disagree, but it's even more important to choose one strategy or the other than to continue assuming that we can do both, if we wish.
The need for a choice between the two is rooted in our basic energy balance and the trade-offs that a carbon tax or a gas tax would stimulate, and in the potential of alternative energy sources to displace coal, oil, or both. Oil today accounts for 39% of US primary energy consumption and 15% of US energy production--more like 23% if natural gas produced from oil fields is included. Coal makes up another 22% of energy consumption and nearly 33% of production. Simply put, we can't grow the 1% of current US energy production from wind, solar and geothermal power fast enough to replace the 62% of energy consumption supplied by both oil and coal in the foreseeable future, never mind the enormous problems of technology and capital turnover involved in trying to substitute renewable electricity for the liquid transportation fuels, lubricants and petrochemicals that account for all but a small fraction of our oil consumption. Even doubling current ethanol production, which hinges on as yet uncommercial cellulosic biofuel technology, would only back out around 2% of US oil use, at 2008's reduced rates. We also need to be clear that putting a price on carbon emissions will have a much bigger impact on our coal use than on our oil imports.
Throughout 2007 and into 2008, as oil prices climbed and concerns about climate change mounted, while the economy remained surprisingly resilient, it was hard to choose between the importance of reducing oil imports and reducing greenhouse gas emissions, and it looked possible to do both. Moreover, energy security and climate change appeared positively synergistic, with reductions in oil consumption expected to reduce emissions and emissions-reducing policies seen as cutting oil consumption, as a side-benefit. But while those physical synergies still look attractive, the rapid decline in oil prices has drastically reduced the urgency and near-term economic benefits of tackling our oil dependence, particularly during what is shaping up to be the deepest recession since World War II. That makes the emissions reductions associated with reducing our oil imports more expensive, compared to other reductions.
Taxing gasoline, rather than carbon, would certainly reduce the greenhouse gas emissions from our use of petroleum, but it could easily result in largely offsetting emissions increases elsewhere, as industry turned increasingly to coal and natural gas for feedstocks, and as biofuels--which would likely be exempted from the tax increase--would mainly be produced in the near term from food crops that require significant inputs of energy-intensive fertilizer and cultivation. Sales of efficient cars would be helped, no doubt aiding a Detroit that seems certain to be forced to make more of them, as a condition of further federal assistance. However, the accompanying fleet-efficiency gains will occur slowly, as long as total car sales--and thus the total fleet turnover rate--remain depressed by a weak economy.
That brings us to the direct economic impact of a gas tax. Until a federal stimulus is passed and actually reaches consumers and businesses, cheap gas and diesel fuel are the stimulus, to the tune of roughly $37 billion/month compared to July/August 2008 prices. I take suggestions that a higher tax on petroleum products could be made revenue-neutral--that is, returned dollar-for-dollar to consumers/taxpayers through cuts in other taxes--with more than a grain of salt. With all due respect to the incoming Congress, that institution has not demonstrated the requisite spending restraint, faced with the prospect of a major new revenue source, in many years. It certainly wasn't on display in last year's debate on the Boxer-Lieberman-Warner emissions cap-and-trade bill.
Although I expect oil prices to recover, once the economy does, the recession presents us with a unique opportunity to begin realigning the entire economy, not just to use less oil as it returns to growth, but to be much less carbon-intensive, overall. With greenhouse gas emissions from the electricity sector exceeding those from transportation by at least 20%, and with renewable power sources looking much more viable and sustainable than current-generation biofuels, focusing on climate change and the gradual and systematic de-carbonization of the economy now seems like a better priority than "energy independence," which has remained unattainable for more than a generation. It will be hard enough for the Obama administration to determine how aggressively to pursue climate policies in the current environment, without the distraction of a gas-tax debate. And while energy security remains vitally important, in its broader definition, it can be achieved for now through the same strategy of supplier diversification that served us so well after the energy crisis of the 1970s-80s.
During the holidays I received emails from friends and other readers pointing out various op-eds calling for a big increase in US gas taxes. The arguments in favor of such a measure include reducing US oil imports from unfriendly nations and making fuel-efficient cars and other advanced energy technology more attractive for consumers and investors. The current low gas prices would allow such a tax to be imposed with much less pain than only a few months ago. Yet as Tom Friedman's New York Times column on the subject recognized, this entails an explicit choice between taxing gasoline and taxing the greenhouse gas emissions linked to climate change. Friedman has been a consistent supporter of higher gas taxes, and he still comes down on that side of the argument. For many reasons, I disagree, but it's even more important to choose one strategy or the other than to continue assuming that we can do both, if we wish.
The need for a choice between the two is rooted in our basic energy balance and the trade-offs that a carbon tax or a gas tax would stimulate, and in the potential of alternative energy sources to displace coal, oil, or both. Oil today accounts for 39% of US primary energy consumption and 15% of US energy production--more like 23% if natural gas produced from oil fields is included. Coal makes up another 22% of energy consumption and nearly 33% of production. Simply put, we can't grow the 1% of current US energy production from wind, solar and geothermal power fast enough to replace the 62% of energy consumption supplied by both oil and coal in the foreseeable future, never mind the enormous problems of technology and capital turnover involved in trying to substitute renewable electricity for the liquid transportation fuels, lubricants and petrochemicals that account for all but a small fraction of our oil consumption. Even doubling current ethanol production, which hinges on as yet uncommercial cellulosic biofuel technology, would only back out around 2% of US oil use, at 2008's reduced rates. We also need to be clear that putting a price on carbon emissions will have a much bigger impact on our coal use than on our oil imports.
Throughout 2007 and into 2008, as oil prices climbed and concerns about climate change mounted, while the economy remained surprisingly resilient, it was hard to choose between the importance of reducing oil imports and reducing greenhouse gas emissions, and it looked possible to do both. Moreover, energy security and climate change appeared positively synergistic, with reductions in oil consumption expected to reduce emissions and emissions-reducing policies seen as cutting oil consumption, as a side-benefit. But while those physical synergies still look attractive, the rapid decline in oil prices has drastically reduced the urgency and near-term economic benefits of tackling our oil dependence, particularly during what is shaping up to be the deepest recession since World War II. That makes the emissions reductions associated with reducing our oil imports more expensive, compared to other reductions.
Taxing gasoline, rather than carbon, would certainly reduce the greenhouse gas emissions from our use of petroleum, but it could easily result in largely offsetting emissions increases elsewhere, as industry turned increasingly to coal and natural gas for feedstocks, and as biofuels--which would likely be exempted from the tax increase--would mainly be produced in the near term from food crops that require significant inputs of energy-intensive fertilizer and cultivation. Sales of efficient cars would be helped, no doubt aiding a Detroit that seems certain to be forced to make more of them, as a condition of further federal assistance. However, the accompanying fleet-efficiency gains will occur slowly, as long as total car sales--and thus the total fleet turnover rate--remain depressed by a weak economy.
That brings us to the direct economic impact of a gas tax. Until a federal stimulus is passed and actually reaches consumers and businesses, cheap gas and diesel fuel are the stimulus, to the tune of roughly $37 billion/month compared to July/August 2008 prices. I take suggestions that a higher tax on petroleum products could be made revenue-neutral--that is, returned dollar-for-dollar to consumers/taxpayers through cuts in other taxes--with more than a grain of salt. With all due respect to the incoming Congress, that institution has not demonstrated the requisite spending restraint, faced with the prospect of a major new revenue source, in many years. It certainly wasn't on display in last year's debate on the Boxer-Lieberman-Warner emissions cap-and-trade bill.
Although I expect oil prices to recover, once the economy does, the recession presents us with a unique opportunity to begin realigning the entire economy, not just to use less oil as it returns to growth, but to be much less carbon-intensive, overall. With greenhouse gas emissions from the electricity sector exceeding those from transportation by at least 20%, and with renewable power sources looking much more viable and sustainable than current-generation biofuels, focusing on climate change and the gradual and systematic de-carbonization of the economy now seems like a better priority than "energy independence," which has remained unattainable for more than a generation. It will be hard enough for the Obama administration to determine how aggressively to pursue climate policies in the current environment, without the distraction of a gas-tax debate. And while energy security remains vitally important, in its broader definition, it can be achieved for now through the same strategy of supplier diversification that served us so well after the energy crisis of the 1970s-80s.
Wednesday, November 19, 2008
A Taxing Opportunity
While watching the scenery from Amtrak's Acela on my way back from a meeting in New York yesterday, I made my first sighting of $1.99 per gallon gasoline, posted on the polesign of a station in Delaware. With wholesale gasoline trading on the New York Mercantile Exchange for $1.138 per gallon at yesterday's close--nearly $7 per barrel below the closing price for light sweet crude oil--most of the country could shortly be paying less than $2/gal. for unleaded regular, for the first time in more than three years. An op-ed in yesterday's Washington Post started me thinking about gasoline taxes, again, and I agree that the current gas price collapse provides a uniquely opportune time for a symbolic increase in the federal gasoline tax, which has not been raised since 1993.
Raising taxes in a recession isn't terribly sound economics in general, but gasoline in 2008 presents an unusual case. As I noted in Monday's posting, the decline in prices from their summer peak to last week's $2.22/gal. average puts roughly $260 billion per year back in the pockets of US consumers, at a time when that ought to be quite helpful. However, it's equally clear that low gasoline prices will complicate the task of selling more efficient cars to an American public that is already buying fewer cars than at any time since the recession of the early 1990s. Moreover, with gasoline demand running at least 3% below last year's at this time, and with prices now a dollar per gallon lower than they were a year ago, and below their annual averages for 2005, 2006 and 2007, state and municipal tax revenues from sales taxes on gasoline will also fall well below expectations. That puts further pressure on state and local budgets already stressed by falling home values and rising unemployment, and it could force cuts in infrastructure projects that many economists suggest we need more of, just now, not less.
This needn't conflict with the necessity to put a price on our emissions of greenhouse gases, effectively taxing fuels on their inherent carbon content. My preference has been for cap & trade, but a simple carbon tax would do much the same thing. Every $10 per ton imposed on CO2 emissions would raise gasoline prices by roughly 10 cents per gallon, anyway, so I'd resist calls for the "big honking tax on gasoline" that Mr. Sloan's op-ed suggests. But with gas prices dropping by more than a dime per week since September, a 10 cent gas tax hike would scarcely be noticed, leaving that $260 billion effective stimulus I mentioned earlier untouched. It could also be shared with the states, with half of the roughly $14 billion per year it would raise going to fund federal infrastructure projects, and the other half allocated to backstop state-financed road and bridge work.
Ten cents a gallon might not sound like much, though the 4.3 cent increase in 1993 cost another first-year President a good deal of political capital. By itself, it wouldn't change the way Americans drive or buy cars. Nor would it be sufficient to nudge consumers towards diesel cars, when diesel fuel has carried an average premium of $0.50/gal. over unleaded regular this year, and currently sells for $0.73/gal. more. However, it would indicate the willingness of the government to intervene in gasoline pricing, when appropriate, in a manner that doesn't impede the market's ability to balance supply and demand, as price controls or a floor price mechanism would. And unlike raising income taxes when salaries and consumer spending are falling, a period of falling gasoline prices is precisely the right moment to raise the federal motor fuel tax, even if just by a little.
Raising taxes in a recession isn't terribly sound economics in general, but gasoline in 2008 presents an unusual case. As I noted in Monday's posting, the decline in prices from their summer peak to last week's $2.22/gal. average puts roughly $260 billion per year back in the pockets of US consumers, at a time when that ought to be quite helpful. However, it's equally clear that low gasoline prices will complicate the task of selling more efficient cars to an American public that is already buying fewer cars than at any time since the recession of the early 1990s. Moreover, with gasoline demand running at least 3% below last year's at this time, and with prices now a dollar per gallon lower than they were a year ago, and below their annual averages for 2005, 2006 and 2007, state and municipal tax revenues from sales taxes on gasoline will also fall well below expectations. That puts further pressure on state and local budgets already stressed by falling home values and rising unemployment, and it could force cuts in infrastructure projects that many economists suggest we need more of, just now, not less.
This needn't conflict with the necessity to put a price on our emissions of greenhouse gases, effectively taxing fuels on their inherent carbon content. My preference has been for cap & trade, but a simple carbon tax would do much the same thing. Every $10 per ton imposed on CO2 emissions would raise gasoline prices by roughly 10 cents per gallon, anyway, so I'd resist calls for the "big honking tax on gasoline" that Mr. Sloan's op-ed suggests. But with gas prices dropping by more than a dime per week since September, a 10 cent gas tax hike would scarcely be noticed, leaving that $260 billion effective stimulus I mentioned earlier untouched. It could also be shared with the states, with half of the roughly $14 billion per year it would raise going to fund federal infrastructure projects, and the other half allocated to backstop state-financed road and bridge work.
Ten cents a gallon might not sound like much, though the 4.3 cent increase in 1993 cost another first-year President a good deal of political capital. By itself, it wouldn't change the way Americans drive or buy cars. Nor would it be sufficient to nudge consumers towards diesel cars, when diesel fuel has carried an average premium of $0.50/gal. over unleaded regular this year, and currently sells for $0.73/gal. more. However, it would indicate the willingness of the government to intervene in gasoline pricing, when appropriate, in a manner that doesn't impede the market's ability to balance supply and demand, as price controls or a floor price mechanism would. And unlike raising income taxes when salaries and consumer spending are falling, a period of falling gasoline prices is precisely the right moment to raise the federal motor fuel tax, even if just by a little.
Monday, June 09, 2008
Painful Lessons
Friday's record closing price for oil of $138 and change put paid to any hopes that last week's average retail gasoline price of $3.98/gallon would turn out to be the high-water mark for this summer, as the price around Memorial Day has been in some previous years. As stressful as the reality of $4 gasoline is on the economy and on individuals, though, there are good reasons not to panic. Hoarding by consumers or attempts by government to moderate prices could make the situation even worse, as we experienced in the previous energy crisis. Although we rarely think of it in such terms, reliable supply generally trumps low prices.
After a long stretch in which the price of gasoline consistently lagged the rate of consumer price inflation, it is now leading the CPI higher along with food-price inflation, which also includes a significant energy-related component. In June 2006 the average retail price of gasoline was $2.85/gal. If it had only increased as fast as overall CPI inflation--ignoring its impact on same--we would now be paying $3.04/gal. That's about what the price would be if gasoline had inflated steadily with the CPI since 1981, when it averaged $1.38/gal. We're just beginning to see the adjustments consumers must make to accommodate this sudden shift in gasoline's share of household expenses, in the absence of ready cash from home-equity loans. If these conditions persist, we will eventually learn what they mean for the value of real estate in outer suburbs that benefited from the rise of long-distance commuting.
Whatever the contribution of speculation to high oil prices--the number one cocktail-party-and-dinner question I am asked, these days--or the role of the weakening dollar, we mustn't forget that oil wouldn't be an attractive investment for commodity speculators and dollar-hedgers without the ongoing collision between global constraints on expanding its output and the rapid growth of demand from the economies of Asia and the Middle East. It would be counterproductive at this point for our government to implement policies that resulted in further increases in demand or reduced supply. Gas tax relief at the pump or a windfall profits tax on oil companies might mollify consumers and voters, but they would ultimately make markets even tighter. So would any quick reversal of the apparent trend by consumers to keep less fuel in their gas tanks.
It might seem odd to look for good news in this situation, but compared to the late 1970s, things could be worse. Gasoline inventories are still at reasonable levels in terms of the number of days of supply they represent. As a result, the only gas lines we've seen were the result of consumers capitalizing on a lag in price increases at stations serving the New Jersey Turnpike. As painful as rationing supply by price has become in this case, it works better than price controls or odd-even refueling restrictions. That's worth remembering in this election year.
After a long stretch in which the price of gasoline consistently lagged the rate of consumer price inflation, it is now leading the CPI higher along with food-price inflation, which also includes a significant energy-related component. In June 2006 the average retail price of gasoline was $2.85/gal. If it had only increased as fast as overall CPI inflation--ignoring its impact on same--we would now be paying $3.04/gal. That's about what the price would be if gasoline had inflated steadily with the CPI since 1981, when it averaged $1.38/gal. We're just beginning to see the adjustments consumers must make to accommodate this sudden shift in gasoline's share of household expenses, in the absence of ready cash from home-equity loans. If these conditions persist, we will eventually learn what they mean for the value of real estate in outer suburbs that benefited from the rise of long-distance commuting.
Whatever the contribution of speculation to high oil prices--the number one cocktail-party-and-dinner question I am asked, these days--or the role of the weakening dollar, we mustn't forget that oil wouldn't be an attractive investment for commodity speculators and dollar-hedgers without the ongoing collision between global constraints on expanding its output and the rapid growth of demand from the economies of Asia and the Middle East. It would be counterproductive at this point for our government to implement policies that resulted in further increases in demand or reduced supply. Gas tax relief at the pump or a windfall profits tax on oil companies might mollify consumers and voters, but they would ultimately make markets even tighter. So would any quick reversal of the apparent trend by consumers to keep less fuel in their gas tanks.
It might seem odd to look for good news in this situation, but compared to the late 1970s, things could be worse. Gasoline inventories are still at reasonable levels in terms of the number of days of supply they represent. As a result, the only gas lines we've seen were the result of consumers capitalizing on a lag in price increases at stations serving the New Jersey Turnpike. As painful as rationing supply by price has become in this case, it works better than price controls or odd-even refueling restrictions. That's worth remembering in this election year.
Wednesday, April 16, 2008
Summer Tax Holiday
In a speech on taxes yesterday the presumptive Republican presidential nominee, John McCain, suggested suspending the collection of federal gasoline and diesel taxes during the summer driving season, from Memorial Day to Labor Day. Most of the commentary I've seen on this so far focuses on the idea's potentially counterproductive impact on fuel consumption and greenhouse gas emissions, as well as on the federal highway budget, which is funded by the revenue from these taxes. These are important concerns. What I haven't seen yet, however, is an analysis of how such a plan would work, and whether it would even achieve its stated goal of reducing fuel prices. The structure of the fuels marketing business and the mechanism for collecting these taxes would likely dilute the benefits of the Senator's proposal, or perhaps negate them entirely.
Senator McCain seems to be responding to one of the most common complaints in today's economy. This week's average US retail price of $3.389/gal. for unleaded regular gasoline is $0.59 higher than the average for 2007, and diesel is $1.12 higher than last year. Waiving the 18.4 cent per gallon federal gas tax and the 24.4 cpg diesel tax would cost the Treasury $9.5 billion, based on last summer's gasoline and diesel volumes. The tax holiday would provide the average driver with a total benefit of about $25, assuming that 100% of the tax cut would be passed on, an outcome that seems optimistic in light of the way the tax is collected.
Under the IRS code, gasoline and diesel are taxed when they leave the distribution terminal in a tank truck or railroad tank car, not when fuel is pumped into your car. If the retail facility is owned and operated by an integrated oil company or a large refiner or distributor, there's no practical difference. But if you buy from one of the country's tens of thousands of independent retailers, the tax is already included in the charges collected by the supplier from the retailer when a truckload of fuel is dispatched to the station. In that case, waiving the tax reduces the payment to the supplier, but it does not guarantee that the retailer will reduce the pump price accordingly, even though the retailer technically only sets the "pre-tax" price.
In the short run, the strongest pressure on retailers to pass on the full effect of a fuel tax holiday would come from the other local stations with which they compete, rather than from their suppliers. So while company-owned and operated stations would likely cut their prices by the full amount of the tax from day one, because of their higher visibility, I wouldn't be surprised to see some retailers initially retain some of the savings, to improve their margins. They're in a tough business, and the temptation would be understandable. Competition would gradually dampen that urge, but we routinely see wide local variations in the retail price of gasoline, which can be as large as $0.50/gal. for the same grade in some markets. A tax cut might amplify those spreads.
Over time, and without any changes in the price of crude oil, gasoline prices would tend to drift back up. Lower prices would stimulate demand--or at the current level it's probably more sensible to think of them reducing demand by less than they would without the tax holiday. More demand means more truckloads dispatched from terminals to service stations, and that signal shows up on the desktop of company pricing managers. It might take longer than three months for this process to displace the entire amount of the tax cut, but by the end of the summer enough of it would have been eroded that when the tax was reimposed after Labor Day, prices would end up higher than they would have been without the cut. It might take several weeks for market forces to compete away that spike.
While consumers would certainly see some benefit from a summer-long suspension of the federal tax on gasoline and diesel fuel, a portion of the savings would stay in the pockets of independent retailers, who would be under less scrutiny to pass on the full tax cut than the major oil companies. Then in September at least some of the benefit would be given back, while the market adjusted to the restoration of the tax. On balance, and ignoring the policy concerns raised by this proposal, it might be simpler and more beneficial all around to send every American a $20 bill and call it a fuel tax rebate.
Senator McCain seems to be responding to one of the most common complaints in today's economy. This week's average US retail price of $3.389/gal. for unleaded regular gasoline is $0.59 higher than the average for 2007, and diesel is $1.12 higher than last year. Waiving the 18.4 cent per gallon federal gas tax and the 24.4 cpg diesel tax would cost the Treasury $9.5 billion, based on last summer's gasoline and diesel volumes. The tax holiday would provide the average driver with a total benefit of about $25, assuming that 100% of the tax cut would be passed on, an outcome that seems optimistic in light of the way the tax is collected.
Under the IRS code, gasoline and diesel are taxed when they leave the distribution terminal in a tank truck or railroad tank car, not when fuel is pumped into your car. If the retail facility is owned and operated by an integrated oil company or a large refiner or distributor, there's no practical difference. But if you buy from one of the country's tens of thousands of independent retailers, the tax is already included in the charges collected by the supplier from the retailer when a truckload of fuel is dispatched to the station. In that case, waiving the tax reduces the payment to the supplier, but it does not guarantee that the retailer will reduce the pump price accordingly, even though the retailer technically only sets the "pre-tax" price.
In the short run, the strongest pressure on retailers to pass on the full effect of a fuel tax holiday would come from the other local stations with which they compete, rather than from their suppliers. So while company-owned and operated stations would likely cut their prices by the full amount of the tax from day one, because of their higher visibility, I wouldn't be surprised to see some retailers initially retain some of the savings, to improve their margins. They're in a tough business, and the temptation would be understandable. Competition would gradually dampen that urge, but we routinely see wide local variations in the retail price of gasoline, which can be as large as $0.50/gal. for the same grade in some markets. A tax cut might amplify those spreads.
Over time, and without any changes in the price of crude oil, gasoline prices would tend to drift back up. Lower prices would stimulate demand--or at the current level it's probably more sensible to think of them reducing demand by less than they would without the tax holiday. More demand means more truckloads dispatched from terminals to service stations, and that signal shows up on the desktop of company pricing managers. It might take longer than three months for this process to displace the entire amount of the tax cut, but by the end of the summer enough of it would have been eroded that when the tax was reimposed after Labor Day, prices would end up higher than they would have been without the cut. It might take several weeks for market forces to compete away that spike.
While consumers would certainly see some benefit from a summer-long suspension of the federal tax on gasoline and diesel fuel, a portion of the savings would stay in the pockets of independent retailers, who would be under less scrutiny to pass on the full tax cut than the major oil companies. Then in September at least some of the benefit would be given back, while the market adjusted to the restoration of the tax. On balance, and ignoring the policy concerns raised by this proposal, it might be simpler and more beneficial all around to send every American a $20 bill and call it a fuel tax rebate.
Thursday, January 17, 2008
Raising Fuel Taxes
At the same time that I was writing about the demand response to higher fuel prices on Tuesday, a Congressionally-appointed commission was meeting in Washington to propose an increase in the gasoline tax that would raise those prices further, in order to maintain the nation's highways. Last summer's bridge collapse in Minneapolis delivered a warning about the condition of America's road infrastructure. Without an increase in the federal highway budget, and in the 18.4 cent per gallon federal gasoline tax that funds it, the situation will get worse. This proposal will test our attitude towards a tax that has long been regarded as untouchable. It will also have implications for the US response to climate change.
Every year that goes by without an increase in the road tax, the purchasing power of the revenue it generates shrinks. If the new 35 mpg CAFE standard succeeds in reducing fuel consumption, then that tax revenue will begin to decline in nominal terms, as well. The recommendation of the National Surface Transportation Policy and Revenue Study Commission for a series of annual 5 cent-per-gallon tax increases suggests that we will be in catch-up mode for some time. But without diminishing the important safety concerns underlying the commission's work, the road tax is the tip of the iceberg. The necessity of reducing greenhouse gas emissions from the transportation sector makes it likely that some form of additional fuel taxation, either directly, in the form of a carbon tax, or indirectly, through a cap-and-trade system, will be a key component of national climate change policy within a few years.
As a new study from the Congressional Budget Office confirms, higher fuel prices stimulate changes in driving behavior and habits, along with consumer preferences for more efficient cars. Considering the amount by which we must reduce emissions over the next several decades, and the changes in consumption necessary to achieve those reductions, this will take a lot more than an extra 5 or 10 cents per gallon, on top of what is required to bring the highway trust fund back into the black. If the cost of CO2 credits under a greenhouse gas cap-and-trade plan reaches $20 or $30/ton, then in fairly short order consumers would see gasoline prices rise by 20 or 30 cents per gallon, dictated by the simple chemistry of hydrocarbon combustion and the increase in producers' costs. Depending on the severity of cuts desired, $100/ton--or $1.00/gallon--is possible.
None of this will be easy. Even without predictable opposition from groups that object to higher taxes of any stripe--a position to which I'm normally sympathetic--it will not be popular to tell Americans who have already seen retail gasoline prices double in the last four years and triple in the last ten that they still aren't paying enough. The burden will fall disproportionately on lower-income folks, and that will complicate both the politics and implementation. Throw in a looming recession, and the obstacles become formidable. Nevertheless, if we want to keep our roads and bridges in good repair, improve our energy security, and reduce greenhouse gas emissions, higher motor fuel taxes now seem unavoidable.
Every year that goes by without an increase in the road tax, the purchasing power of the revenue it generates shrinks. If the new 35 mpg CAFE standard succeeds in reducing fuel consumption, then that tax revenue will begin to decline in nominal terms, as well. The recommendation of the National Surface Transportation Policy and Revenue Study Commission for a series of annual 5 cent-per-gallon tax increases suggests that we will be in catch-up mode for some time. But without diminishing the important safety concerns underlying the commission's work, the road tax is the tip of the iceberg. The necessity of reducing greenhouse gas emissions from the transportation sector makes it likely that some form of additional fuel taxation, either directly, in the form of a carbon tax, or indirectly, through a cap-and-trade system, will be a key component of national climate change policy within a few years.
As a new study from the Congressional Budget Office confirms, higher fuel prices stimulate changes in driving behavior and habits, along with consumer preferences for more efficient cars. Considering the amount by which we must reduce emissions over the next several decades, and the changes in consumption necessary to achieve those reductions, this will take a lot more than an extra 5 or 10 cents per gallon, on top of what is required to bring the highway trust fund back into the black. If the cost of CO2 credits under a greenhouse gas cap-and-trade plan reaches $20 or $30/ton, then in fairly short order consumers would see gasoline prices rise by 20 or 30 cents per gallon, dictated by the simple chemistry of hydrocarbon combustion and the increase in producers' costs. Depending on the severity of cuts desired, $100/ton--or $1.00/gallon--is possible.
None of this will be easy. Even without predictable opposition from groups that object to higher taxes of any stripe--a position to which I'm normally sympathetic--it will not be popular to tell Americans who have already seen retail gasoline prices double in the last four years and triple in the last ten that they still aren't paying enough. The burden will fall disproportionately on lower-income folks, and that will complicate both the politics and implementation. Throw in a looming recession, and the obstacles become formidable. Nevertheless, if we want to keep our roads and bridges in good repair, improve our energy security, and reduce greenhouse gas emissions, higher motor fuel taxes now seem unavoidable.
Wednesday, August 15, 2007
Bridges and Taxes
I'm a bit late to the party, regarding the recent proposal to increase the gas tax to help with the cost of repairing our decaying road infrastructure. Simply put, it seems like a no-brainer, and it would be an awful shame if the Congress and White House didn't deal with this, before the news cycle shifts away from the Minneapolis bridge collapse to more recent events. If we can't find a way to fund more urgent renovation of the decades-old infrastructure in this country, then we will deserve all the comparisons to spoiled rich kids burning through their inheritance from wiser parents.
I understand the arguments about the economic impact of raising taxes and the prospect that even a modest gas tax increase would be the camel's nose under the tent, setting the stage for a steeper gas tax hike to curb demand, or a carbon tax. That just doesn't wash, when you consider the current federal gasoline tax. Never mind the usual comparisons to European fuel taxes, which generally serve entirely different purposes, anyway. Look at how it stacks up against our own state gasoline taxes. They average 27 cents per gallon, after backing out the federal tax of 18.4 cents per gallon, and range from a low of 8 cents per gallon in Alaska to a high of 42.4 cents in New York. The current federal gasoline tax is less than what all but seven of our states collect on the fuel, and it has not changed materially since 1993, when President Clinton raised it by four cents and suffered serious political consequences.
Fourteen years worth of inflation have completely dissipated the value of that four cent increase, so that we are now contributing fewer real dollars to the highway trust fund than we did when Bill Clinton took office. If you consider the escalation of construction costs in just the last few years, including the cost of steel and concrete that have been affected by the enormous construction boom in Asia, the situation looks much worse. In other words, the five-cent increase proposed by members of Congress after the I-35W bridge came down would effectively only get the federal highway trust fund back to the purchasing power that it had in 1997, when it was last raised by 0.1 cents per gallon.
I don't think I'm naive about the political implications of raising the gas tax, one of this country's great sacred cows. But it's also clear that voters are willing to hold elected officials accountable for failing to address predictable disasters, or respond to them appropriately. Even if we need to call it a one-time inflation-indexing of the highway trust fund revenue, rather than a gas tax increase, we need to get on with it. This is an issue with no political agenda other than common sense. It would be a modest down-payment on reestablishing the kind of no-nonsense ethic that will be required if we are to have any hope of handling the much more complex and controversial challenges we face.
I understand the arguments about the economic impact of raising taxes and the prospect that even a modest gas tax increase would be the camel's nose under the tent, setting the stage for a steeper gas tax hike to curb demand, or a carbon tax. That just doesn't wash, when you consider the current federal gasoline tax. Never mind the usual comparisons to European fuel taxes, which generally serve entirely different purposes, anyway. Look at how it stacks up against our own state gasoline taxes. They average 27 cents per gallon, after backing out the federal tax of 18.4 cents per gallon, and range from a low of 8 cents per gallon in Alaska to a high of 42.4 cents in New York. The current federal gasoline tax is less than what all but seven of our states collect on the fuel, and it has not changed materially since 1993, when President Clinton raised it by four cents and suffered serious political consequences.
Fourteen years worth of inflation have completely dissipated the value of that four cent increase, so that we are now contributing fewer real dollars to the highway trust fund than we did when Bill Clinton took office. If you consider the escalation of construction costs in just the last few years, including the cost of steel and concrete that have been affected by the enormous construction boom in Asia, the situation looks much worse. In other words, the five-cent increase proposed by members of Congress after the I-35W bridge came down would effectively only get the federal highway trust fund back to the purchasing power that it had in 1997, when it was last raised by 0.1 cents per gallon.
I don't think I'm naive about the political implications of raising the gas tax, one of this country's great sacred cows. But it's also clear that voters are willing to hold elected officials accountable for failing to address predictable disasters, or respond to them appropriately. Even if we need to call it a one-time inflation-indexing of the highway trust fund revenue, rather than a gas tax increase, we need to get on with it. This is an issue with no political agenda other than common sense. It would be a modest down-payment on reestablishing the kind of no-nonsense ethic that will be required if we are to have any hope of handling the much more complex and controversial challenges we face.
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