Category — Gasoline
Word on the political street is that a 15 cent increase in the federal gasoline tax may well be included in the final draft of a bill being prepared by Senators Lindsey Graham (R-SC), Joe Lieberman (I-CT), and John Kerry (D-MA) to address global warming. Shell, British Petroleum, and ConocoPhillips – are said to support the tax because it’s a less costly intervention in the transportation fuel market (for them anyway) than alternative interventions that might otherwise find their way into this prospective legislation. Shell et al. may be right about that, but be that as it may, this would still constitute lousy public policy. A gasoline tax hike ought to be resisted.
Higher Taxes Will Not Alter Climate Under Anyone’s Math
The proposed gasoline tax increase will have no significant impact on greenhouse gas emissions. That’s because the demand curve for gasoline is rather inelastic. Hence, a 15 cent increase in gasoline prices – presuming that the entirety of the tax is passed on to consumers, which may not prove to be the case – would not discourage very much fuel consumption at all.
While I don’t have any calculations at hand to translate the likely amount of reduced oil consumption into a percentage reduction in global greenhouse gas emissions (although that would be a fine project to undertake if this idea ever finds its way into the bill), the figure is certainly below 1 percent. How much cooler would the planet be given that emissions decline over the next 50, 100, and 150 years? That figure would certainly be too small to even measure.
Regardless, the uninternalized “negative externality” associated with the impact of gasoline consumption on the climate is likely to be rather small in monetary terms. After a review of the pertinent economic literature by economist Ian Parrry, Mr. Parry concluded that a gallon of gasoline likely does about 5 cents worth of damage to the environment via its impact on the global climate, assuming that the conventional narrative about anthropogenic climate change is correct. Accordingly, a 15 cent increase in the gasoline tax to address climate impacts would likely do more economic harm than good even if you believe the scientific arguments forwarded by the IPCC. [Read more →]
April 20, 2010 6 Comments
“Key senators are weighing a request from Big Oil to levy a carbon fee on the industry rather than wrap it into a sweeping cap-and-trade system that covers most of the U.S. economy.
If accepted, the approach — supported by ConocoPhillips, BP America and Exxon Mobil Corp. — could rearrange the politics of the Senate climate debate and potentially open up votes that may not be there otherwise.”
- Darren Samuelsohn, “Senate Trio Hopes to Hit Pay Dirt with Carbon Fee on Transportation Fuels,” Environment & Energy Daily, March 3, 2010, (subs. required)
History matters. And the record suggests that small, wedge taxes are a dangerous thing.
Consider one of the most interesting examples of political capitalism in the history of the U.S. oil and gas industry. The story concerns the first state motor fuel tax, passed in Oregon in 1919 at, you guessed it, $0.01 per gallon. (But that penny is worth about 12 pennies today!)
Was this tax the work of a far-sighted reformer? Or was it a confluence of private and public interests creating a demand for and supply of government favor?
Interestingly, “Big Oil” was behind the Oregon gas tax. The major oil companies calculated that the demand for gasoline and thus the price of gasoline would rise more from tax-financed new road construction than demand for the same would fall from the tax.
Oregon’s beginning led to road taxes in all 48 states within a decade to fund road construction.
Problem was that gas tax revenue started to be diverted to other uses to the chagrin of the oil majors, now organized as the American Petroleum Institute (API). “Phantom roads” became an issue.
Government intervention giveth and taketh away. (Could the same be predicted for the ‘starter’ carbon levy?)
Here is the story of the first motor fuel tax reproduced verbatim from Oil, Gas, and Government (Cato Institute: 1989), pp. 1375–76.
Events in Oregon were the genesis of the motor-fuel tax revolution. The state legislature, desperate to secure new funding for public roads, proposed in 1917 to increase motor vehicle fees. The rationale was that any increase would be saved in automobile repairs once improved roads were in service. Leading the fight with the author of the plan, C. C. Chapman, was I. N. Day, a former state senator turned paving contractor. After a long fight, the legislature approved the tax bill thanks to Chapman’s oft-revised roadmap. As he explained:
The political problem involved was chiefly that of map making…. I was asked to draw a state highway map that would win the votes of a majority of the members by placing roads [so] they could take them home with them as pork wrested from Portland…. This map ran in front of the farm homes of enough legislators that . . . 37 representatives joined in introduction of the bill…. It took all day . . . to get the map changed so a majority of the Senate would vote for the bill…. My poor map was almost unrecognizable, but it served its purpose.
With the motor-vehicle tax, the motor-fuel levy was only a step away. Earlier, a gas tax had been proposed in conjunction with the state gasoline inspection law, and with more revenue needed, Chapman, now editor of a leading newspaper, editorialized for a gas tax, which was seized upon by road interests and legislators. A bill was drafted by the highway committee, and a 1 cent per gallon levy became law on February 25, 1919, with the help of regular editorials by Chapman. Years later, Chapman expressed his thanks before the American Petroleum Institute (API):
In passing, may I pay a deserved tribute of credit to the big oil companies. They cooperated with us every session in the application of the gasoline tax idea. We had reports that they were opposing it in some other states, but in Oregon at no time did they attempt to obstruct it. Their counsel aided in perfecting details of the legislation.
March 3, 2010 9 Comments
My op-ed in today’s USA Today is about President Obama’s proposed new fuel economy standards. Don’t like ‘em. Unfortunately, an editing snafu over at the newspaper inadvertently left out the fact that there are four models at present that meet the proposed new standard – the 2010 Honda Insight (41 mpg) and 2010 Ford Fusion Hybrid (39 mpg) were left off the list.
Space prohibited me from making an additional point. Even if there is no rebound effect, my colleague Pat Michaels finds that global temperatures will only be reduced by 0.005 degrees Celsius by 2050 and 0.0078 degrees Celsius by 2100 once you plug those emissions reductions into the computer models used by the IPCC. (These are thousandths of a degree, mind you.) Of course, proponents contend that U.S. action on fuel efficiency will lead to like action abroad. Well, good luck with that. But even if all of the signatories to the Kyoto Protocol adopted Obama’s proposed fuel economy standards, global temperatures would be reduced by only 0.038 degrees Celsius by 2050 and 0.071 degrees Celsius by 2100. If you tried to monetarize those benefits, you would be hard pressed to come up with an defensible number of consequence.
So what should be done instead? Nothing! [Read more →]
May 20, 2009 6 Comments
One dumb government intervention in energy markets typically begets another, as special interests lobby to counteract the unintended (although not unforeseen) consequences of some previous intervention they championed. The federal ethanol mandate, also known as the renewable fuel standard (RFS), provides a recent example.
Thanks to this Soviet-style production quota system, which Congress created in 2005 and expanded in 2007, daily corn ethanol production in February increased by about 17,000 barrels to 647,000 barrels per day, despite weak motor-fuel demand and poor to negative profit margins for ethanol producers.
Unsurprisingly, inventories of unsold ethanol increased by 1.5 million barrels in February and about 20% of new capacity added last year is idle. An ethanol glut is one of the factors that have bankrupted several ethanol companies. Other factors include high feedstock (corn) prices in 2008–itself a consequence of the mandate—and the collapse of crude oil and gasoline prices in 2009.
To eliminate the glut, the Renewable Fuels Association (RFA) has petitioned EPA to increase from 10% to 15% the amount of ethanol that may be blended into regular gasoline. In other words, RFA proposes to increase by 50% the amount of ethanol you buy each time you fill up. The small-engine industry worries that gasoline containing 15% ethanol might damage lawnmowers, motor boats, generators, and even some cars. Significant research suggests that higher ethanol blends will increase air pollution (see here and here). None of this bothers RFA one bit.
Although not overtly a mandate, raising the blend ceiling to 15% would likely make 15% the industry standard, because refiners are under constant legal pressure to increase the amount of ethanol they blend into the nation’s fuel supply. Under the 2007 RFS, corn ethanol used in motor fuel must increase from 9 billion gallons in 2008 to 15 billion in 2015.
The ethanol industry enjoys a multitude of market-rigging privileges including the RFS, tariffs to keep out cheaper Brazilian ethanol made from sugar cane, and a 45-cents-per-gallon blenders tax credit for each gallon of ethanol sold in motor fuel. Take away those policy stilts, and practically no ethanol would be produced or sold as motor fuel.
May 4, 2009 10 Comments