Just Say No to a Gasoline Tax Hike

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.

Let’s assume, however, that James Hanson is correct and that the IPCC narrative about future warming is too conservative.  If so, the correct response (that is, the policy response that addresses the issue at least cost to society) is a broad carbon tax (or a broad cap & trade program that in any case would amount to the same thing) applying to all sectors of the economy equally.  At present, however, we are being offered a politically-inspired assault on emissions that targets some sources to varying degrees but not others.  This is not only economically inefficient; it’s environmentally counterproductive because it invites wasteful rent seeking, emission leakages will inevitably arise, and total emissions will be far greater than they might otherwise have been.

Other Tax Arguments: Bogus Too

Many might agree on with the above climate argument but argue for a gasoline tax on other grounds.  While public policy intellectuals like to burnish their intellectual street cred by waving this particular Pigouvian banner, I’m not buying it.  I co-authored a study on this subject not too long ago, but for those who have not committed that text to memory, let’s quickly walk through the arguments:

It will slow down the inevitable decline of petroleum supply – Well, that’s true enough, but there is very little reason to think that scarcity is upon us now or in the foreseeable future.  Regardless, when oil becomes scarce, prices will adjust accordingly and the “right” amount of conservation will follow.  And if you think that “Big Oil” (or their international counterpart, OPEC) is jacking up prices for profit, then send them a thank you note – they’re already attending to this “inevitable decline of petroleum supply” for you … no extra tax necessary.

It will reduce consumption and, thus, the impact of future oil price shocks – Supply shocks are less of a macroeconomic problem than many people think.  Aggregate demand shocks are a much bigger problem and a small increase in domestic gasoline taxes won’t do much to address that given that those shocks are most likely to come from demand growth overseas.  Regardless, price volatility is not a market failure and those that fear it can hedge if they so desire.  There is no need for a government response.

It will promote efficient energy use – Nonsense.  There is little evidence that consumers are irrational when it comes to the trade-offs associated with automotive fuel economy or driving behavior.  If a consumer believes that a gallon of gasoline provides more value to him/her than the cost of that gallon of gasoline, then it is efficient to consume.  That simple statement holds unless there are large uninternalized externalities.  On the climate front, there may be externalities, but – as Parry points out – they are not large.

It will reduce pollution – Yes it will.  But are the uninternalized (conventional) environmental costs of that pollution (when monetarized) greater than, less than, or equal to the proposed tax?  Economists find themselves in all three corners of that calculation, so we can’t say for certain.  But if you think that the uninternalized environmental costs of gasoline consumption are a major problem, then the right answer isn’t a gasoline tax – it’s an emissions tax.  And believe it or not, the former would have far less of an impact on the problem than the latter and prove more economically inefficient to boot.

It will reduce dependence on foreign oil – Probably not.  Who says that reduced demand will mean reduced demand for foreign oil rather than reduced demand for (more costly to produce) domestic oil?  Regardless, imported oil presents no more problems than, say, imported computer chips.  Trade is a good thing.

It will reduce the flow of money to Islamic extremists and other foreign bad actors – To some (very small) extent, it will.  But is there any correlation between oil profits abroad and terrorist attacks or “bad acting” from suspect regimes?  No – none whatsoever.

It will reduce automobile accidents and congestion – Gasoline taxes are a very imperfect means to address accident costs because such taxes don’t vary with the density of the setting in which driving occurs or the extent to which a driver might be accident-prone.  Gasoline taxes are hopeless at addressing congestion because they do not correlate with use of congested roadways and, even when they do, they are not steep enough to deter use.  Witness high tax England where congestion in London was a hellish problem until congestion fees were instituted.  Again, better remedies – like congestion fees – are available to policy makers if they are serious about this problem.

It will help to pay for needed roads and bridges – To some extent, this is true.  But will they be the right roads and bridges?  The question arises because revenues from gasoline taxes are allocated based on political calculation more than true need or economic desirability (witnessed well-paved West Virginia versus chronically under-built Northern Virginia).  Moreover, too much of this money is spun off to bike paths, buses, and light rail – not the infrastructure being marshaled to justify the tax as a “user fee.”  If we want user fees for roads and bridges – and we should – then fine.  But let’s charge directly for use via tolls and keep the money where it is being spent. The gasoline tax, once again, is a poor second-best proposal.