Download Cost Benefit of Gas tax

Cost-Benefit Analysis of a Gasoline Tax
Baris Ercal
Karen McKinnon
Sebastian Predescu
January 23, 2007
Professor Richard Wilson
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Introduction
An externality is a term used in economics to describe the impact, financially or
otherwise, of one person’s actions on the welfare of another. A negative externality is
simply an externality that has a negative effect on the wellbeing of others. Global
warming due to the emission of excess greenhouse gases is an example of a negative
externality. In order to combat such impacts, the government can institute command-andcontrol policies or market-based policies. Command-and-control policies are essentially
various forms of regulation on the negative externality such as limiting emissions or
abolishing them altogether. A market-based method for negative externalities, however,
is generally a corrective tax.1 Corrective taxes are generally a more efficient and costeffective method to deal with negative externalities than regulation, which could
potentially have very low or highly unreasonable goals, resulting in economic disaster for
a nation. The gas tax is thus a corrective tax for multiple negative externalities –
congestion, accidents, pollution, carbon dioxide emissions. Our proposed increase of this
tax is in order to better combat the increasing risk of global warming and its effects as
well as a slew of other negative externalities in the most cost-effective manner.
The United States government levied its first tax on gas at 1 cent per gallon – 6%
of the price – in 1932. This figure has risen to 18.4 cents of federal tax and a total average
tax of 41 cents. Revenue from this tax currently goes to the Highway Trust Fund, which
is a resource that was created to help finance the nation’s Interstate highways and now
also funds mass transportation.2 An increase in this tax would discourage driving from a
financial perspective and so would decrease traffic congestion and any excess need for
1
Mankiw, N. Gregory. Principles of Economics. Thompson South-Western, 2007.
Congressional Budget Office, Reducing Gasoline Consumption: Three Policy Options (Washington, D.C.,
2002), p. viii.
2
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maintenance of roads in addition to lowering the emission of pollutants and carbon
dioxide. Another proposition to deal with the negative externalities surrounding driving
has been to raise the corporate average fuel economy (CAFE) standards, which will be
further discussed later on in this paper. As opposed to the consequences of a gas tax, it
will be shown that higher CAFE standards instead encourage driving by making cars
more fuel efficient and thus cost effective for the consumer.
The Environmental Protection Agency (EPA) currently controls the emission of
three different air pollutants by personal automobiles: carbon monoxide, nitrogen oxides,
and hydrocarbons. Carbon monoxide is a highly toxic gas that, if inhaled, can lead to
neurological damage and death in humans. The EPA sets limits on the amount of these
toxins that are allowed to be emitted by passenger vehicles in grams per mile. 3 The
implementation of a gas tax would encourage consumers to conserve fuel by driving less.
Therefore, the amount of these pollutants would naturally decrease because the number
of vehicle miles traveled would decrease over time.
The problem of traffic congestion leads to multiple further delays that cost a lot of
time and money. Researchers Ian Parry and Kenneth Small have estimated that the
financial cost lies between 1.2 and 14.8 cents per mile, which equates to an average of
$0.24 to $2.96 per gallon.4 An increase in the gas tax is not expected to have a significant
effect on the problem of traffic congestion; however, it will still play a role in aiding the
flow of traffic. Since congestion is mainly a problem of traffic during peak periods, very
few models can control this phenomenon. But a simple decrease in the number of vehicle
3
Congressional Budget Office, Reducing Gasoline Consumption: Three Policy Options (Washington, D.C.,
2002), p. 26
4
Ian W.H. Parry and Kenneth A. Small, Does Britain or the United States Have the Right Gasoline Tax?
Discussion Paper 02-12 (Washington D.C.: Resources for the Future, March 2002), p.16
4
miles traveled will presumably lighten traffic and will make a minor impact on a much
larger problem.
On October 17, 1973 the Organization of the Petroleum Exporting Countries
(OPEC) announced that they were going to impose an oil embargo on nations that had
supported Israel in the conflict with Syria and Egypt. One of these nations was the United
States. This embargo had significant impacts on the price of gasoline in the US. There
were price increases on gas of 45% – 50% during this crisis and the price of oil rose from
$3 a barrel to $12.5 Again, in 1979, with the overthrow of the Shah in Iran, a crisis in the
Middle East sparked another price shock in gas in the United States. This time from
January 1979 the average price of gas rose from 66.9 cents per gallon to 98.7 cents per
gallon in November, a 48% increase.6 These situations had a definite impact on the
United States economy. Due to the instability of the Middle East, the probability that a
similar situation could arise is high and therefore, the United States should take all steps
towards demonstrating its independence from the imported oil from this region. In
addition to this, by purchasing such products from these nations, the United States is in
effect supporting the economies of the undemocratic nations in the Middle East. By
instituting a higher gas tax that will reduce gasoline consumption in the long term, the
United States can gradually counter this negative externality. Hopefully, this will in turn
aid in lowering the price of oil by reducing global demand with the United States
exercising its significant market power.
5
Source: http://www.cbc.ca/news/background/oil/
Robert E. Pitts, John F. Willenborg, and Daniel L. Sherrell. “Consumer Adaptation to Gasoline Price
Increases.” In The Journal of Consumer Research, Vol. 8, No. 3. (Dec., 1981), pp. 322-330
6
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The studies indicating the increasing presence and threat of global climate change
seem to pile higher and higher each day. The United States, as a country among the
wealthiest in the world, has the responsibility to tackle the problem of carbon emissions
through governmental regulation. The American government should begin its renewed
efforts by implementing an increased gas tax.
Global Climate Change
Global climate change is caused by an increase in greenhouse gases, most notably
carbon dioxide. These gases “blanket” the planet, holding in heat. This “greenhouse
effect” is essential for keeping the earth at a temperature suitable for life, but becomes
dangerous when the blanket of gases gets too thick due to human activity. Three quarters
of global carbon emissions come from burning fossil fuels, and the carbon emissions
from fossil fuels can be broken down further. Globally, 20% of carbon emissions come
from transportation, 20% from industry, 25% from the residential and commercial sector,
and 35% from electricity generation.7 These figures are similar for the United States,
although there are some differences. Importantly, about one third of American carbon
emissions come from transportation.8 Since the Industrial Revolution, the carbon levels
in the atmosphere have been increasingly steadily. The pre-industrial levels of CO2 were
280 parts per million by volume (ppmv), while the current levels are 370 ppmv. The
carbon levels have definitely not been this high is in the last 420,000 years, and probably
not been this high in the last 20 million years.9
7
Buckley, Lila. 2004. Carbon Emissions Reach Record High. Earth Policy Institute. http://www.earthpolicy.org/Indicators/CO2/2004.htm. (Accessed January 2, 2007).
8
Probst, Katherine. March 2006. Combating Global Warming, One Car at a Time. Weathervane.
http://www.weathervane.rff.org/solutions_and_actions/United_States/
federal_approach/Combating_Global_Warming_One_Car_at_a_Time.cfm. (Accessed January 2, 2007).
9
February 2006. Global Warming: Frequently Asked Questions. National Oceanic and Atmospheric
Administration. http://lwf.ncdc.noaa.gov/oa/climate/globalwarming. html#Q1. (Accessed January 2, 2007).
6
Higher CO2 Concentrations Do Affect Global Climate
Some skeptics argue that carbon levels and global temperature fluctuate naturally,
and that we are just in a natural time of greater carbon levels. Although it is true that
there is some fluctuation of carbon levels and temperature as the earth goes through
certain cycles, everything that is being seen now is unprecedented. Global average
temperatures are increasing more and within a smaller time frame than has ever been seen
before. Over the 20th century, the global average temperature increased between 0.4 and
0.8 degrees Celsius. This is the largest temperature increase in the last 1,000 years. And
increased levels of greenhouse gases in the air have mostly caused this temperature
increase. The International Panel on Climate Change (IPCC) created a climate model
that took into account both natural sources of temperature change, such as solar variation
and volcanic eruptions, and human-caused sources of temperature change, primarily
greenhouse gases and fine particles in the air. When the model took into account only the
natural causes of warming, the heightened temperature of the last century could not be
explained. In fact, the model found that greenhouse gases were the primary cause for the
warming of the last fifty years.10 If humans continue increasing their use of fossil fuels at
the current rate, the IPCC estimates that the global average surface temperature will be
between 1.4 and 5.8 degrees Celsius higher in 2100 than their were in 1990 (Earth Policy
Institute).
Higher Temperatures Will Cause Severe Environmental and Economic Problems
In assessing the need to curb the emissions of greenhouse gases, three other
concepts must be taken into account. First of all, as stated by V. Ramaswamy, a senior
10
Ramaswamy, V. May 2001. Testimony Before the United States Senate. National Oceanic and
Atmospheric Administration. http://www.legislative.noaa.gov/Archives /2001/ramaswamytst050101.html.
(Accessed January 2, 2007).
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scientist at NOAA, “A greenhouse-gas warming could be reverse only very slowly,”
because greenhouse gases remain in the atmosphere for several centuries after they are
emitted and the oceanic response to thermal changes is extremely slow.11 Secondly, the
environmental effects of an increased warming are already being seen today.
The
geographical zone of many species, for instance the Edith’s checkerspot butterfly, have
moved northward or higher in elevation, and in some cases gotten much smaller. Foreign
species have infiltrated certain climate areas because of an unprecedented increase in
warmth.12 Mountain glaciers have retreated significantly, there is less snow and ice cover
worldwide, and global ocean levels have increased between four and eight inches.13
Finally, the future effect of global climate change will have a large economic impact on
every country in the world. The Stern Review estimates that if human behavior does not
change in regard to greenhouse gas emission, the costs and risks associated with global
climate change will cost the world between five percent and twenty percent of global
GDP each year.14
The United States Should Help Take the Lead in Curbing Emissions
The American government has failed to make a commitment to the world to
reduce greenhouse gas emissions. For two main reasons, the United States must step up
to the plate in its commitment to reduce emissions. First of all, the United States is the
largest emitter in the world. With just five percent of the population, the country emits
23-25% of worldwide greenhouse gases.15 With such a large contribution to global
11
Ramaswamy, V. (Accessed January 2, 2007).
Executive Summary. Pew Center for Global Climate Change. http://www.pew climate.org/ globalwarming-in-depth/all_reports/observedimpacts/execsumm.cfm. (Accessed January 3, 2007).
13
Ramaswamy, V. (Accessed January 2, 2006).
14
2006. Executive Summary of the Stern Review: Economics of Climate Change. http://www.hmtreasury.gov.uk/media/999/76/CLOSED_SHORT_executive_summary.pdf. (Accessed January 3, 2007).
15
Buckley, Lila. (Accessed January 2, 2007)
12
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climate change, it is irresponsible for the United States to not take a leading role in
reducing emissions. Secondly, an intelligent move to reduce emissions would not hurt
the economy, and may even help it. According to the Stern Review, it is far from
necessary “to choose between averting climate change and promoting growth and
development.”16
Automobiles Make a Significant Contribution to Carbon Emissions in the U.S.
As mentioned earlier, one third of American carbon emissions come from
transportation. Two thirds of these emissions come from cars and light trucks, meaning
that 22% of carbon emissions are coming from everyday vehicles that people use to
commute.17 To put this number in perspective, if the cars and light trucks were a nation,
they would be the world’s fifth largest carbon emitted.18 Every gallon of gas burned by
an automobile emits 20 pounds of CO2 into the atmosphere.19 Changing the amount of
miles driven by Americans would clearly have an important impact on the greenhouse
gas emissions of the world as a whole.
When trying to decrease gasoline consumption, a successful policy must provide
adequate and correctly aligned incentives to both firms and consumers, as well as
minimize any negative side effects. There are many policy options available to
Lawmakers with this goal in mind, one of the most popular currently being tightening the
corporate average fuel economy (CAFE) standards that set a minimum average fleet
miles per gallon (MPG) rating for producers of cars and light-duty trucks. While many
policies such as this have merit, this paper seeks to demonstrate that raising the price of
16
Stern Review. (Accessed January 3, 2007).
Probst, Katherine. (Accessed January 2, 2007).
18
July 2002. Carbon Emissions Fact Sheet. Environmental Defense. http://www.environmental
defense.org/documents/2209_CarEmissionsFactSheet.pdf. (Accessed January 2, 2007).
19
Probst, Katherine. (Accessed January 2, 2007).
17
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gasoline by imposing a federal tax on its purchase would be the most efficient method to
curb gasoline consumption, bring about desired savings more effectively and with fewer
costs to producers and consumers than other alternatives.
CAFE
Initiated in 1978, CAFE has been the only major government initiative to reduce
gasoline consumption to date. Under the current structure, each automaker’s fleet is
divided into three categories of vehicle: domestic passenger cars, imported passenger
cars, and light trucks (pick-up trucks, minivans, and SUVs). In 2002, manufacturers had
to ensure that the average fuel economy of their automobile fleets exceeded 27.5 MPG
for domestic and imported passenger cars, and 20.5 MPG for light trucks, or else pay a
fine of $5.50 per car sold for every 0.1 MPG that their fleet average fell below the
standard. Vehicles weighing over 8,500 pounds are exempt from CAFE requirements.20
Currently, the average total tax on gasoline is approximately 41 cents per gallon
(varying slightly from state to state), of which only 18.4 cents is federal. The tax,
however, was initially designed to generate revenue, not as an instrument to reduce
consumption. While the federal gasoline tax does, along with similar taxes on other fuels,
raise money for the Highway Trust Fund, which finances the expansion and maintenance
of the nation’s Interstate highways and has also funded mass transit, it is far too small
relative to the current price of gasoline to provide a significant deterrent to consumers.
Despite the increases in the price of gasoline in recent years (see Figure 1), the federal tax
has not changed since 1993.21
20
Congressional Budget Office, Reducing Gasoline Consumption: Three Policy Options (Washington,
D.C., 2002), p. vii.
21
Paul R. Portney; Ian W. H. Parry; Howard K. Gruenspecht; Winston Harrington , The Journal of
Economic Perspectives, Vol. 17, No. 4. (Autumn, 2003), p. 215.
10
22
Figure 1: Retail Gasoline Prices in Recent Years (Weekly Data)
Effectiveness
For a policy to be successful in reducing gasoline consumption, it must give firms
and consumers incentive to save gasoline in as many ways as possible. Raising the tax on
gasoline would give consumers a direct incentive to consume less fuel by raising the
price, and give the incentive to automakers to produce more fuel-efficient vehicles and
develop new technologies to meet the shifting consumer demand towards greater fuel
economy. By contrast, tightening CAFE standards would directly influence automakers
to produce more fuel efficient vehicles, but would only provide incentive to consumers to
purchase the most efficient vehicles if they became cheaper, and would not encourage
them to consume less fuel at all. The fact that CAFE standards do not directly encourage
less gasoline use, along with some flaws in their current structure, makes them quite an
inefficient tool for reducing gasoline consumption.
Stable URL: http://links.jstor.org/sici?sici=08953309%28200323%2917%3A4%3C203%3APWTEOF%3E2.0.CO%3B2-S
22
http://www.bts.gov/publications/white_house_economic_statistics_briefing_room/october_2005/html/hig
hway_retail_gasoline_prices.html
11
Ideally, manufacturers would meet CAFE standards in one of two ways. They
could improve the fuel economy of some or all of the vehicles they sell by developing
more efficient technologies or redesigning their cars to weigh less or have less rolling
resistance for example. Alternatively, manufacturers could reduce the price of more fuelefficient vehicles and charge a premium for less fuel-efficient ones in a strategy known as
mix shifting. If successful, the automaker would sell more of its high-fuel-efficiency
models, thus increasing the average MPG of all the vehicles it sells, but studies have
shown that this rarely occurs to a significant degree. For example, Greene and Fan found
that mix shifting had little more than a negligible role in the gains in fuel economy
between 1975-1993.23
Unfortunately, automakers can also make use of various loopholes to comply with
CAFE requirements without improving fuel efficiency. One strategy involves altering the
ratio of domestic and imported parts in their vehicles. Imported vehicles are generally
more fuel efficient than those domestically produced (though they face identical CAFE
standards), because they cater to consumers who face significantly higher gas taxes than
in America, such as those in Europe. Because domestic and imported cars are classified
differently under CAFE, automakers cannot use the high fuel efficiency of their imported
auto fleet to counterbalance shortfalls in the domestic fleet’s average MPG. However, by
altering the make-up of the least efficient domestically produced cars, they can be
reclassified as imported, such that average fuel efficiency of the domestic fleet is raised
to meet the standard, and that of the imported fleet still remains well above the minimum.
23
David L. Greene and Yuehui Fan, Transportation Energy Intensity
Trends: 1972-1992, Transportation Research Record No.
1475 (Washington, D.C.: Transportation Research Board,
1995).
12
In this case, the manufacturer has managed to comply with the standard without doing
anything to actually increase the fuel efficiency of its vehicles.24
Similarly, automakers could design cars in such a way that they actually are
classified as light trucks and do not face the same CAFE standard as other cars. One
example is the Chrysler PT Cruiser, which seats only four passengers and cannot tow a
trailer, but is counted as a light truck because the back seat can be removed. The rationale
for setting a higher standard for light trucks was that at the time of CAFE's creation only
20% of vehicles sold were classified as light trucks, and those were generally used for
work-related functions and thus required extra power and different gearing. In 2002
however, slightly more than half of all new vehicles sold were light trucks, and almost all
of these were for personal transport.25 Unfortunately, it is nearly impossible to implement
the drastic change to the current CAFE structure required to correct for this trend without
delivering a severe shock to the auto industry.26
Finally, manufacturers can choose to produce “flex-fuel” vehicles, which can also
run on ethanol. The government assumes that such vehicles will be run on ethanol half
the time, and only consider gallons of gasoline used when calculating MPG, so such cars
are given an MPG rating almost double that of their MPG if run on gasoline alone. (The
figure is less than double because ethanol fuel is 15% gasoline). However, there is no
24
Pinelopi Koujianou Goldberg, “The Effects of the Corporate
Average Fuel Efficiency Standards in the US,” Journal of
Industrial Economics, vol. 46, no.1 (March 1998), pp. 1-33.
25
26
Portney et al, p. 205.
National Research Council, Effectiveness and Impact of Corporate
Average Fuel Economy (CAFE) Standards (Washington,
D.C.: National Academy of Sciences, 2002), p. 88.
13
incentive for consumers to run their vehicles on ethanol instead of gasoline without a
significant tax on gas, so in actuality ethanol is used much less than half the time in flexfuel vehicles.
Because of these loopholes, CAFE standards are not the best tool for reducing
gasoline consumption in the United States. As long as gasoline prices remain relatively
low, automakers will not be pressured by higher consumer demand for more efficient
vehicles and so will choose to comply with CAFE in the easiest way possible, often
through a loophole. The result can even have a negative effect in come cases. One
example is the Ford Excursion, an SUV intended for passenger transport that is exempt
from CAFE standards completely because its weight exceeds 8,500 pounds. Its fuel
economy isn’t officially rated, but consumer reviews state it to be around 12 MPG, far
short of the 20.5 MPG minimum required for light trucks.
In fact, the whole notion of using CAFE standards to reduce gasoline
consumption may be flawed. Even if the standards are successful in increasing the fuel
economy of the average car, and consumers choose to purchase these cars even without a
strong financial incentive to forego larger, more powerful vehicles, gasoline consumption
may not fall very much. This is because consumers have an incentive to drive more: if a
vehicle has greater fuel economy, then the average cost to the consumer of driving an
additional mile is reduced (since it requires less gas), so people may become more likely
to drive to work instead of choosing public transportation or embark on an extended road
trip. This is known as the “rebound” effect, and has been estimated to negate as much as
22.2% of the fuel savings generated by CAFE in the long run.27
27
Portney et al, p. 210.
14
A better method for reducing gasoline consumption in the United States must
succeed in providing automakers a direct incentive to increase the fuel economy of their
vehicles, not just an incentive to avoid a government fine. Also, it should encourage
consumers to not only buy more fuel efficient cars, but also to develop more gasolinesaving transport habits, such as having regular maintenance checks on their vehicles and
opting for public transit. Raising the price of gasoline by increasing the federal tax
accomplish this by directly altering consumer demand for gasoline, in a more costeffective manner than tightening or overhauling CAFE standards.
The ability of an increase in the price of gasoline to affect consumer demand for it
is known as its price elasticity of demand; the value has been estimated many times by
economists, with varying results. A 1991 study analyzed the results of 97 previous papers
that estimated the price elasticity of gasoline, and synthesized their results. On average,
the price elasticity was estimated to be -0.26 in the short run and -0.86 in the long-run.
This means that a 10% increase in price will lead to a decrease in consumption of 2.6% in
the short run and 8.6% in the long run. A sizable tax increase of about 35% the current
price of gasoline could therefore reduce consumption by 30% in the long run.
But will an increase in the price of gas have a significant impact on the fuel
economy of the vehicles? The majority of studies on the relationship of gasoline price
and the average fuel economy of vehicles sold indicate a strong positive correlation. For
example, Ohta and Griliches analyzed the increase in sales of more fuel-efficient cars
between April and November of 1979 and concluded that it could only be logically
explained as having been caused by the spike in gasoline prices due to the energy crisis
15
that year. 28 This study only analyzed a short-term shift due to an abrupt price shock, but
similar effects can be achieved in the long term without such a drastic price increase.
Dahl projected that a 40% tax on gasoline would lead to a 20% increase in the average
MPG rating of the auto fleet in the long run (with a 3% reduction in miles driven) in a
study published that same year.29 Even though this study is outdated, there is clear
evidence that consumers will consume less gas if the price rises, and so in the long run
they will demand more efficient vehicles. The automobile industry will respond
accordingly by developing new fuel-saving technologies and producing vehicles with a
higher MPG rating.
The above arguments suggest that raising the gasoline tax would be a more
effective and efficient way to reduce fuel consumption than tightening CAFE standards,
and studies support this position. Kleit, for example, found that increasing CAFE
standards would be 50 times more costly to society in the short run than increasing the
gasoline tax to produce the same results, and 11 times more expensive in the long run.30
A Gas Tax is a Better Alternative than Ethanol Fuel
Another often proposed alternative to a gas tax is the use of ethanol. Although
ethanol shows promise for the future and is already helping to reduce some dependence
28
Makoto Ohta; Zvi Griliches , Journal of Business & Economic Statistics, Vol. 4, No. 2. (Apr., 1986), pp.
187-198.
Stable URL: http://links.jstor.org/sici?sici=07350015%28198604%294%3A2%3C187%3AAPAQDT%3E2.0.CO%3B2-7
29
Carol A. Dahl, The Review of Economics and Statistics, Vol. 61, No. 3. (Aug., 1979), p.431.
Stable URL: http://links.jstor.org/sici?sici=00346535%28197908%2961%3A3%3C427%3ACATAGT%3E2.0.CO%3B2-I
30
Andrew N. Kleit, Short- and Long-Range Impacts of Increases in
the Corporate Average Fuel Economy (CAFE) Standard (Washington,
D.C.: Competitive Enterprise Institute, February 7, 2002)
Stable URL: www.cei.org/pdf/2398.pdf.
16
on oil, the adoption of ethanol should be considered as a complement to the gas tax, not
instead of it. Environmentally, ethanol is at best carbon-neutral. In general, it takes more
energy to create ethanol from corn than ethanol produces when combusted.31
Furthermore, plants are popping up all across the Midwest that burn coal in order to fuel
the ethanol distillation process. One plant in Goldfied, Iowa burns 300 tons of coal per
day in order to turn corn into ethanol.32 Since a switch to ethanol over gasoline in no way
deters excessive driving, and because the use of ethanol in and of itself does not cause a
net decrease in carbon emissions (and may even cause an increase), ethanol should not be
considered as an independent option at this point.
Economically, ethanol does not make sense either. A new study found that
ethanol could use up to half of the United States’ corn harvest next year, raising concerns
about if there is enough corn for ethanol and food. In the short term, the rapidly growing
ethanol industry has raised the incomes of lagging farmers, but economist have serious
concerns about what could happen if the demand of ethanol is not regulated. Without a
large enough corn harvest, the prices of grain, meat, poultry and dairy products could
skyrocket, hurting the base of the economy.33
Clearly, the gas tax is a better alternative to ethanol at this point in time. Ethanol
has the potential to damage the economy and does not guarantee a reduction in carbon
emissions. Ethanol should continue to be explored and produced in the way in which it is
already integrated into the fuel industry.
31
Segelken, Roger. August 2001. Ethanol for Fuel Fundamentally Uneconomic, Study Says. UniSci.
http://unisci.com/stories/20013/0813012.htm. (Accessed January 6, 2007).
32
Clayton, Mark. March 2006. Carbon Cloud over a Green Fuel. CS Monitor.
http://www.csmonitor.com/2006/0323/p01s01-sten.html. (Accessed January 8, 2007).
33
Barrionuevo, Alexei. January 2007. Rise in Ethanol Raises Concerns About Corn as Food. New York
Times Online.
http://select.nytimes.com/search/restricted/article?res=F50C16FD3F540C768CDDA80894DF404482.
(Accessed January 5, 2007).
17
The Proposed Policy
There are many different estimates regarding the correct size of a gasoline tax.
The National Research Council (2002) computes the negative effects of oil dependency
and environmental damage to be $0.24 per gallon of gasoline consumed. 34 However, this
does not consider congestion and traffic accident externality costs or the cost of road
maintenance either. A more complete economic study by Parry and Small (2002)
computes the optimal gasoline tax rate in the U.S. to be $1.01 per gallon,35 which means
increasing the federal per gallon tax rate from 18.4 cents to about 80 cents. This is the
policy we suggest. This amounts to approximately a 150% increase to the total tax rate in
the United States, and approximately a 20% increase in the current price of fuel. This is
large enough to provide a significant incentive to reduce gasoline consumption, but not
crippling. In fact, the U.S.’s gas tax would still remain far lower than that of Japan, the
U.K., and most other western European countries.
Increasing the tax on gasoline without altering that of diesel minimizes strain on
the economy, since diesel is usually the fuel used in production. (Medium and heavy
trucks only account for 3.2% of highway gasoline usage. 36) However, there is a risk that
automakers and consumers will switch to diesel fuel to escape the tax. To prevent this,
we suggest a flat tax of $2,000 on every diesel-powered vehicle purchased. This would be
a large deterrent for the production of diesel-powered passenger vehicles, but less
34
National Research Council, Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards
(Washington, D.C.: National Academy of Sciences, 2002).
35
Ian W.H. Parry and Kenneth A. Small, Does Britain or the United States Have the Right Gasoline Tax? (Wasington
D.C.: Resources for the Future, 2002).
36
Parry and Small, p.31.
18
significant for work-related vehicles such as large trucks, since it represents a much
smaller fraction of the total price.
The tax outlined above will provide the incentive for consumers to consume less
gasoline, but they must also have the flexibility to do so. Thus we suggest that the
additional revenue generated by the tax be invested in public transportation systems.
Some could also be spent on developing more fuel-efficient vehicle engines, to add to the
effort that automakers will already put forth to increase the MPG rating of their products.
Conclusion: A Gas Tax Would Make a Significant and Necessary Positive Impact
Based on the above estimates for the effect of the proposed gas tax, we can
calculate the reduction of carbon emissions from the U.S. that would occur if the tax were
to be implemented. The most recent estimate of total U.S. carbon emissions is slightly
old, but can be taken as a basis. The Union of Concerned Scientists estimates that the
current American carbon output is approximately 1.5 billion tons per year. 37 Taking into
account that 22% of carbon emissions come from areas that would be affected by the gas
tax (personal transportation, mostly), the short term effect of the gas tax would be an
annual decrease of 17 million tons of carbon output, and the long term effect would be a
decrease of 55 million tons of carbon.
37
Science of Global Warming: Each Country’s Share of Global CO2 Emissions. Union of Concerned
Scientists. http://www.ucsusa.org/global_warming/science/each-countrys-share-of-co2-emissions.html
(Accessed January 16, 2007).