Editore"s Note
Tilting at Windmills

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June 21, 2007
By: Kevin Drum

CARBON TAXES....My back-of-the-envelope arithmetic convinced me long ago that any feasible gas tax would have only a modest impact on actual gasoline consumption. Today, Daniel Sperling of UC Davis tells me that real research backs this up:

The one sector where carbon taxes will work well is electricity generation, which accounts for 20% of California emissions (and 40% of U.S. emissions). The carbon tax works because electricity producers can choose among a wide variety of commercial energy sources — from carbon-intense coal to lower-emitting natural gas to zero-emission nuclear or renewable energy. A modest tax of $25 per ton of carbon dioxide would increase the retail price of electricity made from coal by 17%. Given the many choices, this would motivate electricity producers to seek out lower-carbon alternatives. The result would be innovation, change and decarbonization.

Transportation is a different story. Neither producers nor consumers would respond to a $25-a-ton tax....A CO2 tax of $25 a ton would raise the price of gasoline only about 20 cents a gallon....A recent study at the UC Davis Institute of Transportation Studies found that the "price elasticity" of demand for gasoline has shrunk; a price increase of 10% induces less than a 1% reduction in gasoline consumption. Thus, that 20-cent increase would be barely noticeable. In the transport sector, a carbon tax would have to be huge to induce change.

None of this is to say that a carbon tax isn't a good idea. It is, and probably at levels higher than Sperling's $25 per ton. But the hard fact is that it would have only a modest effect on gasoline usage. If we're serious about cutting back, we need other, better policy instruments, like low-carbon fuel standards (Sperling's suggestion), higher CAFE standards, refundable gas guzzler taxes, and so forth. Carbon taxes are only a start.

Kevin Drum 11:42 AM Permalink | Trackbacks | Comments (53)

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higher cafe standards definitely. i've been car shopping the last month or so and my impression is that gas mileage generally hasn't changed much in years. the only exception are the hybrid and they're just way too pricey.

Posted by: mudwall jackson on June 21, 2007 at 11:47 AM | PERMALINK

A carbon tax equivalent to a dollar a gallon for gasoline, phased in over three to five years, will make changes in long-term behavior, which is what we care about. It's very hard to get people to change their behavior concerning driving since so much of the costs are sunk: location of home, type of vehicle.

Posted by: freelunch on June 21, 2007 at 11:50 AM | PERMALINK

Shouldn't a discussion of the price elasticity of demand for gasoline distinguish between the short term and the long term? In the short term it is difficult for drivers to make adjustments. In the long term they can buy a more fuel-efficient car, live closer to work, make car-pooling arrangements, and do other things to reduce gasoline consumption.

Posted by: Colin on June 21, 2007 at 11:53 AM | PERMALINK
None of this is to say that a carbon tax isn't a good idea. It is. But the hard fact is that it would have only a modest effect on gasoline usage. If we're serious about cutting back, we need other, better policy instruments, like low-carbon fuel standards (Sperling's suggestion), higher CAFE standards, refundable gas guzzler taxes, and so forth. Carbon taxes are only a start.

You are right here, but miss the important. Right, because gas taxes are only a start, but all of the other regulatory approaches you suggest miss the most obvious and important approach. Gas taxes produce revenue, but have a limited influence on behavior because—as your source suggests—transportation users cannot, unlike electricity suppliers, "choose among a wide variety of commercial energy sources".

So, that natural solution is to use the revenue produced by the carbon tax applied to transportaiton fuels to change that situation. Its a natural solution because the revenues provided are naturally chained to the need for: as green alternatives become more available and less subsidy is needed to make them viable, the price elasticity of gasoline will rise, and the carbon tax applied to motor fuels will have more effect on behavior and provide less revenue.

The reason gas taxes have limited utility on their own environmentally is because people don't have choices; so the revenue from the gas tax should be used to provide those choices, and thereby make the gas tax more effective.

While some of the other taxes and restrictions you suggest might be desirable on their own, none of them directly address the problem of the absence of alternatives, and some of them face the same problem as the gas tax in terms of absence of viable alternatives limiting effectiveness.

Posted by: cmdicely on June 21, 2007 at 11:55 AM | PERMALINK

A modest tax of $25 per ton of carbon dioxide would increase the retail price of electricity made from coal by 17%.

I don't understand why people think these taxes should be set at a particular level. A gas/carbon/whatever tax should start low but constantly increase. That way the initial cost is small but everyone understands that it will be large at somepoint in the future, giving people both time and a good reason to alter behaviors.

Posted by: Fred on June 21, 2007 at 11:55 AM | PERMALINK

[IP reveals banned commenter]

Posted by: Manco on June 21, 2007 at 11:57 AM | PERMALINK

The claimed elasticity doesn't really pass the smell test for me. It's saying that a 20% reduction in consumption from current levels requires 10$ a gallon gasoline. I may be very wrong about this, but I think we'd see a fairly huge change in driving behavior, followed by a massive change in settlement patterns (and re-urbanization) if gas were $10 (or even $6) a gallon.

I have to conclude that the relative inelasticity is localized to a small portion of price-demand curve.

Posted by: Hugh on June 21, 2007 at 12:06 PM | PERMALINK

Kevin is right in that electricity is the most flexible form of transportable energy. A carbon tax would give incentives to utilities to use less carbon in their mix of energy sources, but also would push consumers to use less and even generate their own power (it would reduce the time-to-payoff on getting solar PV panels, for example). However, as always, the poor and disadvantaged are the least nimble and would end up with the choice of food versus heat. Some measure of aid would have to accompany any tax, and then it all gets complicated.

One simple thing that could be done is just to give everyone in America vouchers for a half dozen compact fluorescent light bulbs. It would cost about as much as two power plants, and displace the energy demand equivalent to twenty eight power plants.

Posted by: Greg in FL on June 21, 2007 at 12:11 PM | PERMALINK

The point is to make gasoline expensive enough so that other ways to power transportation can be developed which will be competitive with gasoline powered vehicles, not to make Joe Sixpack decide to immediately stop driving his F-150 to work. Yes, that takes time, and more than a 20 cent per gallon tax, along with reducing some other taxes on Joe Sixpack, so as to avoid it being an extremely regressive tax. Such a large tax on gasoline would be useful in spurring alternative technology, however, and as long as Congress didn't see fit to use the gas tax to improve the bottom line of Archer Daniels Midland, it would be worthwhile. The study misses the point.

Posted by: Will Allen on June 21, 2007 at 12:14 PM | PERMALINK

Wouldn't businesses, which keep closer tabs on differential spending than the average ("impulsive") consumer, be more influenced by carbon taxes etc? That's where the real benefit lies, IMHO.

Posted by: Neil B. on June 21, 2007 at 12:18 PM | PERMALINK

A carbon tax equivalent to a dollar a gallon for gasoline, phased in over three to five years, will make changes in long-term behavior, which is what we care about.

A dollar isn't enough - that's much less than the price rise since 2000, which hasn't produced any change in demand. The increase needs to be more like $0.03/month for the next 10 years. That would push pump prices to West European levels.

http://europe.theoildrum.com/node/2653

Posted by: Fred on June 21, 2007 at 12:18 PM | PERMALINK

A while ago, I read somewhere--perhaps on this blog--that one of the easiest and most effective solutions to decreasing energy use in big cities was planting trees and making new streets with some sort of chalk dust that would make them grayer instead of black. I'm sure there's a more technical name for this, so does anyone know what it is? It's the sort of thing that Democrats can push all over the country as being both smart, because it works, and efficient, because it doesn't cost much.

Posted by: Brian on June 21, 2007 at 12:22 PM | PERMALINK

Hey Kevin Drum, how about a post about who owns the coal industry?

Posted by: slanted tom on June 21, 2007 at 12:23 PM | PERMALINK

Absolutely, Hugh. Very expensive gasoline would affect where people chose to live, along with changing the incentives for alternative ways of powering transportation. I think the study's authors made some very short-term projections regarding how people would change their behavior, along with being too focused on a small segment of the price demand curve. It likely makes sense to tax carbon emitted from a tailpipe at a significantly higher rate than carbon emitted from a smokestack.

Posted by: Will Allen on June 21, 2007 at 12:24 PM | PERMALINK

I've always thought the CAFE standards didn't make sense, because it was averaged across a company's fleet. A company could have some gas hogs as long as they had some misers to compensate. But if consumers want to be the gas hog, doesn't that skew the company's CAFE statistics? Correct me if I'm wrong.

They should have a rule that relates gross vehicle weight (GVW) to the fuel economy, maybe simply a linear one, and all vehicles have to be at or better than that standard.

Posted by: Volunteerer on June 21, 2007 at 12:26 PM | PERMALINK

I can't say I fully agree with that. I agree that due to housing decisions that are fixed in the short- and medium- term the amount of gasoline consumed does not vary too much with the price. But last summer when prices hit $3/gal (Midwest; = $4/gal in California) I started to see friends and neighbors make changes in driving patterns and also vehicle purchase choices - a lot of Priuses suddenly appeared in driveways. Then the price went back down to $2.25 and everyone went back to previous behavior (even though it was $2.50 within another month; one would almost suspect deliberate manipulation).

In any case the idea is to (1) get people thinking about the long term when housing decisions are NOT fixed (2) start cushioning the impact when the economic price hits $5 and above.

Cranky

Posted by: Cranky Observer on June 21, 2007 at 12:30 PM | PERMALINK

Anyone who believes that gasoline prices haven't caused any change in demand has obviously never sold cars. ;p

What it doesn't do is change the demand -for gasoline-. Let's face it, most of the driving you do, you need to do whether gas is $2 or $4 a gallon... and a lot of the optional stuff is only replaceable by some sort of fuel-burning transportation.

Colin points out the short and the long term. In the long term, a carbon tax does encourage less fuel consumption, sure. When you replace your car, you'll look for one with better mileage (or rather, the marginal value of high mileage will increase). When the power company says, "Hey, it's time for another plant," the benefits of using nuclear go up with respect to coal.

But in the short term, the tax screws everyone. I don't care how much you tax the fuel, 99% of people out there aren't about to go buy a new car in order to take advantage of better mileage. People who are already driving efficient cars get screwed to essentially no purpose. People who have to drive heavy trucks because hey, sometimes you really do need to be able to haul a couple of tons of equipment, get screwed period. Truckers get screwed, obviously - nobody's making a hybrid Peterbilt. The utility companies get screwed big-time, because it's not like they're going to turn off their old, polluting, now-expensive-to-run plants today - even if they wanted to, we the public still need the juice. I'll take carbon emissions over rolling brownouts, thank you very much!

Adding incentives or subsidies for high-mileage cars or no-carbon power production would probably be more useful. Same net effect in making better mileage less expensive with respect to worse mileage, but you don't end up screwing everyone who has a car already.

Posted by: Avatar on June 21, 2007 at 12:34 PM | PERMALINK

I think this is bunk. Consumers have a very
important choice: they can choose to drive a
15mpg SUV, a 35mpg compact car, or a 50mpg hybrid.
A long-term carbon tax will push people in the
right direction, and after 5-10 years the fleet
of active vehicles would probably change quite
dramatically. People in Europe mostly drive
smaller more fuel-efficient cars, due to the
high taxes on gasoline.

Posted by: Richard Cownie on June 21, 2007 at 12:35 PM | PERMALINK

On chalk-dust and tress: LINK

Posted by: buckets on June 21, 2007 at 12:43 PM | PERMALINK

On chalk-dust and tress (mentioned above): LINK

Posted by: buckets on June 21, 2007 at 12:43 PM | PERMALINK

On chalk-dust and tress (mentioned above): LINK

Posted by: buckets on June 21, 2007 at 12:43 PM | PERMALINK

... a price increase of 10% induces less than a 1% reduction in gasoline consumption. Thus, that 20-cent increase would be barely noticeable

Well, then, assuming a linear function, I'd suggest you whack 'em with a 400% increase: that would get you a 40% reduction, and we might have a shot of actually having a planet worth living on in a few decades.

That would get you (assuming $3/gallon currently) to $12/gallon, or £1.60/l, which would be only 60% higher than I'm paying here in the UK. And I don't have a problem with it going that high here, either.

Posted by: Mike on June 21, 2007 at 12:49 PM | PERMALINK

Links don't work here. And chalk and trees are not-world changing - they would reduce only peak summer electrical loads. Helpful, but only a small aspect of a huge, multifacted problem.

Posted by: Fred on June 21, 2007 at 12:50 PM | PERMALINK

We enact graduated tax surcharges for levels of stupidity and offer tax rebates for levels of intelligence.

Dumb tax: vehicle w mpg under 35
Dumber tax: mpg under 25
Dumbest tax: mpg under 15

Smart rebate: mpg over 40
Smarter rebate: mpg over 50
Smartest rebate: mpg over 60

We make it revenue-neutral so as not to piss-off the Grovers. And instead of actually calling it dumb and smart, we call it the Slave to Islam Surcharge, and the Declaration of Independence Rebate.

Posted by: chance on June 21, 2007 at 12:52 PM | PERMALINK

I'm definitely against a tax paid at the pump!

The American consumer's wallet is already stretched and it isn't getting better any time soon. To tax it would be another way of begging for a recession and political retribution at the next election.

Nope that' ridiculous.

Better is to require auto makers to raise mileage standards and, perhaps in conjunction with their support of a health care reform plan, to rid them of their health care problems in exchange for their cooperation producing really usable affordable biodiesel hybrid vehicles. Using biofuels to end our attachment to oil and using hybrids to conserve energy as much as possible should move us toward a cleaner less Middle-East-centric energy policy.

Posted by: MarkH on June 21, 2007 at 12:56 PM | PERMALINK

Simple.

The tax rate of $25 a ton is way too low.

It will not even begin to compensate for the losses that many people will suffer at the hands of anthropogenic climate change. (ie. billions of people losing their homes, starving, and dying).

...nobody's making a hybrid Peterbilt. ...
Posted by: Avatar on June 21, 2007 at 12:34 PM | PERMALINK

Volvo is (pdf warning)

Posted by: osama_been_forgotten on June 21, 2007 at 1:02 PM | PERMALINK

Carbon taxes are only a start.

why so downbeat? Carbon taxes are an excellent start. According to your quotes, they would enhance the market prospects of alternative electricity sources, and drivers would be supplying considerable sums of money for alternative fuels development.

Actually, the "start" has already occurred. The U.S. reduced CO2 emissions about 1.4% from 2005 to 2006 (BP energy report that I linked a few days ago, and some published commentaries on it). If continued for 10 to 20 years, that would be a 14% to 28% reduction, a considerable achievement. A carbon tax alone would add to the achievement.

On the related topics of energy, fuel, and GHG emissions, you are really much too pessimistic.

What price of gasoline will really make consumers buy a lot less? I was wondering what gasoline is actually worth to the buyers, considering what they use it for, and my guess is somewhere in the range of $6 - $10. So if gasoline approaches $6 per gallon, don't expect much reduction in consumption; as gas prices rise through the range $6 to $10, expect dramatic reductions. However, other fuels are cost-competitive with gasoline at gasoline prices around $4 or less (probably "less", but published figures are variable, and large supplies do not exist, so spikes above $4 are likely in the short term.)

Posted by: MatthewRmarler on June 21, 2007 at 1:12 PM | PERMALINK

In the short term, demand for gas is highly inelastic. If it was $5 a gallon, most people would still have to commute, most of our cities and towns simply have mass transit systems that aren't up to the task.

In fact, right now, we are paying a lot more for gas, but it's not going into the federal government for more research or better mass transit. It's lining oil companies profits, because they understand the above.

In the long term, of course, it will have an effect. More folks will get more fuel efficient cars, opt for living and working situations that are closer together or allow the use of mass transit. But that takes time, and may not even off-set the increase in demand from population increses and economic growth in countries like China and India allowing more people to own cars.

Posted by: Fides on June 21, 2007 at 1:15 PM | PERMALINK

The degree to which people will save less or in other ways cut back on their lifestyle in order to keep using just as much gas as they usually do is quite stunning. However, those who don't have any other transportation options are pretty much stuck.

cmdicely is right-- the only way this works is if the revenue from any kind of carbon/gasoline tax is actually used in a way that allows people to seek alternatives to driving. A high-speed rail connection between SF and LA would be a good start. Improving intra-state public transit between towns that ran on more than just rush hour would be a good next step.

Posted by: Tyro on June 21, 2007 at 1:22 PM | PERMALINK

Colin: Shouldn't a discussion of the price elasticity of demand for gasoline distinguish between the short term and the long term?

I believe that the answer is yes. A permanent 10% increase in the cost of gasoline probably results in a 1% reduction in gasoline cost every year for a few years, perhaps 5% to 10% overall. Not only that, every 10% increase in gasoline price makes some alternative fuel more attractive, if research continues over the long term to bring down prices.

cmdicely: So, that natural solution is to use the revenue produced by the carbon tax applied to transportaiton fuels to change that situation.

I agree with that.

Greg inFL: One simple thing that could be done is just to give everyone in America vouchers for a half dozen compact fluorescent light bulbs.

San Diego Gas and Electric subsidizes the purchase of CFLs, approximately what you suggest.

Volunteerer: I've always thought the CAFE standards didn't make sense, because it was averaged across a company's fleet.

Congress wants increased CAFE standards, whereas the President wants increases in fuel economy of 4% per year in all vehicle classes. The proposals are not mutually exclusive, and they could be included together.

Posted by: MatthewRmarler on June 21, 2007 at 1:24 PM | PERMALINK

didn't the economist's environmental report say that we had to have a carbon tax of $30-$50/ton to stabilize atmospheric CO2 at a safe-ish level? don't have the time to go through UC Davis' research, but i think consumption would respond to price increases over the medium term, rather than the short term. you've still got to get to work in the car you have, even if gas is 20 cents more, but over a few years, you'll get a more efficient car or move somewhere with a more central/walkable/bikeable location when those decisions come up. or am i getting this wrong?

Posted by: jwa on June 21, 2007 at 1:27 PM | PERMALINK

Gas consumption is completely elastic!

If gas went up by $1.00 per gallon, I would certainly sell my house to move closer to work, even though that would mean I would have to move my kids to a new school. Or, I would find another place to work closer to home where I would retain the benefits, vacation and seniority I have now, because jobs are so plentiful now.

Better than that, if gas went up by $2.00 per gallon, overnight, OVER FREAKIN NIGHT, the city I live in would build mass transit. Right now they have a plan that in 20 years will build trolleys along about a 50 mile route that pretty much parallels the few freeways we have. But if gas went up by $3.00 per gallon, OVER FREAKIN NIGHT the city would change the laws of physics and the laws of cities and build 600 miles of trolley routes!

So yeah, gas consumption is completely elastic, just like the collisions between the cars driven by economists that pretend to be physicists.

Posted by: jerry on June 21, 2007 at 1:31 PM | PERMALINK

Increasing CAFE standards could also have perverse effects if fuel prices don't increase correspondingly. As fuel economy improves, people's fuel consumption drops and gasoline prices may also drop in response to the reduced demand. People may then actually drive MORE since it's cheaper, due to both improved mileage and reduced gas prices. The magnitude of this effect obviously depends on the elasticity curve but it may be significant (how much does fuel demand have to drop to cut oil prices by 50%? my guess is that the curve of oil price vs gas demand is a helluva lot steeper than the gas price/demand elasticity curve).

You have to improve fuel mileage using CAFE and increase fuel prices with gas taxes at the same time. There should be a gas tax that sets a price ceiling on gas with an initial value of $2.50 a gallon. Increase it by 25 cents a year for 10 years until you're at $5 a gallon. Over the same ten years, the CAFE requirement would double (presumably with a gradual switch towards hybrids and smaller cars as people replace their existing cars...over ten years, most of the fleet will be replaced). This will halve the gas consumption for the same total miles driven and dollars spent on gas.

Oh, and make the tax revenue neutral by taking the full amount raised and dividing it evenly among ALL taxpayers (not just drivers) and giving it back, starting from day 1.

Posted by: ramster on June 21, 2007 at 1:36 PM | PERMALINK

You guys are missing the most important point. A carbon tax won't change driving much because it will change other behavior first, like inducing utilities to fuel-switch from coal to gas in their dispatch and new construction. You're starting off with the idea that the most efficient way to reduce CO2 emissions is to get people to drive less, but that's just wrong, and reflects a lack of understanding about energy markets. So what if people don't drive much less? The point is that every ton of CO2 emissions causes an externality (present value of expected future damages) that researchers currently guess is worth something like $10 or $25 per ton of CO2. So charge every ton of emissions for that externality - in some cases, people will just pay the difference because it's worth it, and in others, they'll change their behavior. Emissions decline where the market - i.e. 300 million people in their homes and businesses - decides it's cheapest. Everybody else pays the externality bill.

Posted by: dcbob on June 21, 2007 at 1:58 PM | PERMALINK

A gas tax increase would be unfortunately be disproportionately unpopular and also regressive. I'm with ramster on making it revenue neutral, except I'm not sure about refunding it to non-drivers.

Here's an idea on what to do with it: I calculate that a typical car uses somewhere between 600 and 1000 gallons a year. That means a 20 cent tax increase would generate $120 to $200 revenue per car per year. How about if we apply the average revenue per car toward each car's auto insurance policy. That reduces the fixed cost of owning a car, increases the per mile costs, and keeps the net average cost of ownership the same.

Posted by: JoeBob on June 21, 2007 at 2:51 PM | PERMALINK

I think what a lot of people are missing in discussing the elasticity of demand for gasoline is the fact that because public transit is so poor in most parts of the country many people have no choice but to drive, no matter how expensive gasoline becomes.

The assumption has always been that if the price of gas gets high enough, people will get out of their cars and hop on public transit. However, public transit only works for people who go straight from home to work. If you do errands on the way to/from work, or have kids to pick up/drop off, or don't live close to public transit...well you've got to keep on driving no matter how expensive gas gets.

That's why consumption hasn't decreased even though gas is $3.00 a gallon!

Posted by: mfw13 on June 21, 2007 at 3:54 PM | PERMALINK

>The assumption has always been that if the price of gas gets high enough...However, public transit only works for people who go straight from home to work. If you do errands on the way to/from work...

But no one solution has to work for everyone, and errands aren't every day. This sort of reasoning is why people claim to need a huge SUV for the last 0.1% of the their transport needs.

In Vancouver, where there's ok transit by NA standards, the transport planners claimed for years there wasn't enough latent demand to justify explansions, based on that sort of reasoning. Then the universities and colleges went for "bulk-buy" transit pass programs, which caused on quantum jump in use, and the price of gas went to $1.20/litre ($5/gallon), causing a second.

The skytrain is packed now. So are the buses. People are late for work due to being left at stops. The lines are a half-block long at transit hubs. The media still bleats about the poor souls stuck in slow auto traffic on the bridges, but *more* people wait at those stops (they just don't have a ton of metal around them). Latent demand is clearly huge.

Transit doesn't have to work for 90% of the people 90% of the time, to be worth investing in. Improve it to the point where it's useful for 1/2 the people, 3/4 of the time - and then watch it take off.

Anyone who has travelled in western europe knows just how second-class NA transit is. You don't know what the latent demand actually is until the systems are worth using, and some appropriate stick is applied.

Posted by: Bruce the Canuck on June 21, 2007 at 4:42 PM | PERMALINK

"A modest tax of $25 per ton of carbon dioxide would increase the retail price of electricity made from coal by 17%. Given the many choices, this would motivate electricity producers to seek out lower-carbon alternatives. The result would be innovation, change and decarbonization."

$25/ton is pretty high, actually. A lot of technologies would become feasible then. $50/ton gets into the range of costs for capture & sequestration using current technology.

But it's not that surprising that transportation is going to be more price-insensitive: there's just less alternative technologies, and carbon capture is a nonstarter. Maybe plug-in hybrids, but the grid isn't ready for that yet.

Frankly, if we got rid of 40% of our CO2 emissions by switching to carbon-neutral technologies for power generation, we'd be close to where we need to get to.

Posted by: Sock Puppet of the Great Satan on June 21, 2007 at 4:58 PM | PERMALINK

Wow. This issue does a pretty good job of separating people by intelligence. dcbob hits a pretty important point here: he highlights the way a carbon tax uses the power of the market to find the most efficient way to reduce carbon consumption. A bunch of other people have pointed out that estimates of price elasticity are probably way too low because the bulk of the trend is probably much longer term. Finally, a bunch of people are complaining that we shouldn't increase taxes. These people are so dumb, its amazing. Congress can pass a tax plan that is revenue neutral, raising some taxes, lowering others. In fact, they do this all the time. One of the problems with a gas tax, or any carbon tax really, is that it will be regressive. Okay, simple solution: make the rest of our tax code more progressive! Conservatives complaining about liberals making their lives harder with a gas tax are just too dumb to realize they've been taking it up the butt from their own party for years. When the government increases spending and lowers taxes on rich people who do you think pays? Yes, its everyone else. Geniuses.

Posted by: mpowell on June 21, 2007 at 5:42 PM | PERMALINK

A tragedy that Republicans in the Senate managed to defeat a part of proposed energy legislation that would remove some tax breaks on major oil companies. The money saved would be directed at conservation projects that would benefit all citizens.

The tax changes would have channeled $11 billion over 10 years into development of renewable fuels such as ethanol, biodiesel and power from wind turbines. It provides an additional $18 billion in other tax breaks — from tax credits to clean and renewable energy bonds — to support improvements in energy efficiency, clean coal technology, development of gas-electric hybrid cars that could be plugged into the national power grid and other alternative energy programs.

The Republicans should suffer at the polls for this sort of thing, but other interests prevail to offset the concern. The racist white trash in the South and Midwest will continue to be swayed by issues that do not affect their households a whit -- abortion, gay marriage, etc. (which are simple cover issues for what really interests them -- resegregation of the schools, end to one man, one vote and all those black sheriffs)and will continue to vote Republican and continue to blame Washington for their self-inflicted woes rather than themselves.

Posted by: theoilman on June 21, 2007 at 5:46 PM | PERMALINK

I don't like big SUVs either...

But when we talk about climate we worry a TON about cars. They are the hardest problem to solve. We should spend our time now worrying about things that don't have to carry their fuel with them and that have longer useful lifetimes...ie, everything but cars.

The whole spin on this study is completely bogus. It just makes the point. Burning coal to make electricity is butt stupid given what we know about pollution and climate change. Frankly, next to this, driving a car fueled with gasoline is quite reasonable. We need to stop obsessing about cars!

Posted by: BoulderDuck on June 21, 2007 at 10:53 PM | PERMALINK

People may not give a damn about paying 20 cents per gallon extra, but they'll be pissed if they see that money given to someone else.

Give the money out in the form of free mass transit days, carpool rewards, rebates for bicycles and fuel efficient cars, open carpool lanes up to fuel efficient cars, etc. Make a point about who is paying for it.

Posted by: rewolfrats on June 22, 2007 at 12:42 AM | PERMALINK

My 2cents...

1) Cap-and-trade and a carbon tax are pretty much the same thing, at least in theory. They both involve "setting a price" on carbon emissions. One works "backwards" by picking the desired carbon quantity-- the market picks the price. One works "forwards" by picking the carbon price-- the market chooses the quantity.

2) In theory, a tradeable low-carbon fuel standard, like this guy advocates, just is the same thing as a carbon tax combined with a fuel subsidy. Seriously.

Think of it this way: Suppose you are a fuel producer. You produce X amount of gas this year, and the gas contains Y amount of carbon. Under this policy, you will get charged a certain amount for each kg of carbon in all your fuels. But that's not quite true: there is some amount of carbon you're allowed to put in your fuel. That allowance is some ratio of how much fuel you produce. The more fuel you produce, the higher your allowance.

OK, so (a) you get charged for each kg of carbon in your fuels, (b) you get reimbursed some amount for each kg of fuel you produce.

(a) is a carbon tax. (b) is a fuel subsidy.

(For more details see this great paper:
http://preview.tinyurl.com/yo5vnm
Tradeable emissions standard (which I think is what the editorialist is describing) is analyzed in section 3.3.2.)


3) OK, assuming we agree on the above. What the author is saying is simply that we can't politically raise the tax high enough to get the quantity we want, so let's just pick the quantity we want! But doing that doesn't solve some magical problem. The effective tax rate created by "working backwards" from this quantity is exactly the same as the carbon tax rate we'd need to pick to get that quantity. In other words, it doesn't matter whether you work "backwards" or "forwards" because the underlying supply and demand curves are always the same (you can't just change people's demand curves.)

4) There are some differences between cap-and-trade approaches and tax approaches (implementation is very different, lots of room for fiddling at the margins, transaction costs are different, etc.) But the fundamental point this guy makes is that a tradeable low-carbon standard solves a problem that a carbon tax can only more expensively solve. At least according to the raw theory, that is not true.

Posted by: mk on June 22, 2007 at 4:48 AM | PERMALINK

Oh, and...

5) If a tradeable carbon standard is the same as a carbon tax combined with a fuel subsidy -- uh, remind me why we want to subsidize fuel again?

Right. We don't.

A carbon tax is the most effective way to reduce overall emissions.


6) One more thing. Like others have mentioned, we have to decide as a society whether we care enough to specifically target the transportation sector for large-scale carbon emissions reduction. If this LA Times dude is right, we need to set a special, much higher carbon tax just for transportation. But why not set a somewhat lower carbon tax and get cheaper emissions reductions from other sectors of the economy? You should always pursue reductions where they are cheapest, no?


DCBob -- did I screw any of this up?

Posted by: mk on June 22, 2007 at 4:55 AM | PERMALINK

What counts is development over time. If it's a one-off change, people will suck it up. When the UK had a policy of putting up the VAT on fuel by inflation+X annually, mileage fell and public transport ridership went up.

Sadly, this policy was dropped after protests by right-wing farmers and truckers, but I wouldn't bet against it making a comeback. (The tax wasn't cut - a couple of years' increases were put off.)

Suggestion: declare that the price of gasoline will not be permitted to fall below a value x.

Posted by: Alex on June 22, 2007 at 5:16 AM | PERMALINK

Why add carbon tax, when we can replace income tax with resource tax. It is much more flexible regarding the actual cost of consuming of a particular resource for public. For example, cost of consuming (mostly imported) oil is significantly more (giving huge costs of trade deficit and dependence on hostile nations, and support of our fleet and army who ensure imports) than consuming domestic coal, despite similar content of carbon atoms (direct environmental impact of burning a fuel IS NOT ALL). Significant point - this must not be added tax, but a tax replacing current mess of Internal Revenue Code, and thus, with time, as huge as current income tax, bringing price of gasoline to 10-20 per gallon, but at the same time giving people money to pay for it by eliminating income tax. That IS the incentive.
Regarding the possibilities of reducing consumtion - they are huge and numerous. 17 million of new passenger vehicles are being sold in this country - if the incentive to save gas (money) is big enough, average vehicle bought is going to become lighter and more aerodynamic. 30+ million of resale vehicle are sold, and older, heavier of them will be retired faster. 7 million resale homes and 2 million new homes are being sold annually, and significant cost of gas and energy will influence desicions in the direction of more energy-efficient choices (house only big enough, not huge for speculative resale, but better made, with three-pane windows and maybe even back to "insulated concrete blocks" instead of "carton boxes" as a technology for new homes) in places better for commute. And proper pressure (it is better be national and organized) on local zoning commissions for smarter, more dense zoning will make public transportation viable. It all will kick in with time, but there are plenty of small changes which could save gas right now - shared rides, deferred rides (to make more in one ride), public transportation, telecommute... Technology is ready for 2/3 of office workers never even set foot in their offices, mostly outdated company polices keep them there...

Posted by: PV on June 22, 2007 at 9:01 AM | PERMALINK

20 c per gallon is ridiculously low, though. If it was a couple of dollars, it would go a long way to reducing consumption *over time*. There IS a reason the Euros have much smaller and gasoline efficient cars than us. It has something to do with taxes, trust me on this.

The important point to keep in mind is, oil prices are very high today, so we get the desired effect (VC funding for ethanol, focus on alternatives in general) for "free" today. But the oil price goes in cycles. What if we see 20-barrel oil again? For the research on alternatives going on now to have an effect, it needs to be sustained. A $2 gas tax would guarantee that.

Posted by: pnut on June 22, 2007 at 10:12 AM | PERMALINK

"If gas went up by $1.00 per gallon, I would certainly sell my house to move closer to work, even though that would mean I would have to move my kids to a new school. Or, I would find another place to work closer to home where I would retain the benefits, vacation and seniority I have now, because jobs are so plentiful now."
Posted by: jerry on June 21, 2007 at 1:31 PM
------
"Transit doesn't have to work for 90% of the people 90% of the time, to be worth investing in. Improve it to the point where it's useful for 1/2 the people, 3/4 of the time - and then watch it take off.

Anyone who has travelled in western europe knows just how second-class NA transit is. You don't know what the latent demand actually is until the systems are worth using, and some appropriate stick is applied."
Posted by: Bruce the Canuck on June 21, 2007 at 4:42 PM
-----

One factor which contributes to the inelasticity of demand for gasoline is *worsening*-the location of the workplace is becoming increasingly volatile due to employment churning. I think a combination of *both* increased CAFE standards and some form of increased carbon taxes could work here. Funnel the revenue from the taxes into mass transit programs for the whole country. Bruce makes a good point, if you had a high-quality, convenient mass-transit system that was widely available for you to use, more consumers would opt for it instead of driving in tangled traffic all day. What about raise CAFE and taxes, and take the tax money and rebate it part of it *back* to people who have little or crappy mass transit, while the country goes on a crash mass-transit infrastructure build?

Posted by: Doc at the Radar Station on June 22, 2007 at 11:22 AM | PERMALINK

How depressing. The same old tripe about taxing carbon and subsidizing alternatives, with lots of grandiose state planning.

Keep it simple, keep it really simple, and you might have success in reducing carbon dioxide emissions. A tax fully refunded on an equal, per head basis is the way to go. It may take adjusting the level to get actual decreases in carbon emission, but it gives the maximum amount of flexibility to meet the goal. If you insist on foolishly using the revenues to subsidize alternatives, you will get a never ending series of nonsense solutions similar to corn ethanol; the alternatives selected will be weighted toward those with political connections, not with true market viability. Let the consumers decide how to adjust to the new price of carbon.

Posted by: Yancey Ward on June 22, 2007 at 1:30 PM | PERMALINK

Yancey Ward, You make some good points regarding simplicity. Actually, I think boosting CAFE is the simplest way to go of any solution. Let counties/municipalities experiment on their own with taxes to develop better mass transit. Let's just scrap the idea of a federal portable fuel "carbon" tax entirely. The reason I think that CAFE is the simplest solution is:

1) It structurally makes efficiency improvements in the vehicles we buy.

2) Car manufacturers actually have *better* visibility on how to design their product mix. If your competitors are all having to make similar changes, there is less risk with commitment to different strategies. If we were continuing to extend and improve CAFE incrementally past 1989 we wouldn't have seen the big box SUV boom, perhaps lower gas prices now (due to lower demand), and domestic manufacturers in *better* shape because their product mix would more closely match their competitors.

3) Perhaps most important: It has already been done before with success. When it was first enacted, you did see overweight/underpowered vehicles, but throughout the '80's the industry adapted and I think that CAFE during that time had a positive effect on fuel price. That kept more money in people's pockets.

Posted by: Doc at the Radar Station on June 22, 2007 at 2:08 PM | PERMALINK

Doc,

You don't need CAFE if you have a sufficient tax on fuel use since consumers will demand and receive more fuel efficient vehicles, and CAFE alone will accomplish little in regards to fuel use since it will reduce the cost of driving.


Posted by: Yancey Ward on June 22, 2007 at 2:35 PM | PERMALINK

Thing is, it's silly to try to find one magic solution to reducing carbon emissions when the emitters themselves are so diverse--electric utilities, airlines, trucking companies, individual motorists, farmers, industries that use process heat, etc.

When someone asks, "carbon tax, cap-and-trade, or CAFE standards?" the right answer is, "Not or. And." Pace Dr. Sperling, I think the electric utility industry, which is made up of a manageable number of emitters that can be easily monitored, would likely respond best to cap-and-trade regulations, as long as the cap shrank to pretty close to zero over a couple decades. The more widely distributed emitters, such as motorists, would probably respond better in the long term to a steadily rising carbon tax, since the mechanics of how one would actually buy-and-sell individual carbon credits seems cumbersome.

Steadily rising to what level? How about to the point where the revenues from the tax exactly pay for the capture and sequestration of all the emitted carbon. That's the piece of the puzzle that needs the dedicated revenue source, anyway. Any other use--from offsetting income taxes to subsidizing car manufacturers--will in the end wind up offsetting much of the good that the carbon tax will do, ecologically speaking.

Posted by: jlw on June 22, 2007 at 2:47 PM | PERMALINK

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Posted by: cghfztrlu efzwysv on January 15, 2008 at 9:33 PM | PERMALINK




 

 

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