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A Gas Tax And A Carbon Tax Are Two Different Things

by Michael Levi
March 3, 2011

I thought I’d filed this one away under “things that some people once believed but now realize are wrong”, but the usually astute Economist, in a largely estimable cover package, wakes me from my slumber:

There is a silver lining [in the current situation]: the rest of the world could at long last deal with its vulnerability to oil and the Middle East. The to-do list is well-known, from investing in the infrastructure for electric vehicles to pricing carbon.

No, no, no. A carbon tax that rose over a couple decades to $100/ton would push the limits of the economically acceptable. It would, in the process, revolutionize the power sector. It would make coal badly uncompetitive with gas, would almost certainly lead to a large nuclear expansion and to a boost for wind power, and could even (along with RD&D) make carbon capture and storage economically viable.

And it would add a measly dollar to the price of a gallon of gasoline a long time from now. Anyone who thinks that that would be transformative enough to “deal with” U.S. oil exposure is kidding himself. The new post-2008 normal for gasoline prices is already more than a dollar higher than people thought it would be a few years ago. But there’s been no radical change. The prospect of paying another buck a gallon in 2030 wouldn’t be much additional incentive.

Yes, in theory, one could add a few dollars to the price of a gallon of gasoline by cranking a carbon tax up to a few hundred dollars a ton. But the risk to the broader economy would be immense. (There is also precisely zero chance that it would be politically acceptable.) On top of that, the European experience with petrol taxes suggests that even that might not be enough.

Bottom line: If you want to change oil consumption through tax policy, you need to tax oil consumption. If you want to change carbon emissions through tax policy, you need to tax carbon emissions. That’s it.

P.S.: The other “well-known” move – “investing in the infrastructure for electric vehicles” – probably isn’t so wise either. The appeal of electric vehicles is that we already have the key bit of infrastructure that we need to get started: the electric grid. The main chokepoint right now is cost, not capacity, and that’s where policy should focus.

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  • Posted by Charles Komanoff

    Though I agree that the most recent dollar a gallon rise in the price of gasoline hasn’t been transformative, I think its impact may be greater than you suggest.

    Adjusting to the 2010 CPI, you have to go back to 2002 to have the U.S. average pump price a buck less than in 2010. In those eight years GDP grew 15% but gasoline use rose just 2%. Credit for this decoupling goes to the higher price, presumably. And there’s more downward pressure on gas usage in the pipeline, given lags associated with vehicle purchases, location decisions, etc.

    As for Europe’s experience, insofar as their per capita petrol consumption is one-half of ours, I don’t see the basis for inferring negative findings from their higher petrol taxes.

    Your primary point re the difference between taxing carbon emissions and taxing gasoline is well taken. And while the politics are daunting for either, the idea of returning all or nearly all of the revenues, via either payroll tax reductions or regular “green checks,” could be a path for building bipartisan support.

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