In the run-up to the (keep your fingers crossed) Obama administration, discussions on how to actually accomplish “change we can believe in” are starting. The NYT covered the formation of Obama’s transition team last Saturday, and now Andrew Sullivan has posted on Robert Samuelson’s suggestion for a gas tax. From a letter I posted recently, here are some additional thoughts on how to preserve momentum for consumers and investors to conserve and promote alternative energy:
Recognizing that U.S. policy intervention cannot set the world price of oil, why would a floor for domestic prices be a good idea? Because as a cartel, OPEC does appear to have the power to influence world prices, and they use that power to discourage conservation and alternative energy investments. If you look at U.S. petroleum imports and the change in prices for energy relative to the consumer price index, the real $ value of those imports have gone up dramatically, while energy prices through 2007 remained in a narrow band relative to overall U.S. price inflation. I don’t know if you could prove it, but I think at least until the end of 2006, staying in that narrow band by manipulating production levels was a key OPEC goal. The chart below shows that the relative price of energy never increases faster than general inflation[1]:
As long as price increases aren’t too volatile, Americans don’t seem to change their behavior regarding energy, either as investors or consumers. It was only in 2008 with $4 per gallon gasoline that real changes in miles driven and types of cars bought started to kick in. Now, with gasoline prices apparently headed back to $2/gallon, we risk losing progress on energy independence even before we start. See this press release from a sustainable travel advocacy group on a potential rise in American auto sales with a drop in gas prices: http://www.acttravelwise.org/news/1199
Using a flexible tax to set a 2009 floor on energy prices (say $3 per gallon on gasoline) with regular annual increases to the floor(e.g., a 4% increase would create a floor of $3.12 in 2010) would bring certainty that the days of cheap gasoline are over. Investors and consumers would have a clear understanding about future fuel prices to make decisions on the kinds of cars they buy or the miles they drive. You could argue that people should have figured this out already, but the history of the U.S. sport utility vehicle market in the 1990s suggests that consumers make short-term decisions; “reduced energy costs, whether achieved through energy efficiency or less expensive energy supply, will result in increased energy demand, a phenomena know as the rebound effect.”[2] Extending this flexible tax to other forms of energy would encourage conservation and create a return on investment for other forms of alternative energy. The flexible taxes could decrease as market prices rise to and then above the floor; the revenue from these taxes could be used to fund green energy programs. If this approach is sold as a response to OPEC’s cartel behavior and a step towards energy independence rather than as a new tax, I think Americans would support it.
[1] Figures from the CEA Economic Report to the President 2008 (B-70) and the Energy Information Administration Annual Energy Review 2007 (p. 130).
[2] CEA Economic Report for the President 2008, p. 169.
Posted by sschewe 
Posted by sschewe 
