R-Squared Energy Blog

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Gas Taxes and Long Range Energy Planning

I consider the level of dependence of the U.S. on imported petroleum to be a very large financial risk endangering the country’s future. There are certainly other import-related risks as well, but here I want to talk about the financial risk.

I consider it similar to having a mortgage upon which you pay interest each month – but in which the interest rate can fluctuate wildly. If you typically pay 7% interest on your mortgage, but your rates quickly climb to 12%, a lot of people would find themselves in a deep financial hole. Come to think of it, a lot of people did when they found themselves in a similar situation. They gambled on the future and lost.

With respect to oil prices, we are also gambling on the future. We import a bit over 9 million barrels per day of crude oil (we also import gasoline, diesel, etc.) Each $10/bbl increase in the price of oil means that consumers pay $33 billion more each year for oil. We are now paying $100 billion more each year for oil than we were just a few short years ago, and that money comes out of all of our pockets. This acts as a tax upon the U.S. economy, albeit one that doesn’t primarily benefit U.S. citizens.

The drain on the U.S. economy is one thing, but the risk is quite another. Why do we tolerate that sort of price risk? In my opinion, it is because tolerating the status quo is viewed by politicians as the cheapest, most politically safe option. And even if they are concerned about the risks, when economists say that oil might be going back down to $30, politicians are paralyzed from taking action. The uncertainty is a killer.

A story I read this morning highlights that uncertainty, and points to some of the consequences:

Low Gas Prices Threaten Green Car Revolution

The single biggest factor determining the success or failure of high-tech fuel-efficient cars is not battery technology, legislation, tax incentives, new model introductions, or infrastructure. It’s gas prices. The price at the pumps is the elephant in the room when it comes to green cars.

I would imagine that there is general agreement on that. When gas prices raced ahead, the Toyota Prius began to outsell the Ford Explorer. When gas prices fell back to $2/gal, SUV sales surged and Prius sales plunged.

The fundamental problem is that many people don’t make long-range plans with energy prices in mind. When gasoline goes to $2/gal, some expect it to stay there and so that SUV purchase doesn’t look bad – until gasoline is back to $4/gal. And the inability to plan is compounded by analysts who give mixed messages on which way oil prices are going:

Japanese broker Ryoma Furumi said oil prices will stay rangebound at $70-$75 a barrel; analysts at Mirae Asset Securities said prices are likely to consolidate between $65 and $75; and Jim Ritterbusch, president of Ritterbusch & Associates, said crude could be pushed toward the $75 mark.

Verleger, the energy consulting firm, predicts a drop in oil this year—all the way down into the $30s. The firm bases this prediction on crude stockpiles in the US being 14 percent higher than a year ago, and gasoline supplies up by 2.2 percent. Also, OPEC is currently pumping 600,000 barrels a day more than the world needs.

Meanwhile, Christophe de Margerie, chief executive of French oil giant Total, this week said he sees a risk of oil rebounding to $100 a barrel unless there’s greater investment in exploration. He warned of a possible oil shortage between now and 2015 if immediate action is not taken to invest in exploration. “The reserves of oil are there but if you don’t invest they don’t come on the market,” de Margeries said.

Would we plan differently if we knew that oil prices were going to be $100/bbl? Of course we would. We have already seen consumers respond as oil prices went over $100/bbl. But while consumers were responding, a lot of damage was done to the U.S. economy. The airline industry and the auto industry took a beating, as did many personal budgets that suddenly had to cope with much higher weekly fuel outlays.

Enough gambling on oil prices! Let’s raise the price of petroleum via taxes so that people can make energy plans that incentivize them to become more fuel efficient. As I have argued before, you can direct that back at people in the form of a tax credit. The idea would be to trade energy taxes for income taxes.

The benefit would be that we would start moving toward a higher level of fuel efficiency without having to legislate CAFE mandates that end up being gamed. With increased fuel prices, people will demand more efficient vehicles. Automakers will know which cars they need to build. Renewable energy – particularly those varieties that aren’t heavily reliant on fossil fuels – would also see a boost. Not only would they be competing against higher priced fossil fuels, but project developers could have more assurance that oil prices aren’t going to fall to $30 and destroy their project economics.

The benefits would be substantial. Most importantly, our consumption would fall. I consider it very important to stretch our remaining fossil fuel endowment as far as we can, and we can do a better job of that if we manage it. We need to buy time, because renewables are not ready to fill the supply gap that will result if we burn through our remaining oil too quickly.

I don’t think there is any question our oil imports would fall as people started to change their transportation arrangements. Following the high prices of mid-2008, total petroleum imports over the following 12 months fell by 700,000 barrels/day over the previous 12 months (although it is hard to say how much of that was recession-induced).

I have long complained that government energy policies that vacillate every time a different political party comes into power have long been an impediment for companies trying to do long-range project planning, both for fossil fuel and renewable energy projects. Volatile prices have much the same impact. I have had my disagreements with Vinod Khosla in the past, but his call to put a floor underneath oil prices has merit (see Point 14 here).

Having a price floor would would allow companies – especially energy companies and auto makers – to do a better job of long range planning. I don’t fault automakers for getting caught with an oversupply of SUVs as oil prices skyrocketed. They were just making cars that people in a low-oil-price scenario had long demanded. With the certainty of higher prices, the auto companies needn’t gamble that SUV sales are going to come back strong. They would know that they need to shift to the more efficient vehicles that consumers will demand.

I have no problem with taking calculated risks, but I do not gamble. Living on the Gulf Coast of Texas without hurricane insurance is gambling, because the hurricane probability is too high. I don’t see that as much different than the risk we place on the economy by not taking more proactive steps to insulate the economy against price spikes. But we didn’t learn that lesson in 1973, nor in the 1974-75 recession that followed. I don’t expect we are much wiser today.

September 24, 2009 Posted by | carbon tax, gas tax, Vinod Khosla | 32 Comments

About That $72 Billion Subsidy

I am going to be pretty busy for the next few days, and probably won’t be able to put anything new up until at least mid-week. Until then, over the past few days there have been a lot of headlines about a recently released study from the Environmental Law Institute. The study concluded that over the past seven years, fossil fuels have benefited from some $72 billion in subsidies. Their headline was innocent enough:

U.S. Tax Breaks Subsidize Foreign Oil Production

(Washington, DC) — The largest U.S subsidies to fossil fuels are attributed to tax breaks that aid foreign oil production, according to research to be released on Friday by the Environmental Law Institute in partnership with the Woodrow Wilson International Center for Scholars. The study, which reviewed fossil fuel and energy subsidies for Fiscal Years 2002-2008, reveals that the lion’s share of energy subsidies supported energy sources that emit high levels of greenhouse gases.

The research demonstrates that the federal government provided substantially larger subsidies to fossil fuels than to renewables. Fossil fuels benefited from approximately $72 billion over the seven-year period, while subsidies for renewable fuels totaled only $29 billion. More than half the subsidies for renewables—$16.8 billion—are attributable to corn-based ethanol, the climate effects of which are hotly disputed. Of the fossil fuel subsidies, $70.2 billion went to traditional sources—such as coal and oil—and $2.3 billion went to carbon capture and storage, which is designed to reduce greenhouse gas emissions from coal-fired power plants. Thus, energy subsidies highly favored energy sources that emit high levels of greenhouse gases over sources that would decrease our climate footprint.

Let me be perfectly clear here. I am very opposed to policies that subsidize our usage of fossil fuels. But I am also opposed to painting with very broad brushes. In the case of the oil subsidies, three things stand out. First, the taxes the oil companies paid over that time period are about an order of magnitude higher than those so-called subsidies. Second, many of these so-called subsidies would merely be called tax deductions in any other industry. Finally, many of the so-called subsidies didn’t even go to Big Oil.

One of my diligent readers took the time to actually read the study, and broke it down:

I was a little puzzled by this ELI study. First of all, the itemized subsidies only added up to $68 bn, not $72. Maybe they were just listing the largest items – I didn’t read the fine print. I thought it would be useful to see just what was being subsidized rather than blurting out “BIG OIL Subsidy!!” I found it useful to consider 10 categories of fossil fuel subsidies.

1) 22%, or $15 billion of the $68 billion listed, was allocated to the Foreign Tax Credit you referenced. Not $72 billion.

2) 23% went to subsidize production in high cost environments, areas that may have otherwise been commercially marginal (although that of course depends on price). This seems like a legitimate use of subsidy to me, if without it most of these projects would have not been undertaken. [RR: As I have argued before, it makes sense to subsidize things that are deemed important, but otherwise uneconomic].

3) 11% went to various accounting conventions, particularly treatment of intangible costs.

4) 10% went to assumed loss stemming from lower than expected offshore lease government take. This seems very arbitrary to me. As I understand it, the ELI is assuming some globally fair government take, and calculates that the feds could get more. Maybe. But there’s no free lunch. A higher take might mean lower bids or less development.

5) 9% went to a low income housing energy assistance program. This is money paid to states to insure low income families get access to fuels. Hardly a Big Oil subsidy.

6) Another 9% went to government storage programs, the SPR and two other minor programs. This is a government initiative, not a handout to the oil industry.

7) 8% went to an accounting rule benefiting independent producers, not Big Oil.

8) 5% went to the coal industry.

9) 1% went to incentives for clean fuels.

10) 1% went to a variety of small miscellaneous programs.

So, of these

– Numbers 1 and 3 may have room for revenue take ($22 bn);

– Number 4 possibly but would have the side effect of lower US production (how could it not?) $7 bn;

– Number 2 would clearly have a negative impact on US production ($16 bn);

– Number 7 would hurt smaller companies but may be minor source of revenue ($5 bn)

– The rest are not really benefiting the oil industry very much.

I view this as $22 bn in possibly vulnerable oil industry subsidies, another $23 bn in at least partly defensible subsidies, and $27 billion (getting back to $72 bn) in subsidies that don’t benefit the large mutlinationals much at all.

Again, let me make it clear that I oppose true fossil fuel subsidies. In fact, I support “antisubsidies” – higher taxes – for fossil fuels in order to incentivize conservation and promote renewables (and again, I think it can be done in a revenue-neutral manner). But I do think the discussion should be intellectually honest, and we shouldn’t lump money destined for research into carbon sequestration into all-encompassing “oil subsidies.”

September 21, 2009 Posted by | carbon tax, gas tax, oil companies, subsidies | 47 Comments

The API on Cap and Trade

Yesterday the American Petroleum Institute conducted a blogger’s conference call to talk about various energy issues that they are focused on. I used to regularly attend these calls, but things have been quite busy and it has been a while since I participated. But I thought it would be worthwhile to check in and find out which issues they are currently occupied with. I asked one question on cap and trade during the call (see below).

The API listed three key areas that they are focused on. These are the Waxman-Markey climate bill, which they think will cost jobs (particularly in the energy industry), domestic access to petroleum resources, and taxation of the oil and gas industry. Participating from the API were:

MODERATOR: Jane Van Ryan, API

SPEAKERS:

Jack Gerard, President and CEO, API
John Felmy, Chief Economist, API
Doug Morris, API
Kyle Isakower, API

The bloggers on the call included:

The audio and transcript can be found here. In his opening statement, Jack Gerard happened to mention recent testimony of Alan Krueger, Assistant Secretary for Economic Policy and Chief Economist of the US Treasury, in which he justified higher taxes on the oil industry by suggesting that current tax policies have led to overproduction by the industry. That is simply astonishing. Yes, it must be overproduction that has caused our oil imports to increase year after year to the point that we import 60% of what we use. One wonders what the import level will reach once this domestic “overproduction” is reined in through punitive taxes. For a bit more on Krueger’s testimony, see:

Administration attempts to justify tax proposals surprise Gerard

Alan B. Krueger, assistant US Treasury secretary for economic policy, mentioned that the administration was looking at other industries’ tax breaks during a Sept. 10 hearing by the Senate Finance Committee’s Energy, Natural Resources, and Infrastructure Subcommittee on the White House’s Fiscal 2010 oil and gas tax proposals.

When a subcommittee member, Jim Bunning (R-Ky.), asked him if the administration was currently singling out the oil and gas industry as it seeks tax incentive repeals, however, the US Department of the Treasury official replied, “That is correct.”

Gerard said he continues to be amazed by Obama administration statements that oil and gas tax incentives should be repealed to prevent overproduction of domestic resources. “The Treasury Department’s Green Book says there’s too much oil and gas production in the United States. We think that’s laughable. We think there needs to be some serious dialogue about what these proposals mean and about ways to get back to producing more oil and gas,” he said.

Also see Geoff Styles’ analysis of the issue:

Overproducing US Oil?

Back to the call, I get concerned about proposals in which the price tag is vaguely defined. I would much rather see a direct tax on gasoline in which the impact can be modeled, over a new system whose overall impact on prices is uncertain. The latter is a big economic risk to me. So I asked a question about cap and trade, with Geoff Styles following-up.

11:16 MS. VAN RYAN: Another question? Robert, I know that you sent one to me by e-mail. Would you like to pose that question yourself?

11:24 MR. RAPIER: Yeah, I’ll do that. Yeah, the question was, I understand the concern about the cap-and-trade legislation; I have similar concerns. I am wondering if you have an alternative proposal; if there is any kind of legislation for cap-and-trade that you could get behind that achieves the same goals?

11:46 MR. GERARD: We haven’t. There has not been a proposal out there yet, Robert, that we have gotten behind. We think now is the time for a reset. There was a lot of focus on this early on in the Waxman-Markey bill. There was a lot of effort gone into it and it just came out in the wrong place. So what we have been attempting to do over the past few months is to point out the significant flaws in that legislation with the hope and expectation that we can help educate policymakers and the public.

And what we found is that when you begin to educate, not only does it resonate but it is clearly understood. The House exercise was focused primarily on the utility area or consumers’ bills, industrial bills that we often think of that you get at home to pay for your heating, your cooling, et cetera. But it almost totally left out the fuels question. And that is why 44 percent of all the emissions – or I should say refineries – will be held responsible for 44 percent of all the emission and yet given only 2.25 percent of allowances to transition us to a carbon-constrained world. So the net effect of that is – and I am oversimplifying this now – is that you’ve shifted the cost onto those who use fuels.

And that is why you see the farm bureau, you see the truckers, you see small business and others. When they began to see through the dust of the activity in the House, they say, well, what happened is we are looking at our utility bills and the Congress made an effort to transition us over time to a carbon-constrained world and they tried to provide some mitigating factors – in this case, allowances – to do that, but on the fuel side, we got totally forgotten. So anybody who drives a pickup truck, a car, rides the bus, the train, flies on an airplane is going to have an almost immediate impact as a result of Waxman-Markey.

And so in educating on that front, I believe we now have their attention that we have got to look at that question. And we internally, and as an industry, are developing further thoughts and ideas, if you will, as to how best address the fuel question and how it fits into the broader framework of a carbon-constrained world.

14:13 MR. STYLES: Jack, this is Geoff Styles. Could I follow up on that?

14:16 MR. GERARD: Please.

14:17 MR. STYLES: Because I certainly share your concern about the disproportionate way that Waxman-Markey doles out the free emissions allowances. In conversations with some of the folks who have been supporting the bill, I get a sense that there is a belief out there that, to some extent, maybe to a significant extent, they feel that the costs that would be imposed on the refining sector would somehow be absorbed by the refining sector and not actually passed on to consumers. Has API done anything looking at, you know, to what degree, any degree, of cost absorption by the refining sector as opposed to simply shifting the market pricing points, and in effect, pushing it on to consumers would take place?

15:11 MR. GERARD: Let me answer that generally. And I will turn to our chief economist, John Felmy, afterwards to see if he can add anything to it. My simple response would be unless you can repeal the laws of economics and supply and demand, that is the only conditions under which that thought would work because it just doesn’t make any sense.

What we are talking about here is significant costs. We are not talking about nuances around the edge. And just as I mentioned earlier, some of our analysis shows you would drive gasoline over $4 a gallon in the current environment. And so, you know, potential job loss of 2 million jobs. We are not talking a penny or two here. We are talking about quarters and dollars.

And how they could come to that conclusion might give them some political cover in trying to justify what they have asked for in the bill. But I don’t see how it makes any economic sense and frankly, it is unrealistic. Now, let me turn to an economist to give you a real answer. How is that?

16:14 JOHN FELMY: Well, if I could just add, I mean, that is absolutely right. There are two key factors. First of all, the emissions that the refiners themselves produce – they are competing on a world scale with international refiners. And we had commissioned EnSys to take a look at that. And it clearly showed that it would be a severe and negative implication for refining capacity in the U.S. because of an inability to be able to compete.

But more importantly on the consumption side and a sense of being responsible for the emissions from the tailpipes of your users, I think it is helpful to look at the current refining situation right now. In the second quarter of this year, almost every refiner lost money. And in the fourth quarter of last year, basically, there was a complete inability to pass along any cost changes.

And so with that kind of market conditions, primarily driven by international competition with a lot of, for example, gasoline on world markets from places like Europe and so on, I fail to understand how there is that ability to be able, from an economic sense, to have that happen. Analytically, you have got a weak gasoline market. You have got a lot of supply on world markets. And that competitive aspect, by most analysts, is expected to remain.

17:33 MR. STYLES: So in effect then, John, what you are saying, I think, is what I concluded a long time ago, which is if refineries are expected to absorb this, they will absorb it by going out of business.

17:44 MR. FELMY: Exactly. If you are already losing money and you raise your costs and you have no ability to address that, the margins already were low when they were positive, and when they are negative, there is nothing to give away.

17:58 MR. STYLES: Thank you.

18:00 MR. FELMY: And with, you know – we have got three broad classes of refiners in this country. You have got the big ones, which are about 50 percent; you have got about 25 percent, which are the big independent ones that are not integrated; and then a lot of very small refiners that would really take a beating in that environment.

————

Following that exchange, I got a bit distracted with juggling cats and never had a chance to ask another. But if you are interested in the rest of the discussion, you can access the transcript and audio at the link.

September 19, 2009 Posted by | American Petroleum Institute, api, carbon tax, energy policy, gas tax, politics, refining | 28 Comments

Tariffs in the Climate Bill

A number of people have written to ask why I haven’t commented on the climate bill. There are two reasons. First, the House and Senate versions are very different, so the final form may not resemble the version the House just passed. Second, I haven’t had the time to read through much of it.

There was one issue that I considered quite important, but I didn’t know whether it was in the bill. Jim Mulva was recently quoted as saying that the climate bill would impose higher taxes on domestic fuel versus imports. While we can agree that Mulva’s comments are self-serving, I also believe that most people would oppose a bill that shifts more of our fuel supply to imports.

While I know the goal here is to favor renewable energy, what happens if it can’t fill a void left if the new bill discourages domestic production? The void will be filled by imports. Prices will also rise, so some of the void will be filled by conservation. But in order to keep the playing field level, I really liked the idea proposed by Jeff Rubin: If you place a carbon tax on domestic production, you can place a carbon tariff on imports. This idea was discussed in my review of his book Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization.

I hadn’t heard any discussion of this until today. From Steven Mufson of the Washington Post:

Obama Praises Climate Bill’s Progress but Opposes Its Tariffs

President Obama yesterday said that the House took an “extraordinary first step” by passing a climate bill on Friday, adding that he hoped it will “prod” action by the Senate and predicting that the legislation could make renewable energy “a driver of economic growth.”

But he said he hopes that Congress will strip out a clause that would impose a tariff in 2020 on imports from countries without systems for pricing or limiting carbon dioxide emissions.

Obama went on to suggest that there were other protections built in that will keep the playing field level. I would like to know what those are. I can understand how tariffs would do it (although enforcement raises some sticky questions). But I have heard enough double-speak on energy policy that I want to see the fine details of how the playing field will be kept level.

Make no mistake: This bill is a tax increase. That’s the basis for the political opposition. But I have long advocated a tax increase on fossil fuels to slow the rate at which we are using them up (and to make renewables more competitive). So I don’t oppose the bill on the basis that it is a tax increase. On the other hand I can’t say that I endorse it, because I haven’t read it. I certainly believe there are more efficient ways of raising carbon taxes than this. I still think – perhaps naively – that my proposal to tilt the tax code toward higher fossil fuel taxes and lower income taxes would be more attractive than this.

June 29, 2009 Posted by | Barack Obama, carbon tax, climate change, energy policy, gas tax, global warming, Jim Mulva, politics | 30 Comments

Raise Wages, Cut Carbon Bill

I don’t normally post press releases that are e-mailed to me (I get 4 or 5 every day), but this one is important to me. (See my essay The Case for Higher Gas Taxes for my revenue-neutral proposal which is along the same lines as the bill that has now been filed).

On this topic, I am also currently reading Jeff Rubin’s new book Why Your World Is About to Get a Whole Lot Smaller and Rubin makes the argument that with a tax on carbon emissions, you can then put carbon tariffs on high emitters like China. In this way, many of the high energy industries – such as steel manufacture – will become much more competitive back in the U.S. because we are able to do it a lot more efficiently. This will also incentivize developing countries to become more efficient. I will elaborate when I review the book.

————————————–

Bill Raises Wages and Cuts Carbon, Improves National Security and Spurs Innovation

Better bipartisan approach to energy, climate legislation

Saying the last thing the economy needs now is a tax increase, U.S. Rep. Bob Inglis (R-SC) along with lead co-sponsors Reps. Jeff Flake (R-AZ) and Daniel Lipinski (D-IL) filed the Raise Wages, Cut Carbon Act of 2009 (H.R. 2380) Wednesday as a revenue-neutral approach to energy innovation and environmental stewardship.

The bill is a bipartisan alternative to the cap-and-trade legislation working through the Energy & Commerce Committee.

The bill calls for a reduction in payroll taxes for employers and employees in exchange for an equal amount of revenue from a carbon tax, resulting in a net-zero change in taxes and a “double dividend” in efficiency.

Inglis is hopeful the RWCCA bill will attract bipartisan support with the idea of lowering payroll taxes, creating jobs by allowing markets to work and improving our national security by addressing energy and environmental challenges. The measure has the advantage of providing predictable pricing over time to encourage technological investment.

“Let’s lower taxes on something we want more of—income, labor, industry—and shift the tax to something we want less of—carbon dioxide,” Inglis said. “By doing so, we’d do far more than just clean the air—we’d create jobs and we’d improve the national security of the United States by breaking our addiction to oil.”

The bill starts with revenue-neutrality by reducing payroll taxes and putting more money into the hands of American workers. Social security benefits to seniors would be increased to help pay higher energy costs. The Social Security Trust Fund would not be touched and the tax swap would be handled in the General Fund of the Treasury.

A proposed carbon tax of $15 per ton of CO2 would be applied in 2010, increasing to $100 by 2040, adjusted each year for inflation. The bill includes a clear schedule of rates, allowing businesses to plan accordingly. Fossil fuels would be taxed as they enter the economy, at the mine mouth, the oil refinery and the natural gas pipeline, making it easy to implement and minimizing administrative costs.

Problems with the Waxman bill include: it amounts to a massive tax increase in the midst of a recession; it puts carbon credit trading in the hands of the Wall Street traders (who brought us mortgage-backed securities and the banking crisis); it lacks a WTO border-adjustment, which could hurt U.S. companies compete in a global economy; and it has no Republican support.

The advantages of the Raise Wages, Cut Carbon bill include: it’s not a tax increase—it’s a revenue-neutral tax swap; it fixes the underlying market distortion of unrecognized negative externalities, and thereby unleashes the power of free enterprise to solve the problem of energy security; and it gives American manufacturers a level playing field.

May 13, 2009 Posted by | carbon tax, energy policy, gas tax, politics | 25 Comments

Raise Wages, Cut Carbon Bill

I don’t normally post press releases that are e-mailed to me (I get 4 or 5 every day), but this one is important to me. (See my essay The Case for Higher Gas Taxes for my revenue-neutral proposal which is along the same lines as the bill that has now been filed).

On this topic, I am also currently reading Jeff Rubin’s new book Why Your World Is About to Get a Whole Lot Smaller and Rubin makes the argument that with a tax on carbon emissions, you can then put carbon tariffs on high emitters like China. In this way, many of the high energy industries – such as steel manufacture – will become much more competitive back in the U.S. because we are able to do it a lot more efficiently. This will also incentivize developing countries to become more efficient. I will elaborate when I review the book.

————————————–

Bill Raises Wages and Cuts Carbon, Improves National Security and Spurs Innovation

Better bipartisan approach to energy, climate legislation

Saying the last thing the economy needs now is a tax increase, U.S. Rep. Bob Inglis (R-SC) along with lead co-sponsors Reps. Jeff Flake (R-AZ) and Daniel Lipinski (D-IL) filed the Raise Wages, Cut Carbon Act of 2009 (H.R. 2380) Wednesday as a revenue-neutral approach to energy innovation and environmental stewardship.

The bill is a bipartisan alternative to the cap-and-trade legislation working through the Energy & Commerce Committee.

The bill calls for a reduction in payroll taxes for employers and employees in exchange for an equal amount of revenue from a carbon tax, resulting in a net-zero change in taxes and a “double dividend” in efficiency.

Inglis is hopeful the RWCCA bill will attract bipartisan support with the idea of lowering payroll taxes, creating jobs by allowing markets to work and improving our national security by addressing energy and environmental challenges. The measure has the advantage of providing predictable pricing over time to encourage technological investment.

“Let’s lower taxes on something we want more of—income, labor, industry—and shift the tax to something we want less of—carbon dioxide,” Inglis said. “By doing so, we’d do far more than just clean the air—we’d create jobs and we’d improve the national security of the United States by breaking our addiction to oil.”

The bill starts with revenue-neutrality by reducing payroll taxes and putting more money into the hands of American workers. Social security benefits to seniors would be increased to help pay higher energy costs. The Social Security Trust Fund would not be touched and the tax swap would be handled in the General Fund of the Treasury.

A proposed carbon tax of $15 per ton of CO2 would be applied in 2010, increasing to $100 by 2040, adjusted each year for inflation. The bill includes a clear schedule of rates, allowing businesses to plan accordingly. Fossil fuels would be taxed as they enter the economy, at the mine mouth, the oil refinery and the natural gas pipeline, making it easy to implement and minimizing administrative costs.

Problems with the Waxman bill include: it amounts to a massive tax increase in the midst of a recession; it puts carbon credit trading in the hands of the Wall Street traders (who brought us mortgage-backed securities and the banking crisis); it lacks a WTO border-adjustment, which could hurt U.S. companies compete in a global economy; and it has no Republican support.

The advantages of the Raise Wages, Cut Carbon bill include: it’s not a tax increase—it’s a revenue-neutral tax swap; it fixes the underlying market distortion of unrecognized negative externalities, and thereby unleashes the power of free enterprise to solve the problem of energy security; and it gives American manufacturers a level playing field.

May 13, 2009 Posted by | carbon tax, energy policy, gas tax, politics | 19 Comments

This is a Good Idea?

Update: Obama Says ‘No Way’

WASHINGTON – President Barack Obama on Friday rejected his transportation secretary’s suggestion that the administration consider taxing motorists based on how many miles they drive instead of how much gasoline they buy.

“It is not and will not be the policy of the Obama administration,” White House press secretary Robert Gibbs told reporters, when asked for the president’s thoughts about Transportation Secretary Ray LaHood’s suggestion, raised in an interview with The Associated Press a daily earlier.

————————-

Regular readers know that I would be strongly in favor of increasing gasoline taxes in exchange for income tax credits. I think such an idea would be politically palatable, provided it is clearly communicated to everyone that 1). If they make efforts to conserve, this system would be better for them financially; and 2). Higher gasoline prices will push us in the direction of less energy dependence by encouraging conservation and alternatives. Those who love the idea of energy independence and hate the idea of sending our dollars to OPEC should love the idea of changing our tax system in this way.

But some have a different idea of changing the way we are taxed:

Transportation Secretary LaHood eyes taxing miles driven

WASHINGTON, D.C. — Transportation Secretary Ray LaHood says he wants to consider taxing motorists based on how many miles they drive rather than how much gasoline they burn – an idea that has angered drivers in some states where it has been proposed.

A tentative plan in Massachusetts to use GPS chips in vehicles to charge motorists by the mile has drawn complaints from drivers who say it’s an Orwellian intrusion by government into the lives of citizens. Other motorists say it eliminates an incentive to drive more fuel-efficient cars since gas guzzlers will be taxed at the same rate as fuel sippers.

Yeah, count me among those who would say that. While it doesn’t eliminate the incentive to drive fuel efficient cars – after all, there is still the matter of the gasoline bill itself – it does remove some of the incentive for choosing fuel efficiency. It also decreases the incentive for choosing alternatives to gasoline-powered vehicles. It seems inherently unfair that the person who drives the new Ford Fusion hybrid should pay the same road taxes as the person who drives a Hummer. I want to encourage people to drive the Fusion.

Besides a VMT tax, more tolls for highways and bridges and more government partnerships with business to finance transportation projects are other funding options, LaHood, one of two Republicans in President Barack Obama’s Cabinet, said in the interview Thursday.

“What I see this administration doing is this – thinking outside the box on how we fund our infrastructure in America,” he said.

I am all for outside the box thinking. But let’s be clear: There is a reason ideas are outside the box, and sometimes it’s because they are just really bad ideas.

LaHood said he firmly opposes raising the federal gasoline tax in the current recession.

Think for a second about what he is saying. He opposes raising the gasoline tax. Why? Well I presume he would say that he doesn’t want to increase people’s tax burden. OK, then why do you propose to change taxes on the basis of miles driven? Is it to raise less money? The same amount of money? No, you are trying to raise more money, because there have been shortfalls as people have reduced their consumption:

Among the reasons for the gap is a switch to more fuel-efficient cars and a decrease in driving that many transportation experts believe is related to the economic downturn. Electric cars and alternative-fuel vehicles that don’t use gasoline are expected to start penetrating the market in greater numbers.

Further, you are going to increase the costs of vehicles by requiring the GPS chips be installed. But I guess it could make it much easier to give speeding tickets. Imagine with a GPS system in your car just how easily it would be to catch speeders. Surely we can all embrace a system that could be utilized to send you a speeding ticket any time you drive 2 miles an hour over the speed limit.

Am I off base here? Someone convince me that this is a good idea. I think people are going to be much more resistant to this than what I have proposed.

February 20, 2009 Posted by | energy policy, gas tax | 68 Comments

Nobody Wants Small Cars

I reported on it last week in How Quickly We Forget, but the Houston Chronicle yesterday reiterated the point the people are reverting to bad habits:

GM exec complains ‘nobody wants’ small cars now

General Motors Corp. Vice Chairman Robert Lutz said lower fuel prices are discouraging U.S. sales of small cars and gasoline-electric hybrid vehicles.

Gasoline prices “are completely messing it up,” Lutz said today in a Bloomberg interview, referring to demand for small vehicles. “Nobody wants them.”

Lutz endorses the same fix that I have proposed:

Lutz drew parallels to government cigarette taxes that pushed the price of a carton to more than $20.

“That’s the way the market mechanisms work,” he said. “Guess what, cigarettes are so expensive that people weaned themselves off.”

While I of course strongly agree that price is the mechanism that moves people to action (or inaction), there is a bit of irony in that statement, given that the market mechanism currently has Lutz and his fellow automakers asking the government for a big bailout.

January 14, 2009 Posted by | gas tax, General Motors | 60 Comments

Thoughts on the New Energy Team

In case you are just venturing out of your cave for the first time in a week, you are probably aware that President-elect Obama has announced his new energy team:

Obama names energy team

The team includes Nobel Prize winning physicist Steven Chu as Secretary of Energy, former EPA head Carol Browner to fill the newly-created job of Energy Czar, and Lisa Jackson to head the EPA. The focus of this essay will be on Dr. Chu, but I will comment briefly on the others.

Lisa Jackson is trained as a chemical engineer (as was the outgoing Secretary of Energy Samual Bodman). It should go without saying that I like to see technical people in roles like this, where understanding science and data are both critical. Carol Browner, while not trained as a technical person, has a lot of administrative experience within the EPA. Incidentally, I once met Mrs. Browner, as she was the person who presented my research group with the 1996 Green Chemistry Challenge Award at the National Academy of Sciences.

While I don’t know nearly as much about Browner and Jackson, Dr. Chu has a very long public record. I have been searching through his various publications, speeches, and presentations to get a really good view of the man. Here is what President-elect Obama had to say about Dr. Chu:

“His appointment should send a signal to all that my administration will value science. We will make decisions based on the facts, and we understand that facts demand bold action.”

If you asked me for a few characteristics that would top my list of desirables for the spot of Energy Secretary, I would want someone who is 1). Knowledgeable about a broad range of energy technologies; 2). Someone who is passionate about the subject; 3). Someone who isn’t highly partisan, and can work with diverse groups.

Dr. Chu’s record indicates to me that he easily fills these three criteria. Dr. Chu is currently director of the Lawrence Berkeley National Laboratory. Among his accomplishments there was to secure a $500 million partnership with BP to do alternative energy research. (See this story from Salon for more details.) This suggests someone who can work with industry on next generation energy technologies. I am not sure how quickly he feels we can transition away from oil, and therefore whether we need additional exploration and drilling. However, he has been outspoken over his opposition to coal, and his concerns about global warming. Some quotes on these topics from Dr. Chu. First, his position on coal is pretty clear:

“Coal is my worst nightmare.”

He favors nuclear energy over coal (it should come as no suprise that a physicist like Dr. Chu is pro-nuclear):

“The fear of radiation shouldn’t even enter into this.”

“Coal is very, very bad. Nuclear has to be a necessary part of the portfolio.”

Chu, who also is professor of physics and molecular and cell biology at UC Berkeley, said nuclear is the preferred choice to coal, pointing out that coal releases 50 percent more radioactivity than nuclear power plants.

His concerns over global warming have been well-publicized:

Consider this. There’s about a 50 percent chance, the climate experts tell us, that in this century we will go up in temperature by three degrees Centigrade. Now, three degrees Centigrade doesn’t seem a lot to you, that’s 11° F. Chicago changes by 30° F in half a day. But 5° C means that … it’s the difference between where we are today and where we were in the last ice age. What did that mean? Canada, the United States down to Ohio and Pennsylvania, was covered in ice year round.

So think about what 5° C will mean going the other way. A very different world. So if you’d want that for your kids and grandkids, we can continue what we’re doing. Climate change of that scale will cause enormous resource wars, over water, arable land, and massive population displacements. We’re not talking about ten thousand people. We’re not talking about ten million people, we’re talking about hundreds of millions to billions of people being flooded out, permanently.

He is no fan of corn ethanol:

We can indeed make fuel out of crops. Corn is not the right crop. The reason it’s not the right crop is because the amount of energy you put into making a fuel and growing the corn and fertilizing the corn fields and plowing the fields is within ten or 20 percent of the amount of energy you get by making it into the ethanol that you can put in your car.

Also, the amount of CO2 you create by growing corn is again within 20 percent of the amount of carbon dioxide you make by drilling and refining oil and putting into your car.

He favors higher gas taxes:

“Somehow we have to figure out how to boost the price of gasoline to the levels in Europe.” Source.

From that same article:

Lee Schipper, a project scientist with the Global Metropolitan Studies program at U.C. Berkeley, hailed Obama’s nomination of Chu as Energy Secretary and praised his colleague’s support for higher gasoline taxes.

Schipper thinks Obama’s concerns about not placing additional burdens on America’s families can be addressed by agreeing to rebate all — or close to all — of the money raised by higher fuel taxes. “The answer is: raise the price of gasoline and give all the money back,” said Schipper.

Hmm. Where have I heard that before?

He appreciates the need for greater energy efficiency (and like me, wants to be emperor of the world):

“I cannot impress upon you enough how important energy efficiency is.”

“Just refrigerator efficiency — bigger refrigerators by the way — saves more energy than all we’re generating from renewables [today], excluding hydroelectric power.”

“If I were emperor of the world, I would put the pedal to the floor on energy efficiency and conservation for the next decade.”

And finally recognizes that the U.S. can be a leader in new energy technologies, but are starting to fall behind in some areas.

“We have an option to be a leader in energy technologies, but we are not because our support system for that is on again off again. The future wealth of the United States will come from our ability to invent new technologies.”

“Americans take for granted that the United States leads the world in science. But we’ve lost many of these leads, especially when it comes to energy.”

“The U.S. is making it easier for other countries to catch up and pass us.”

So, let’s see. He has had a career devoted to energy, is clearly passionate about the subject, doesn’t favor making ethanol from corn, thinks we need higher gas taxes, favors nuclear power, favors alternative energy funding, is pro-science, and favors higher energy efficiency. That’s exactly how I would describe myself, so from my perspective he is a very good choice. I like his priorities. He has also been involved in research on cellulosic ethanol, and will likely send more research dollars flowing in that direction.

I think the issue that will generate some controversy is his very strong position on global warming. Not since Al Gore was Vice-President will there be such a staunch proponent of reducing greenhouse gas emissions at the highest levels of government. Global warming activists will love him. Skeptics probably won’t be quite so enthusiastic.

——————

Here are the quick bios of the rest of the energy/environment team, courtesy of Wired:

Lisa Jackson, EPA head

Quick bio: Trained as a chemical engineer at Princeton, she has spent her entire career with government environmental agencies. She worked her way up through the EPA from 1987-2002, then moved to the New Jersey Department of Environmental Protection, eventually becoming its head in 2006. She was appointed as New Jersey Governor John Corzine’s chief-of-staff less than a month ago.

Carol Browner, energy czar

Quick bio: The longest-serving EPA administrator in the history of the agency, Browner is the non-scientist on the team. She came up through politics, working as Al Gore’s legislative director in the late 1980s, before heading the Florida Department of Environmental Regulation. She was appointed by Bill Clinton in 1993 to helm the EPA and left in 2001. Since then, she’s been a consultant with The Albright Group.

Her position: The new “energy czar” will coordinate (and politically shepherd) the President-elect’s various proposals around energy and the environment.

December 17, 2008 Posted by | cellulosic ethanol, coal, conservation, DOE, energy policy, gas tax, global warming, greenhouse gases, politics, Steven Chu | 40 Comments

The Case for Higher Gas Taxes

Taxes and Choice

Whenever I mention the idea of increasing gas taxes, some inevitably hear only half the message: A tax increase. They don’t want to know about any tradeoffs I propose, or if there might be a long-term benefit. They just know one thing: Tax increases are bad.

But I don’t want to increase taxes. I don’t like to pay taxes any more than anyone else does. I don’t feel like a patriot when I write a check to the IRS. No, what I am going to propose would give you more choice in the taxes you pay. I want to change the way you pay taxes in a way that will benefit future generations and reduce our dependence on foreign oil.

Don’t get me wrong. I understand the benefit of taxes. I recognize that a good bit of my tax dollars are well spent. I am happy to pay taxes that help improve our overall quality of life, or that secure a better future for our children. I just wish I had more control over the taxes I pay.

This attitude explains why I have always been a fan of lotteries. People can choose to buy a lottery ticket, and a portion of the proceeds goes into the tax coffers. But I can choose not to buy a lottery ticket. I feel the same about taxes on alcohol and cigarettes. I can choose not to drink or smoke, or I can drink and smoke a lot, and voluntarily pay more taxes.

Why We Need Higher Gasoline Taxes

The same logic holds for certain other consumption taxes, such as gasoline taxes. I can choose to use less, and the higher the price, the greater my incentive to make that choice. If the price is low, so is the incentive to conserve.

I think most can agree that in the U.S. a lot of gasoline usage is discretionary. We don’t treat our fossil fuel endowment as something that our children and grandchildren might need. We seem to be content to burn through it and keep our fingers crossed that there is a solution right around the corner for future generations. This is exactly the sort of “spend now, pay later” mentality that has gotten us into such a financial mess.

But what if you knew that there was solution just around the corner for our fossil fuel dependence? What if you knew that unless we scale back consumption, your children and grandchildren will have to make far greater sacrifices? I think I speak for most parents when I say that I am willing to voluntarily sacrifice if it enhances the odds that my kids will have a brighter future.

This forms the basis of my support for higher gasoline taxes. In my opinion, a small sacrifice today will stretch our fossil fuel endowment and buy more time for sustainable alternatives to emerge. The advantages of having a higher gasoline tax, or more generally a fossil fuel tax, would be many in my opinion. They include:

• It would lead to conservation, which would help preserve our remaining fossil fuel endowment.

• It would encourage mass transit (people flocked to mass transit this year as prices climbed).

• It would make alternative energy candidates more competitive with fossil fuels, without picking specific technology winners.

• It would enable people to do a better job of planning ahead, as opposed to the constant expectation that low gas prices are right around the corner.

• It should encourage more efficient city planning, and rein in some of the suburban sprawl.

• It would make the price of fossil fuels more reflective of the negative externalities that are not currently priced in (air pollution, military expenditures, etc.).

• It would penalize alternative energy sources with low energy returns, and reward those processes that minimize fossil fuel inputs.

Political Palatability

But I don’t want to just give the government more money in the form of higher taxes, and therein lies the catch with my proposal.

The most often cited disadvantage is that higher gas taxes are regressive; that they would hurt lower-income workers the most. That’s a fair criticism, but we can address it. Let’s consider some rough numbers for illustration (assuming only a gasoline tax). The average family consumes almost 2,000 gallons of gasoline a year (per the EIA, gasoline consumption in 2007 was 142 billion gallons for a U.S. population of 300 million people). If we phased in a federal gasoline tax increase of $0.20/gallon this year, $0.30/gallon next year, and then $0.50/gallon in each of the three following years, the total tax increase would be $2.00/gallon. Such an increase would still put gasoline prices at less than they are in Europe, but should encourage serious conservation measures, while at the same time allowing people time to plan for the tax increase.

But what about the additional tax burden of $4,000 on the average family? In order to offset the burden of these higher taxes, I would propose that as a part of the package we lower tax rates, or offer a tax credit equivalent to the increased tax burden for the average American. This is equivalent to $400 in the first year of the tax, and $4,000 by the time the last increase is phased in. Families that use less gasoline than the average should actually see their overall tax burden decrease. Those who consume more than 2,000 gallons per year will see an overall increase in their tax burden – and will therefore have a stronger incentive to reduce their fuel consumption. For those whose fuel usage is for farm or business use, the fuel taxes could be deducted against business income.

The price spikes over the past year have highlighted just how vulnerable our fossil fuel dependence has made us. We are dependent on certain regimes that are hostile to our interests. It is only a matter of time before energy prices go back up, and vast amounts of money start once again flowing out of our economy and toward those hostile regimes.

If we are to start working toward a solution to our fossil fuel dependence, we must first accept personal responsibility for our own energy consumption. We need to shed the belief that we are going to run this country on ethanol or biodiesel. It simply can’t be done at our current levels of energy usage. In the U.S. we currently import over 10 million barrels of crude oil a day (and finished products over and above that). That is over 12 barrels of oil imported each year for every man, woman, and child in this country. We need to – as a first step – bring our energy consumption more in line with that of the EU. By doing this, we have a realistic chance of (temporarily) reaching energy independence.

The intent is not to increase net tax revenues, but rather to discourage excessive consumption. This is a practical measure to address our fossil fuel dependence. We saw the impact high prices have had over the past year. People started to embrace mass transit, conservation, and higher fuel efficiency. Many had no choice, as higher prices devastated personal budgets. Without a doubt, people responded to higher fuel prices.

We need to have better forward planning around fuel prices, or the next round of price spikes will see more failures in the airline and auto industry, and will once again play havoc with personal budgets. But as long as politicians keep promising low gas prices, some people will avoid making choices to lower their energy consumption. The surest way to encourage people to move toward lower energy consumption is to let them know – with certainty – that higher prices are on the way.

I close by reiterating that I am not proposing a net increase in taxes, nor am I proposing bigger government. But when I pay taxes, I would rather be taxed on my consumption – which I can choose to reduce. Because of the need to reduce our fossil fuel dependence and save some of our fossil fuel supplies for future generations, this sure seems like a no-brainer to me. Yet I am not the first to propose such a scheme, which leads me to believe that our political leaders lack the collective courage to tackle this controversial issue.

Here’s hoping with a new administration, the response is a sincere “Yes we can!”

December 11, 2008 Posted by | energy policy, gas tax, politics | 68 Comments