Tradeable Gas Rights

Martin Feldstein has a way to reduce gasoline consumption, tradeable gas rights:

Tradeable Gasoline Rights, by Martin Feldstein, Commentary, WSJ: The rapid rise in the price of gasoline has produced calls for tougher fuel economy standards on new cars and trucks. Although reduced gasoline consumption would be good for the environment and for national security, such a regulatory change would be a mistake. A far better approach would be a system of tradeable gasoline rights, or TGRs. These could be distributed in a way that actually raises the income of a majority of households while giving everyone an incentive to reduce gasoline consumption.

In a system of tradeable gasoline rights, the government would give each adult a TGR debit card. The gasoline pumps at service stations ... would be modified to read these new TGR debit cards... Buying a gallon of gasoline would require using up one tradeable gasoline right as well as paying money.

The government would decide how many gallons of gasoline should be consumed per year and would give out that total number of TGRs. In 2006, Americans will buy about 110 billion gallons of gasoline. To keep that total unchanged in 2007, the government would distribute 110 billion TGRs. To reduce total gasoline consumption by 5%, it would cut the number of TGRs to 104.5 billion.

The government could distribute TGRs to reflect geographic differences in driving patterns. ... Businesses that use trucks would also get TGRs.

A key feature of these gasoline rights is that they are tradeable. Individuals with more TGRs than they need could sell the excess, while those who want to use more gallons than their allocation would have to buy extra TGRs. The gasoline companies could act as clearing houses for these trades, using their gasoline pumps to sell TGRs in the same way that they sell gasoline or to buy TGRs in exchange for the cash needed to purchase gasoline. Other institutions like banks could also trade TGRs for cash. And individuals could of course buy and sell TGRs among themselves by letting others use their card.

The market price of a TGR would depend on the number of TGRs that the government distributed relative to the number of gallons that households would buy if there were no TGR system. The smaller the number of TGRs, the greater would be the price per TGR... The money price of gasoline would continue to reflect the world price of oil and the local cost of refining and distribution.

If the price of a TGR turned out to be 50 cents, an individual who buys an extra 20 gallons of gasoline would use up $10 worth of TGRs. If he avoids the purchase -- by driving less, driving at speeds that use less gas, or driving a more fuel-efficient car -- he could sell the 20 TGRs for $10.

The 50 cent price of the TGR would have the same incentive effect as a 50 cent gasoline tax. But while a gasoline tax lowers everyone's real income, the TGR system creates winners as well as losers. Someone who receives 800 TGRs for a year but only needs 500 would pocket $150 by selling his unwanted TGRs. But even such individuals would still face the right incentive: Every extra gallon consumed would reduce their net cash by 50 cents.

Advocates of a gasoline tax argue that it would produce extra revenue that could be used to reduce the budget deficit or to finance equally large cuts in personal taxes. ... [But] it is hard to believe that Congress would now respond to the public's unhappiness over high gasoline prices by enacting a gasoline tax that would raise the price even more.

That aversion to a higher gasoline tax is why tougher mileage standards for new cars is back on the legislative table. They would, however, do virtually nothing to lower the price of gasoline. And if individuals want to economize on gasoline by driving smaller or more fuel-efficient cars, they can do so now without government action. ...

Higher gas mileage standards would reduce gasoline demand in a very inefficient way by focusing exclusively on the rated mileage of new cars. Separate fuel efficiency standards for each type of vehicle -- one of the options now being considered -- would be even worse because it would provide no incentive to switch to more fuel-efficient cars.

Requiring higher mileage standards on new cars would do very little to reduce total gasoline consumption in the near term because each year's new cars are only about 10% of the total cars on the road. Unlike the system of TGRs that raises the effective cost per gallon, the new car standard would do nothing to change the behavior of owners of existing cars. But the TGR system would cause owners to economize on gasoline by driving fewer miles, driving at speeds that use less gasoline, using tires that improve miles per gallon, and servicing their engines to maintain fuel efficiency. And of course the higher effective cost of gasoline would also cause new car buyers to prefer more fuel-efficient vehicles.

In short, a system of tradeable gasoline rights would be better than either higher taxes or tougher new car regulations. That a majority of households could benefit from the TGR system while all households would have an increased incentive to economize on gasoline is both an economic and a political advantage. It would be an efficient way to reduce gasoline that Congress could actually pass.

[Dual posted with added comments. More at Brad Delong and Angry Bear.]

Comments

[jimbo]

Yes, CAFE always was a dumb idea, but it allows politicians to be seen "doing something" about the environment, global warming, and high gasoline prices without hurting any economic interest. This idea would have more impact, but I cannot believe that Feldstein trusts government allocation of TGRs. Sure, Congress cannot bring itself to enact a fuel tax, but why would repesentatives from New York or Chicago agree to higher TGR allocations to residents of Texas? Here's a better idea: The US should cap petroleum imports. Capping petroleum imports would be easier to enforce. It would raise the price of gasoline and domestic producers would reap the benefits. If desired, Congress could tax away those profits, but that would kill investment in domestic production and result in still higher prices. The environmental benefits that flow from higher prices are obvious and the same as the benefits from a tax. In fact, instead of capping imports, Congress could just put a tarrif on oil imports, although I suppose that would violate WTO and NAFTA laws. Maybe they could put a tarrif on oil imports from countries we don't like - Venezuela, Saudi Arabia, Iran, and so on.

[Jim]

So the Journal is advocating a gas rationing program run by the federal government, one of the benefits of which is that it's good for the environment? I think I'm dreaming.

[joshua corning]

The government would decide how many gallons of gasoline should be consumed per year...

What a great idea!

[powderhouse]

I'm stumbling over part of his argument, and am too lazy to drag out an old textbook and review the pros and cons of permits vs. taxes. He says: "But while a gasoline tax lowers everyone's real income, the TGR system creates winners as well as losers."

If I don't drive at all, then a gasoline tax doesn't affect my income in the slightest (ignoring the effect of gas prices on goods I consume, but that should have the same impact on my income as a permit system). So if I don't pay the gas tax, my nominal income isn't lowered, and if my neighbors do drive and thus pay the gas tax, my real income (relative to my peers) has increased, right?

While permit systems do have distributional issues associated with the initial allocation, I don't follow his logic on taxes hurting everyone. I thought that the two approaches were essentially the same theoretically, except that permits fix the quantity consumed (and leave price uncertain) while taxes fix the price (and leave quantity uncertain).

[Chris Ball]

Greg Mankiw points out that this kind of rationing is the functional equivalent to just raising the gas tax until the desired consumption level is acheived and then giving everyone the equivalent lump sum in return. The equivalence isn't total though. In a rationing scheme, the market automatically determines the price increase rather than relying on central planning, which is good, but on the other hand, the transaction costs of running a gas ration market would probably have to be pretty huge for it to work well. I prefer the simplicity of just raising taxes, but I'm afraid the knee-jerk reaction people have (especially in the U.S.) to new taxes might make it politically infeasible. Of course either would be better than neither.

[Joe Otten]

I'm with Chris. This is a system of taxes and handouts by another name. And a tax that - if demand proves inelastic - could be immense.

I don't see why there should be less political opposition to this unknown level of tax than there would be to a regular tax.

And unless universal government handouts are thought to make good economic sense anyway (they aren't), why are they thought to this time?

[joshua corning]

The government would decide how many gallons of gasoline should be consumed per year...

What a great idea!

That way in the future when we have an exeptionaly cold winter we'll have the chance to "Freeze in the Dark"

...plus we get the added bonus of starving to death when the trucks can't get enough CO2 waivers to ship our food to the grocery store.

[Haynes Goddard]

Could someone enlighten me on this? CAFE standards are regularly criticized by economists, but I don't recall any discussion of the benefits of creating certainty in a high variability gasoline market. Those of us of a certain age will recall that US auto companies were repeatedly out of phase with petroleum markets in the 70's and 80's. First they were building large vehicles when OPEC created high prices. They got the message, and built small cars, only to find that petroleum prices came down, and the shift was back to larger cars.

Private markets cannot make rational long term investment decisions in an environment of such high price variability. The solution is either to set a floor for the price of gasoline in real terms, or to set a quantity standard. CAFE does exactly that, where the quantity dimension is mpg. This creates certainty.

Of course, failure to set gasoline prices via a tax to cause the consumers to choose and sustain this standard as an equiblibrium has been the source of problems for the auto companies who face a mismatch between the CAFE requirements and the structure of demand for vehicle size.

But was not CAFE better than nothing?

[Rob]

"Separate fuel efficiency standards for each type of vehicle -- one of the options now being considered -- would be even worse because it would provide no incentive to switch to more fuel-efficient cars"

How is this worse? This statement is contradictory of itself.

If standards were to be set for each type of vehicle, very strict ones would be placed on SUVs, luxury cars and other "gas-guzlers". With higher standards on the less gas-efficient vehicles, the automakers would increase the price of those vehicles thus providing an incentive for people to purchase and drive more fuel-efficient cars.

This is very elementary environmental economic thinking.