There has been a lot of talk lately about raising the gas tax. Call for a $1/gallon increase have been raised by the political and academic elite: Al Gore, Greg Mankiw, John. I'm in full agreement that gas prices are too low, and $1/per gallon may be in the ballpark of the right price increase. But yesterday in class I was talking about pollution trading markets and their benefits and I inadvertently convinced myself that there is a better way to solve the low gas price problem gas consumption external cost problem.
Updates are in red.
The proposal I'm about to put forth is not new, nor is it polished. Instead, it's a first attempt to generate a discussion. Let's set up a gas credit market. Here's how my version would work.
1) Cap gas consumption at current level--hey it's a start.
2) Issue gas consumption cards (GCC) to the public. Every U.S. citizen of driving age will receive a card (similar to a drivers license).
3) Credit each GCC holder with a monthly allotment of gas. The total allotment is equal to the current gas cap established in 1).
4) Set up a GCC clearinghouse (similar to ebay) where GCC holders are free to buy and sell gas credits.
5) Every time a driver fills up, they must swipe their GCC and be deducted the appropriate number of credits. This is in addition to paying for the gas itself.
6) Annually decrease the gas cap by 5% (or some percentage).
7) Temporary GCC cards can be sold at gas stations to avoid any problems with running out of gas credits. Sort of like buying calling-card cell-phone minutes.
How does this improve on the gas tax?
a) Gas credits can be bought and sold on the open market. The GCC market will establish the external 'price' of gas. This is the equivalent of the tax, but we don't have to guess at what the tax will be. Further, it separates the cost of gas from the external cost of gas consumption.
b) We can solve the perceived regressive nature of the tax by adjusting the initial distribution of gas credits. If we want to transfer wealth to lower income individuals, we simply allocate a disproportionate number of credits to low income individuals and allow them to sell. As an extreme example, we could invert the income distribution to determine the initial allocation. The lowest 5% of the income distribution gets 95% of the credits. If us rich folk want credits we have to buy them. I know that's an extreme example, but hopefully it illustrates the possibility of solving the frequently cited distributional criticism of gas taxes without affecting the final outcome.
c) If members of the public think that gas consumption is too high, they can simply buy credits on the market and retire them. There is no requirement that credits have to be used. So we don't have to pinpoint the exact amount of gas consumption that is optimal, the market will do that for us.
d) The annual rollback in credits will force prices higher, creating the natural incentives to conserve gas, increase fuel efficiency and invest in the development of alternative fuels.
I know there are a lot of details to be filled in, but I think it's a start. I'll update the program as I get comments from our amazingly astute readers. Who's in?
