Environmental Economics

A price floor for U.S. gas

Maximilian Auffhammer at the energy blog with no name:

... The national average price for gasoline is $1.80 this week, with a minimum of $1.29 in Tulsa, Oklahoma. The external costs for a gallon of gasoline, as estimated in a now classic paper, are approximately $2 per gallon. This means that the average American is currently purchasing gasoline at half of its true social cost.

Now, higher oil price won’t fix the external costs of course and we have argued ad nauseum for a carbon tax on this blog to fix one of the market failures. Michael Anderson and I have a nice paper suggesting that one would need to charge a gas tax somewhere significantly north of $2 to make drivers internalize all of the external costs you spew on your fellow citizens faces while hurling your Dodge Hellcat down I-80 at rush hour.

But low gas prices have all kinds of negative effects for a society that does not properly tax gas. People drive more and hence cause more congestion. People purchase less fuel efficient cars, since they think gas prices will always stay where they are any given day, which is rational. (What is not, is that folks buy more convertibles on sunny days.) So we drive our bigger cars more on a road network that is falling apart. Bridges and highways are in terrible condition, as has been documented widely.

The smartest energy economist I know and Energy Institute colleague, Severin Borenstein, has suggested a perceived outrageous solution to this problem a while back. A price floor for gasoline. Stop the presses! A neoclassical economist suggests a price floor. My version of the idea goes like this. If the price of oil drops below a certain price, say $70 per barrel, gas prices get frozen at the average local historical price for $70 oil. Yes, we would keep gas prices artificially high. This would discourage consumers from driving more and maintain disincentives to purchase really fuel inefficient cars.

But what to do with the profits? Give it to refiners? Oil companies. No. The idea is for the regulator to capture this windfall and use it to put our highway system back together. You are shaking your head. Well, the Chinese are not. In the first week of January, the National Development and Reform Commission (which is China’s economic planning agency) announced that price of Diesel and Gasoline would not be lowered as long as the price of oil is below $40. ...

Here is a post with some simple analysis on the Chinese proposal. I don't have any problem with this proposal other than it is a wolf in wolf's clothing. We would avoid a sales tax where consumers and retail producers bear the burden which would be shifted to the oil companies with a profit tax. Are the only winner's the gas stations (i.e., retail producers)? Or, since they make all of their money off beer sales (I'm looking at you Phil's Citgo) then they are hurt when people fill up less?

“Gas Taxes and Oil Subsidies: Time for Reform”

Jeffrey Frankel at Econbrowser:

World oil prices have been highly volatile during the last decade. Over the past year they have fallen more than 50%.

Should we root for prices to go up, down, or stay the same? The economic effects of falling oil prices are negative overall for oil-exporting countries, of course, and positive for oil-importing countries. The US is now surprisingly close to energy self-sufficiency, so that the macroeconomic effects roughly net out to zero. But what about effects that are not directly economic? If we care about environmental and other externalities, should we want oil prices to go up or down? Up, because that will discourage oil consumption? Or down because that will discourage oil production?

The answer is that countries should seek to do both: lower the price paid to oil producers and raise the price paid by oil consumers. How? By cutting subsidies to oil and refined products or raising taxes on them. Many emerging market countries have taken advantage of the last year of falling oil prices to implement such reforms. The US should do it too.

Congress continues to shamefully evade its responsibility to fund the Federal Highway Trust Fund. On July 30 it punted with a 3-month stop-gap measure, the 35th time since 2009 that it has kicked the gas-can down the road! There is little disagreement that the nation’s roads and bridges are crumbling and that the national transportation infrastructure requires a renewal of spending on investment and maintenance. The reason for the repeated failure to put the highway fund on a sound basis for the longer term is the question of how to pay for it. The obvious answer is, in part, an increase in America’s gasoline taxes, as economists have long urged. The federal gas tax has been stuck at 18.4 cents a gallon since 1993, the lowest among advanced countries. Ideally the tax rate would be put on a gradually rising future path.

Fuel pricing is a striking exception to the general rule that if the government has only one policy instrument it can achieve only one policy objective. A reduction in subsidies or increase in taxes in the oil sector could help accomplish objectives in at least six areas at the same time ...

Five of the six areas are those that have been repeated over and over by economists with little effect (why are we so easy to ignore? is it the brown shoes? the mumbling?): revenue, less pollution, climate change, less traffic congestion and more road safety, national security. Mitigation of income inequality is number 6. 

Note that the link in the phrase "as economists have long urged" is, coincidentally and ironically (is that irony?), to Mankiw. 

Mileage Taxes Coming to a State Near You?

Oregon is about to embark on a first-in-the-nation program that aims to charge car owners not for the fuel they use, but for the miles they drive.

The program is meant to help the state raise more revenue to pay for road and bridge projects at a time when money generated from gasoline taxes are declining across the country, in part, because of greater fuel efficiency and the increasing popularity of fuel-efficient, hybrid and electric cars.

Starting July 1, up to 5,000 volunteers in Oregon can sign up to drive with devices that collect data on how much they have driven and where. The volunteers will agree to pay 1.5 cents for each mile traveled on public roads within Oregon, instead of the tax now added when filling up at the pump.

via www.usatoday.com

Hmmmm...must be May and must be time for me to reharp on an idea I've been harping on for over 8 years now.  Here's the original harp:

All cars are subject to an annual fee based on miles driven.  The fee will be per mile driven and will be inversely proportional to the EPA calculated city fuel efficiency figure.  Keep reading for details...

Here's how it would work.  Each year, drivers will be required to have their mileage checked at an authorized service facility.  Based on the EPA certified city fuel efficiency rating provided by the EPA for the specific type of car, the car owner will pay a fee (call it F) per mile driven. The fee will be equal to the inverse of the EPA fuel efficiency figure. 

So consider two car types: a gas guzzler (GG) and a fuel efficient car (FE).  Suppose the gas guzzler has an EPA MPG rating of 15 mpg city and the FE car has a rating of 35 mpg city.  The per mile fuel efficiency payment for the gas guzzler will be $0.067 per mile drive (1/15) and the per mile fuel efficiency payment for the fuel efficient car will be $0.029 per mile driven.  If a driver of each type of car drives 12,000 miles a year, the GG driver will pay an annual fee of $804, and the FE driver will pay an annual fee of $348. 

The Fuel Efficiency Payment has a couple of nice features:

1) It places a higher burden on those driving less fuel efficient vehicles--that should satisfy those blaming the SUV drivers for all of the problems*.

2) It places a higher burden on those driving more.  By increasing the marginal cost per mile driven, total miles driven should decrease.

3) Assuming fuel efficiency and income are negatively correlated--that is, the rich tend to drive larger, more expensive, less fuel efficient cars--the Fuel Efficiency Payment places a higher burden on higher incomes.

4) It provides an incentive for drivers to switch to more fuel efficient vehicles.

Now that I've hopefully convinced you that a fuel efficiency payment will act as a type of gas guzzler tax that would be less of a burden on lower income drivers, would provide incentives for decreasing miles driven and would encourage a switch to more fuel efficient vehicles, I'd like to point out that the fuel efficiency payment is algebraically identical to a $1/gallon GAS TAX** that many economics including John and me think would go a long way toward solving many of the transportation related externalities.   

While flat mileage taxes like that proposed for Oregon have some advantages (they provide a more predictable and steadier stream of revenues), they do little to encourage higher fuel efficiency.  This seems particularly prescient given the recent shocking realization that low gas prices actually cause people to buy less fuel efficient vehicles:

With bargain gasoline prices putting more money in the pockets of Americans, owners of hybrids and electric vehicles are defecting to sport utility vehicles and other conventional models powered only by gasoline, according to Edmunds.com, an auto research firm.

There are limits, it appears, to how far consumers will go to own a car that became a rolling statement of environmental concern. In 2012, with gas prices soaring, an owner could expect a hybrid to pay back its higher upfront costs in as little as five years. Now, that oft-calculated payback period can extend to 10 years or more.

 

Two from Economic Inquiry (July 2015) on gas prices and saving lives

Paul J. Burke and Shuhei Nishitateno: 

This study utilizes data for 144 countries from 1991 to 2010 to present the first international estimates of the gasoline price elasticity of road fatalities. We instrument each country's gasoline price with that country's oil reserves and the yearly international crude oil price to address potential endogeneity concerns. Our findings suggest that the average reduction in road fatalities resulting from a 10% increase in the gasoline pump price is in the order of 3%–6%. Around 35,000 road deaths per year could be avoided by the removal of global fuel subsidies. (JEL R41, H23, O18, Q43)

via onlinelibrary.wiley.com

At a value of statistical life of $9 million (that was the number Kip Viscusi was using a the SBCA meetings in March, removing global fuel subsidies would generate a life saving benefit of $315 billion. 

Damien Sheehan-Connor:

Policies to reduce carbon emissions by vehicles, such as fuel economy standards and gasoline taxes, have impacts on vehicle weight and thus on safety. This paper develops a model that separately identifies the impact of vehicle weight on mortality and selection effects that impact accident propensity. The main results are that (1) the safety externalities associated with heavy vehicles are greater than the environmental ones; (2) under fuel economy standards, vehicle weights have recently decreased with little likely effect on accident deaths; and (3) similar environmental benefits could be combined with substantial reductions in deaths by implementing higher gasoline taxes. (JEL H23, D62)

via onlinelibrary.wiley.com

A higher gas tax would generate substantial life saving benefits too. 

Digging deeper in the NYTimes/Stanford/RFF global warming poll

25% support higher electricity taxes and 36% support higher gas taxes "to try to reduce future global warming." Here are the questions and results from the poll:

Someone should run the crosstabs on these questions and the one where "more likely to vote for political candidates who campaign on fighting climate change."

Stop making sense*: part two

Margaret Walls:

Federal and state gas taxes in their current form—excise taxes per gallon of fuel sold at the retail level—may have outlived their usefulness as a transportation funding source. There are two fundamental problems. First, they have not kept up with inflation. Second, as vehicle fuel efficiency has increased, tax revenues have declined; this problem will worsen in the future with ramp-ups in corporate average fuel economy (CAFE) standards.

At 18.4 cents per gallon, the federal tax has been unchanged since 1993. Allowing for 20 years of inflation, it is equivalent to roughly 11 cents today. An ad valorem tax—a percentage of gasoline sales—would be one way to solve this problem. A few states have added ad valorem taxes to their excise tax and/or applied their general state sales tax to gasoline. Another option is to index the tax to inflation; Florida does that and with legislation just passed in Maryland, that state will do so too.

But these changes would not fix the second problem. From 1990 to 2010, the CAFE standard was set at 27.5 miles per gallon (mpg). In 2017, the standard will be about 40 mpg and by 2025, 55 mpg. So a new car driven 14,000 miles per year used to yield the government about $94 in annual tax revenues, but in 2025, it will generate only $47, about half as much.

Meanwhile, much of the nation’s road infrastructure is badly in need of repairs, upgrades and expansions. If current gas taxes aren’t doing the job, what should we do?

Some experts have suggested shifting the per gallon tax to a per mile tax. ... But there are hurdles to implementation and some experts have estimated it would take 10-15 years to fully switch from a per-gallon to a per-mile tax.

I believe it’s time to think outside the box of user fees. User fees are efficient when we want to ration use, such as when roads are congested, but not necessarily on rural roads or at times of day when traffic is free-flowing. Also, we might want user fees to internalize the costs of road wear and tear, but heavy trucks (and weather) are most responsible for road damage, not light-duty vehicles. For transportation financing, I think it might be time to consider a more broad-based tax. Using general sales taxes, as some states are doing, is one approach. Taxing oil rather than gasoline is another idea. Increased vehicle registration fees are also worth considering. And governments may want to make more use of the private sector in public-private partnerships and innovative contractual arrangements.

Personally, I’m not sure what’s best or that there is a single best approach, but the states might be setting us up for some useful natural experiments. After years of stagnation, some states are moving to act. Some have recently raised their excise tax rates, while others have indexed their taxes to inflation, and still others, like Virginia, have moved toward a combination of sales taxes and registration fees and away from the excise tax approach. Still more are in the process right now of considering changes. Letting the states act as laboratories—accompanied by rigorous analysis of the outcomes—might be a good first step.

via blogs.wsj.com

My favorite solution, simply because it might be easiest to implement and it makes some sense, is to raise the vehicle registration fee and index the gas tax to inflation. 

*With apologies to the Talking Heads. 

Hat tip: Common Resources

Stop making sense: part one

With apologies to the Talking Heads:

Regarding the Dec. 2 front-page article “Effects are wide as oil prices sink”:

One would have to be an unforgivable contrarian to second-guess the bonanza enjoyed by U.S. consumers from the dramatic drop in gasoline prices. Yet that development provides an opportunity whose cost would encroach only slightly on our good fortune: an increase in the federal gas tax — unchanged since 1993 from 18.4 cents per gallon and, in inflation-adjusted terms, now worth around 12 cents. No wonder it has ceased to make any meaningful contribution to sound economic and environmental policy. The resulting and serious depletion of the Highway Trust Fund — and, with it, the deteriorating conditions of the nation’s transportation infrastructure — is just one example.

Can political boldness face up to both opportunity and challenge?

Joel Darmstadter, Bethesda

The writer is a senior fellow with Resources for the ­Future.

via www.washingtonpost.com

Hat tip: Common Resources

Daily demand and supply: gas prices

I filled up for $2.77/gallon driving back from the airport last night. You can't get it for less than $3 in Boone:

The national average price of gas tomorrow will drop below $3.00 per gallon for the first time since Dec. 22, 2010, ending its longest streak ever above that price, according to AAA. AAA estimates that lower gas prices are helping consumers save at least $250 million per day on gasoline compared to early summer when the national average reached $3.68 per gallon. ...

The national average price of gas has remained more expensive than $3.00 per gallon for 1,409 consecutive days. During that 46-month period, gas prices averaged $3.52 per gallon and reached as high as $3.98 per gallon on May 5, 2011.

More than 60 percent of all U.S. stations are selling gas for less than $3.00 per gallon today. Consumers can find at least one station selling gas for less than $3.00 per gallon in nearly every state. The drop below $3.00 per gallon is significant because about 40 percent of American adults believe that gasoline is “too high” when the price reaches that level, according to a AAA survey conducted in March. ...

AAA anticipates gasoline prices may continue to drop in the near term, but it is possible that prices in many areas will begin to stabilize soon. Unless there are unexpected developments, gasoline should remain relatively inexpensive this winter due to lower demand and typical seasonal trends. By spring, higher gas prices may return due to refinery maintenance, increased demand and a return to summer-blend gasoline. ...

Gas prices typically decline in the autumn due to decreased driving and the switchover to winter-blend gasoline, but prices have fallen faster than many expected this year due to sharply lower crude oil prices. The price of West Texas Intermediate crude oil has dropped more than $20 per barrel since late June due to strong production and concerns about the global economy, particularly in Europe and Asia. There also are reports that some OPEC nations, such as Saudi Arabia, would be willing to let prices fall to maintain a competitive market share.

Crude oil is the main cost associated with gasoline and represents about two-thirds of the price of a gallon of gas. It is estimated that every ten dollar per barrel change in the price of crude oil results in a 25-cent change in the price of a gallon of gasoline.

via fuelgaugereport.aaa.com

Maybe this is a good time to discuss raising the gas tax? 

One of the WSJ Numbers "Guys" reads the AER

The new WSJ Numbers Guy [guy?] seems to love economics more than Carl does:

Cheap gas makes people use too much of it — that’s the takeaway from a study in this month’s American Economic Review. In “The Economic Cost of Global Fuel Subsidies,” Lucas Davis, a associate professor at Berkeley’s Haas Business School, uses World Bank data to show that countries with consumer fuel subsides have higher fuel consumption.

Crude and refined oil are traded internationally, so their wholesale prices are similar everywhere. What causes such a great variation in price — from $0.08 a gallon in Venezuela to $9.61 in Turkey — are taxes and subsidies. Mr. Davis determined countries’ subsidies by calculating the difference between domestic consumer prices and international spot prices, and factoring in distribution, transport and retail costs. Basically, if what people pay at the pump is less than the cost of the fuel and its related costs, he considers the fuel subsidized. Without factoring in external costs to the environment, Mr. Davis estimates the opportunity cost of gasoline everywhere to be roughly $3.57 per gallon.

Using this rationale, he determined that 24 countries subsided [sic] gas and 35 subsidized diesel in 2012, totaling $110 billion in fuel subsidies world-wide. Compared to countries without fuel subsidies, these countries generally use more fuel than necessary. According to the report, “subsidies create deadweight loss by enabling transactions for which the buyer’s willingness-to-pay is below the opportunity cost.” ...

The U.S. is a bit of an outlier in this theory. U.S. subsidies are on the production end, which Mr. Davis said only amounts to “cents” worth of savings on the consumer end. Because Americans pay more than the opportunity cost for fuel at the pump, Mr. Davis doesn’t consider its fuel to be subsidized — but that doesn’t stop Americans from using lots of fuel.

There are a number of reasons Americans consume so much gas. First of all, even without consumer subsidies, fuel doesn’t make up a huge share of U.S. income and it is lightly taxed compared to other OECD countries (An average of $0.49 a gallon in the U.S compared to $4.00 in Germany and the Netherlands). Mr. Davis said U.S. taxes don’t reflect the huge external costs of excess driving — roadwork, traffic congestion, accidents, and carbon dioxide emissions — which  he approximates should be about double what Americans pay in taxes per gallon. ...

via blogs.wsj.com

Why isn't there a Laffer curve for gas taxes?

The logic is the same: lower the gax tax, people drive more miles and revenue increases. And, I'm sure, we create more jobs. Ah, well, I can dream can't ? Now, back to business:

The federal gas tax, long used to help states pay for roads and bridges, hasn't been raised since Bill Clinton was president. The prices of asphalt, steel and heavy machinery — like everything else — have been climbing. And Americans are driving fewer miles per year in vehicles that get ever-better gas mileage, meaning there is less revenue.

Now, states that have been loath to increase their state gas taxes are viewing the idea more favorably. Others are changing their gas tax law in ways designed to bring in more money for roads and bridges. ...

All the efforts face tough political battles. States have been extremely reluctant to increase the amount they levy at the pump: 24 states haven't raised the gas tax in at least a decade, and 16 haven't done so in 20 years or more, according to the Institute on Taxation and Economic Policy. Some states are trying to avoid protracted fights over hiking the gas tax by linking the gas tax to inflation or making it a percentage of the price paid per gallon. That way, it goes up automatically as inflation or gas prices go up.

Several states where the gas tax is already linked to inflation or fuel prices saw automatic state gas tax hikes this year. The federal gas tax is 18.4 cents a gallon, where it has been since 1993.

via www.usatoday.com

States that haven't raised their gas tax in 10 years have allowed it to fall by about 20% in real terms. States that haven't raised their gas tax in 20 years have allowed it to fall by almost 40% in real terms. I'm sure that over the same time the cost of roads and bridges has not gone down.

Indexing the gas tax to inflation makes the most sense. This simply makes it constant in real terms. Making it a percentage of the gas price unnecessarily causes the variance of the price at the pump to increase, creating uncertainty.