I understand that there are many reasons why it’s hard to get anywhere close to the amount of intervening we should be doing to push back on carbon emissions. We heavily discount future risks, deep pocketed interests fill their deep pockets with profits maintained by the status quo, they buy politicians who help them wit that, the challenge of international coordination, and at least given current technology, the fact that the science gets harder the longer we wait.
But the figure below reveals another reason it’s so hard to fight human-generated pollution. The damn price of gas is the same this week as it was 10 years ago! The Sunoco station I jogged by this AM had unleaded at $2.09 a gallon–northern VA tends to clock in at around the national average. Well, according to data from Gas Buddy, that’s the same national average for the retail price of a gallon of regular a decade ago. Same with a barrel of oil by the way. And these are nominal prices. The overall consumer price index is up 20% since then.
Source: GasBuddy.com
I’m sure that there are many who, not unreasonably, look at that figure, look at their stagnant paycheck, and say, “Um…that’s good news, dude!” Restrained energy prices means you don’t go broke filling up the tank and thus have more disposable income to meet other needs and wants.
As someone who’s documented real wage stagnation for decades, I feel you. But as someone who has a habit of breathing that I just can’t shake, and has children who’ve also developed that habit, not to mention all the other scary side effects from human impact on the environment, I think this figure shows how seriously under-priced energy has become once we consider its negative externalities.
The other thing I see in that picture is an untapped elasticity: higher after-tax prices would dampen demand. And don’t forget that while Congress is puttering about trying to patch together some funding for the nearly depleted Highway Trust Fund, the federal tax on retail gasoline has been stuck at 18.4/gallon cents since 1993. Given the fact that gas prices are where they were a decade ago, can’t we at least bring a higher federal tax to the table? I know how cramped our tax debate has become, but I know lots of partisans–OK, I know a few–who share my view that if you bring the facts to them, their might be enough grownups who get that transportation infrastructure actually costs something.
Like I said, I’m well aware of all the reasons why we won’t put a higher price on carbon, and more than most economists, I’m highly sensitized to the need for more disposable income among many working families that have been hit hard by wage and income stagnation. But from the perspective of a healthy society, the price of gas is too damn low.
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The decline in oil prices is largely a result of the synchronized global slowdown, just as the run up of prices was do to the synchronized global expansion. It’s happened to almost all other commodities, except that Saudi oil policy is helping depress oil prices a bit more. However, falling commodity prices are now one of the automatic cyclical stabilizing mechanisms that helps control the downturn. There are risks in messing with those.
Energy price increases hit low income households proportionally much harder than upper income households according to the BLS. Sad fact.
No easy answers.
What IS the price elasticity of retail gasoline? Best guess?
Just this week I wrote my state rep (a Republican) asking him to sponsor legislation to raise the state tax on gasoline – and diesel – no better time to do it. I know him personally. We don’t agree on much, but he is a newbie and smart. His response was that farmers are having a terrible year and there is no way they can pay more taxes. Please note that farm fuels are not subject to road use taxes and many farmers fill their cars and trucks from untaxed on-farm supplies. And 40% of corn, the main crop around here, goes to ethanol.
My point about all this is that after a bad system has run on for several years it builds up a constituency of people who benefit from it even though it does more harm than good, net. Then the bad system becomes impossible to change. Medicare Part D is a similar thing. The evil legislation men do lives after them; the good often dies in committee.
Sounds like your state rep is ill informed. Or he’s more interested in not upsetting his supporters ( in the oil/gas industry?)than he is in moving things in a more constructive, better long term direction.
As long as people don’t experience the external costs of gasoline, or other fossil fuels, in their wallets they won’t feel much urgency to do something significant and substantial about climate change. Remember when the oil crisis hit in the mid 1970’s? People started buying economy cars because it cost them less to fill up their tanks with gasoline.
What would the price of gasoline have to be to account for all of its externalities? What is the price in the EU? How about Japan? Would the oil and gas industry here in the USA ever allow that to become the price at the pump? I’d bet that the chances of that happening are somewhere between slim and none. And slim left town!
I agree unequivocally that we should jack up taxes on the price of fuel to incentivize people to conserve. What to do with that money, though? I’m not sure it should be dumped into alternatives as I’m not convinced that there are viable alternatives that reach the scale necessary (an excellent place for detailed information is the blog “Do The Math” (http://physics.ucsd.edu/do-the-math/) where a physicist _who wanted to justify alternatives_ came to the realization that nothing out there will work if we don’t drastically cut back on our energy consumption). Were I with any influence I would take those taxes (perhaps a buck a gallon, perhaps more, and certainly indexed to inflation) and dump them into infrastructure. However, fuel taxes alone are not enough as they no longer are adequate proxies for road usage, so some sort of usage tax needs to be in place as fuel use gets minimized.
You are an important voice saying important things and I really appreciate that you do so!
Keep up the great work!
Jared, big fan of yours. But the following just shows the huge blind-spot that afflicts most Acela Corridor liberal pundits and economists and economist-pundits: “The other thing I see in that picture is an untapped elasticity: higher after-tax prices would dampen demand.”
This works well on a whiteboard but doesn’t reflect the reality of working class people in Flyover territory. Neo-libs and economic libs have both embraced the idea that “Tax it more, people will use it less” while ignoring clear evidence of in-elasticity of that demand and the ability of the working poor to subsitute within the category.
You don’t keep alcoholics from drinking by raising taxes on alcohol, they just shift to cheaper alcohol. That is why ever fricking convenience store in the country has a chiller full of ‘malt liquor’ and sweet wines. Because they have higher alcohol numbers than regular beer and wine.
Ditto on smoking. Poor people smoke. Poor people will continue to smoke even though tobacco prices have increased at incredible rates. They just won’t smoke Benson & Hedges or even Marlboros when they can find American Spirit for less Maybe that tobacco tax is inhibiting young people from STARTING to smoke, but mostly they act as a horribly regressive tax on the poor.
Which gets to the point of this post. Working class people fill their tanks so they can get to work. And absent systems of mass transit that simply don’t exist outside major urban areas they will continue to pay whatever price it is to fill their tanks to get to work. At best raising gas taxes cause the working class to forego pleasure driving and so clear room for urban elites to enjoy public parks and wilderness areas because the poor literally can’t afford to drive there. Well good on you! But one thing we know is that consumption taxes on gas, alcohol, and tobacco are not going to do crap for cutting down their consumpiton by the Cadillac Escalade, 200 bottle of wine, Cuban Cigar crowd, not when those taxes are levied by volume and not price.
“Tax more and people consume less” is good economics. And like much of economics has bubkis to do with the real world and too often just results in taxing the working class on what they consider necessities. (And yes it you live a working class life then stress reducers like cigarettes and beer are necessities – we can’t afford vacations at Vail or trips to Bali to clear our heads.).
Well said Bruce.
If there were substitutes for gasoline, then the demand elasticities would be much greater. And since their are no plausible substitutes, raising the gas tax will do little environmental good.
Crude rule of thumb: A $1 increase in the price of barrel of crude oil is roughly the equivalent to a $2 tax on one MT of CO2. So a $200/ton CO2 tax gets oil prices to consumers back to where they were in early 2008. Yet it took the Great Recession to reduce oil consumption. No one is even talking of any such tax. Not even the NRDC.
1.849/gallon in White Post VA. Not a good thing for climate change. Seems like a good thing for the economy, in the short term. Almost an oxymoron. We need to raise the gas tax, NOW!
It’s about $2.39 here in the SF Bay Area where I live. Very ‘cheap’ compared to $3.50+ about two years ago. I agree that state legislatures (because Congress would never do it) need to raise the taxes on gasoline now when it’d hurt consumers less. Be ready, however, for an outcry by gas/oil reps that it’ll cost jobs, etc. Even here in Calif with its clear Democratic majority in both houses of the legislature, it’ll be a tough sell because many of the Dems receive campaign contributions from the fossil fuel industry.