Want Less Oil Use? Raise Gas Taxes!

The laws of economics are nearly as immutable as the laws of physics.

If you want to reduce consumption of an item, increase its price, or reduce its supply (same effect, different mechanism).

David Frum points this out in a very lucid piece on CNN.com, here.

We want to get the country off oil? Tax it. (Politicians may not wish to say it, but their advisers can at least think it.) Then liberate people to find their own best alternative -- and incentivize industry to develop alternatives that make sense at the new higher price. And be prepared to argue candidly and straightforwardly in the marketplace of ideas why this new tax is right and justified.

If not, then kindly please spare us the grand speeches about how the status quo is the thing you will not accept. It is precisely the thing you are accepting.

However, as Frum correctly points out, a politician who raises gas taxes by $1+ per gallon will soon be an ex-politician.  That's because there is not really a strong consensus on reducing our use of fossil fuels in this country.  As I write here so often, people want cheap gas and high fuel efficiency, but they aren't willing to pay much for it.

One sensible solution to the sting of higher taxes is to do a "feebate" scheme, where the taxes which are collected are distributed back to the taxpayers as tax rebates.  This way, you would nudge the consumer to consume less fuel, but on average wouldn't hurt the economy much.  Congress can even play with the rebate rules, to penalize higher income consumers less than low income consumers, exclude business and agriculture uses, etc.

Instead, we have the perverse system of CAFE, which tells automakers what cars to build and in what mix they can sell them, but is largely invisible to the consumer except on the window stickers at the dealership.  

Well, CAFE isn't free either.  Getting to 36mpg is going to have some nasty side effects on the vehicles available on the marketplace, foremost of which is that cars are going to get more expensive.   So instead of slightly less expensive cars and pricier gas, we are going to have cheaper gas and more expensive cars.  You still pay in the end, though--efficiency costs money.  The advantage of the market approach is that the consumer has choice--if someone wants to drive a thirsty vehicle, and they can afford the gas tax,they can choose to pay.  With CAFE, the very choice of the thirsty vehicle may be taken away, depending on how the fleet average works out.