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August 30, 2005

Three Objections

Matt's got a TAP column today laying out his objections to CAFE standards. Readers will be unsurprised to know I find it unconvincing. But who knows -- I may be wrong. So here are three objections for the gas tax, and maybe if advocated could answer there, I could better understand their case:

• Matt writes: "CAFE rules are, in effect, a tax on gas-guzzlers that's used to subsidize buyers for the purchase of more efficient cars. Companies meet the standards by offering a discount on their more efficient models and by charging higher prices than they otherwise would on less efficient models." Okay. What's wrong with that? Is there some reason we want gas-guzzlers on the road?

• Matt argues that "[a] much better way of reducing consumption would just be to tax it straightforwardly with higher gasoline taxes." He then, to eliminate the regressivity, advocates plowing the savings into a progressive tax cut, or end of the year rebates or something.

Why does anyone think this will pass? And, if we take the progressive step and pound in that you'll somehow get the money back, why do we think it'll change behavior? But really, the question here is what possible convergence of circumstances makes a nation furious at high gas prices agree to pay even more at the pump?

• "Some families share one automobile; others have one for each parent and one for each teenager. To put it in crude, self-interested terms, some Americans -- like, say, me -- don't own a car at all. We're the true heroes of energy efficiency, and CAFE rules provide us with no benefits whatsoever. But if you want to subsidize energy conservation, it makes no sense to leave out people who conserve through not driving or carpooling."

Actually, it does. Matt doesn't use the subway because he's virtuous, he does it because he's got a subway to take. If he lived in LA, he'd have a car. I live in LA. I have, and need, a car. In a month, I'll live in DC. I'm not sure I'll take my car. In any case, I'll mostly use the subway. Not because I'm more virtuous there than here, but because the subway makes sense there and is effectively nonexistent here. What Matt's suggesting amounts to a subsidy for urbanites because driving, for most people, isn't a choice, it's decided by geography.

My grandparents used to live in Basking Ridge, NJ. The market was 8 miles away, the hairdresser 15, work 12, and so forth. They weren't doing anything wrong by driving -- it's just what they had to do. The commercial areas were quite separated from the residential communities. If you do blue collar work in Irvine or Newport Beach, you have to live in Garden Grove or Fountain Valley. You simply have to drive -- there's no other viable option. And is it really fair to subsidize the rich guy who can live near his employer or the urbanite who can take the subway and instead penalize someone who hasn't the money to rent near his work? Why?

Most of this country has a car culture. It's not a moral decision, it's a simple question of where you can afford to live and where your job/kids/life requires you to go. And those who drive more are not morally equivalent to those who drive frivolously -- a commute to work so you can own a house is different than a road trip to TJ. If you could somehow separate those two out with a gas tax, maybe you'd have a case, but until you can, attacking the commuter is another way of saying "I no longer want this congressional seat and I'd be very appreciative if you gave it to someone else."

Lastly, Matt's right on about the SUV/light truck distinction -- the creep of trucks and SUV's into everyday vehicles has wreaked havoc on the rules. But a serious reworking of CAFE standards could easily address that. And while reworking CAFE won't be easy, right now it's got the popular will behind it and, in any case, is infinitely simpler than convincing Americans that the right response to skyrocketing gas prices is a government tax which'll jack up what they pay at the pump.

August 30, 2005 in Energy | Permalink

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Comments

The other point that MY makes is that a gas tax would hit those who commute long distances harder as if the choice to commute a long distance is a measure of your wealth. Plenty of poor folks commute a long ways too.

Posted by: Col Bat Guano | Aug 30, 2005 4:35:06 PM

I think that your third argument is the core one that needs to be discussed. Fundamentally, if you want to push back global warming, you need to force people closer together. Scientifically speaking, people who live in areas where they have to drive 80 miles a day to get anything done are disproportionately damaging the environment (in terms of CO2 at least). The gas tax would reflect this fact. Fundamentally, to have less CO2 we need to improve the efficiency of cars, but probably also make less trips, which in turn means stopping sprawl and probably making rural communities pay the true cost of their travel patterns.

Posted by: JohnTh | Aug 30, 2005 4:41:41 PM

I'll take a stab at these questions.


What's wrong with that? Is there some reason we want gas-guzzlers on the road?

Because less fuel inefficient vehicles may in fact be more environmentally friendly than more fuel inefficient vehicles in some cases. For example, all else being equal, a smaller vehicle will be more efficient than a larger vehicle. For someone with a large family a larger vehicle may very well be more environmentally friendly than 2 vehicles which would otherwise be needed, but the CAFE standards do not reflect that reality at all. A Gas tax would reward the most fuel efficient choices in all circumstances, while CAFE standards would in only some circumstances. Theoretically 'rules' could be put into place to deal with these various issues, but that sort of thing is what caused the SUV loophole in the first place.

Why does anyone think this will pass? And, if we take the progressive step and pound in that you'll somehow get the money back, why do we think it'll change behavior? But really, the question here is what possible convergence of circumstances makes a nation furious at high gas prices agree to pay even more at the pump?

It seems to me that these questions are entirely wrong. Doesn't it seem desirable to convince people to adopt the best solution to the problem, whatever it may be rather than a solution that will not have the desired effect?

One could just as easily ask, why you think reforming CAFE standards would be effective, given that fuel efficiency has been decreasing under our existing CAFA rules? Why do you think it would work in the future when it hasn't in the past? Won't any new regulations be subverted in some fashion just like the ones be have are subverted?

And is it really fair to subsidize the rich guy who can live near his employer or the urbanite who can take the subway and instead penalize someone who hasn't the money to rent near his work? Why?

Since the justification for mandating higher fuel efficiency or an increased gas tax has to be that gasoline consumption entails costs on everyone that are not accounted for in the price of fuel, and that those costs need to be accounted for and controlled in some fashion then it is fair that those who cause those costs pay for them, regardless of their reason.

The use of the word 'subsidize' is inappropriate here, what is proposed is that those who cause the negative effects pay for them, and that those who don't, don't.

CAFA standards would do this partially; a gas tax would do it exactly.

Posted by: Dave Justus | Aug 30, 2005 4:47:50 PM

"if we take the progressive step and pound in that you'll somehow get the money back, why do we think it'll change behavior?"

Well, here's the simple theory behind a gas tax: let's say you buy one cup of coffee a day at a dollar i.e. 30 dollars a month. Suppose I raise the price of coffee to 4 dollars a cup but in addition I give you a tax cut of 90 dollars. You wouldn't be any worse off than before - you could still afford a cup of coffee a day - but you probably wouldn't drink as much coffee as before, because the coffee is so much more expensive in comparison to the other things you could do with the money. That's the theory that's behind proposals to raise the price of gas, but then give the money back to people via a tax cut (or by taking care of their auto insurance). Obviously, it's more complicated than that, but that's the basic idea.

To get the economist's take on oil probably the best thing to do is to go to the unofficial krugman archive, search for the word oil, and snout around for a while. This column from October 2001 is probably a good place to start.

Posted by: roublen | Aug 30, 2005 5:02:38 PM

I may try to take a stab at this issue over at The Oil Drum if I get a chance to really think this through, but in the meantime, I want to address one thing. Matt says: "To put it in crude, self-interested terms, some Americans -- like, say, me -- don't own a car at all. We're the true heroes of energy efficiency, and CAFE rules provide us with no benefits whatsoever. But if you want to subsidize energy conservation, it makes no sense to leave out people who conserve through not driving or carpooling."

With all due respect to Matt, I find this sentiment kind of offensive. Do people who don't use gasoline at all need a monetary incentive to continue their current good habits? I live in Manhattan and I walk to work. Every day I am thankful that I don't have to put $50/week into my car. Isn't that reward enough? Furthermore, a gas tax doesn't reward walkers and bikers and mass transit riders either, so as far as I can see, neither CAFE nor a gas tax has anything to offer those people.

Posted by: the oil drum (ianqui) | Aug 30, 2005 5:42:49 PM

roublen, but if you (and others) start drinking less coffee (or using less gas) the changes will no longer be revenue neutral, the taxes will no longer cover the rebates. Where is the extra money going to come from? Furthermore what about your neighbor who didn't drink coffee in the first place? Does he get a rebate also? If so the scheme will be in deficit from the start. If not he may object particularly if you stop drinking coffee immediately so you are getting $90 a month more than him for no apparent reason.

Posted by: James B. Shearer | Aug 30, 2005 7:04:32 PM

James: right, hence the "more complicated". If you instituted a revenue neutral gas tax/payroll tax swap (analogous to giving people $40 or $50 instead of $90) , some people would be better off, some would be worse off, but the economy & environment as a whole should be better off because 1) you'd be taxing "bads" (consumption of gasoline) more heavily 2) you'd be taxing "goods" (income from wages) less heavily 3) of the total amount of revenue derived from gas sales, you'd be decreasing the pecentage that goes to the oil companies and increasing the percentage that goes to the government, i.e. a gas tax to some extent acts like a "windfall profits" tax.

This is all econ 1 theory. The actual size of these 3 theoretical effects in practice is what's important. Combined with the political difficulty of selling policies which make some people better off, some people worse off, but are good for the economy & environment as a whole.

Also, read the Krugman article above on the "oil-hog cycle", and why there's probably a government role for trying to smooth the excessive and myopic fluctations in the price and consumption of oil.

Posted by: roublen vesseau | Aug 30, 2005 9:28:27 PM

"One could just as easily ask, why you think reforming CAFE standards would be effective, given that fuel efficiency has been decreasing under our existing CAFA rules? Why do you think it would work in the future when it hasn't in the past? Won't any new regulations be subverted in some fashion just like the ones be have are subverted?"

Because our current CAFE rules got laxer under Reagan. The drop wasn't an accident -- it was a policy change. When we did it in the past, it worked perfectly, and when we stopped enforcing it, it stopped being followed.

Posted by: Ezra | Aug 30, 2005 11:47:09 PM

Matt doesn't use the subway because he's virtuous, he does it because he's got a subway to take. If he lived in LA, he'd have a car.

Thank you. I tried to make this point in a post a few weeks ago. Yes, we have a "car culture", but believe me, few people like commuting in their cars, and if you give them a sensible, useable, well-laid-out public transit system, they will use it.

Posted by: Toast | Aug 31, 2005 9:36:21 AM

Ooops. Wrong link. Here's the mass transit post.

Posted by: Toast | Aug 31, 2005 9:38:37 AM

Ezra,

I am not denying that. It doesn't matter why or when the rules got laxer, they did, and CAFE isn't working as intended.

So, lets imagine you get the political clout to pass your new and improved CAFE standards. They are perfect and close every loophole and are a marvel of legislative and regulatory accomplishment. People spontaneously break into song just thinking of them.

Then, in a few years, when the wonder has worn off and people are secure in the belief that the great Klien CAFE standards are saving the planet, automakers and others get together and successfully lobby to weaken and reduce these marvelous rules.

Posted by: Dave Justus | Aug 31, 2005 11:55:43 AM

But did CAFE in fact "work"? Or was it more a matter of high prices, expectations of even higher prices, lower incomes and lower fuel economy to start with,

and wasn't that increase in fuel economy rapidly eaten up by more cars and greater miles per driver, once prices started easing back?

You ask what's wrong with SUV's subsidising small cars, well, plenty, if that has little impact on SUV sales, but raises small car sales a lot.

You state that even poor people in the US need a car, or at least the working poor.

But why is that? Mightn't that have something to do with cheap cars and cheap petrol to begin with? Ie choosing CAFE over petrol taxes.

In London half of households do not own a car. In Europe as a whole average miles travelled per driver is half that of the US.

In Britain, prices were raised slowly (at inflation plus fuel price escalator) when world market prices were low. When they started rising, the government stopped raising taxes.

That way the pain to low income households is kept down. And thanks to tax credits they do get an income boost. But they've got the choice to spend it on something other than petrol, and largely they do.

Yes, I think CAFE is taxing the rich to give to the poor, to some degree, but said giving is specifically tied to encouraging driving (and therefore, urban sprawl, congestion, traffic accidents, more vehicles and maybe even more petrol consumption).

Posted by: Heiko Gerhauser | Aug 31, 2005 8:35:28 PM

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