Opinion

The Great Debate

Will Obama raise fuel taxes?

December 8, 2008

John Kemp Great DebateJohn Kemp is a Reuters columnist. The views expressed are his own.

LONDON, Dec 8 (Reuters) – China’s decision on Friday to link domestic fuel prices to the international price of crude oil, but increase consumption taxes on gasoline and diesel sharply to spur more efficient use of energy in the medium term, raises the question whether the incoming Obama administration might be tempted to do the same.

China is taking advantage of a cyclical pull back in energy to push through a permanent structural increase in taxes and prices. The aim is to combine a short-term boost to the economy with longer-term and more consistent incentives for improving energy efficiency.

By consolidating a series of tolls and administrative charges into a single, easy to collect consumption tax, the government is simplifying the tax system, creating a new source of revenue, and ensuring the change will have no impact on the politically sensitive inflation rate.

More importantly, it creates a fairly simple mechanism for raising energy costs further in future to spur additional efficiency gains, irrespective of cyclical changes in the crude oil price.

Once short-term economic weakness is past, the government can easily raise the consumption tax progressively over the next few years.

In effect, the tax breaks the link between the government’s energy efficiency programme and short-term oil-market movements.

NEW ADMINISTRATION PRIORITIES

Across the Pacific, the incoming Obama administration has made clear improving energy efficiency is also one of its highest priorities.

The president-elect’s future national security adviser, General James L. Jones, has been working on energy issues for an affiliate of the U.S. Chamber of Commerce since retiring as NATO’s supreme allied commander in Europe. He made clear in a recent interview improving energy security would be one of his central objectives, marking an unusual extension of the adviser’s traditional role.

The incoming administration faces several related challenges, however:

  • It needs to maintain the recent trend towards smaller and more fuel efficient motor vehicles, even though retail gasoline prices have halved in less than six months.
  • It needs to find a way to increase the volume of ethanol blended in the gasoline supply, even though ethanol is now more expensive than fossil-fuel gasoline, and mandated volumes are running up against the technical limits of the U.S. car fleet (the “blending wall”).
  • And it needs to find a way to continue providing incentives for developing alternative energies (such as advanced biofuels and oilsands) as well as alternative power sources (fuel cells, electric vehicles).

VOLATILITY DEGRADES PRICE SIGNAL

The common problem is that short-term price volatility threatens long-term strategic planning by both energy producers and consumers.

Adam Smith’s theory of the “invisible hand” has price changes acting as a signal to ration demand and encourage supply.

Policymakers have long accepted that inflation can interfere with these signals by making it hard for consumers and producers to distinguish between a relative change in prices and incomes (to which they should respond) and a general rise in the price and income level (to which they should not).
Inflation introduces “noise” into the price mechanism, making it hard to extract signals correctly.

Extreme price volatility can have the same impact. Large price movements and repeated price reversals leave producers and consumers uncertain about the correct response.

The problem is worse in sectors such as energy where changes in consumption and production involve long-time lags and costly investment.

The oil price surge in 2006-2008 was widely interpreted as a response to the threat of a long-term shortfall in supply (since there was no actual shortage of physical crude oil in the near term). It appeared to send a strong signal about the need to develop substantial new oil reserves, invest heavily in alternative fuels, and achieve massive increases in energy efficiency.

The subsequent collapse, including long-dated prices, seems to be signalling that these long-term high-cost investments will not be needed.

Producers and consumers are struggling to work out whether the market was right in JulY 2008; whether it is right now; or whether the world really has changed that much in less than six months.

A HELPING HAND FOR ADAM SMITH?

The incoming administration’s public announcements indicate senior policymakers believe all these new and alternative fuel supplies will be needed. The question is how to maintain the efficiency drive and incentives for long-term investment during a period of price weakness.

Following China’s example and raising fuel taxes is probably the most attractive mechanism.

By raising the long-term floor for domestic gasoline and diesel for any given level of international crude prices, it sharpens efficiency incentives and would maintain the pressure towards smaller and more fuel efficient vehicles.

Crucially, it could solve the problem of the blending wall. Most U.S. vehicles are able to run on a maximum 90-10 gasoline-ethanol blend (E10) that will limit the overall amount of ethanol blended into the fuel supply to around 12-13 billion gallons per year, and is likely to become binding in the next 18 months.

To meet the longer-term objective of blending as much as 36 billion gallons into the fuel supply by 2022, the administration will need to increase the number of vehicles taking higher 15-25 percent blends, or shift an increasing proportion of the car fleet to flexible-fuel vehicles running on a 15-85 gasoline-ethanol blend (E85).

The problem for policymakers is whether to go for a big-bang approach (pushing for widespread adoption of E85-adapted vehicles) or a gradualist one (increasing the standard blend to 15 percent, then 20 percent, etc).
Widespread adoption of E85 requires investments in an expensive pipeline infrastructure and new cars.

Neither is likely unless distributors, pipeline companies and motor manufacturers can be guaranteed sufficient minimum demand for the fuel and associated cars.

The question is how to promote widespread adoption of higher 15-20 percent fuel blends and E85. One possibility is to make production of E85 vehicles a condition of any government rescue package for the major auto makers.

But rolling out E85 vehicles does not guarantee they will actually be filled up using E85 fuel. Federal agencies have been obliged to buy E85-capable vehicles since the early 1990s. Most are filled up with regular gasoline, owing to the lack of filling stations carrying E85 in most areas outside the Midwest. And at low gasoline prices, there is no guarantee ethanol will be competitive.

There must be a temptation to impose a sharply differential tax rate on the fossil fuel and ethanol components of gasoline to encourage higher blend rates or E85 vehicles, creating clear long-term incentives for switching to more ethanol use.

The main factor restraining policymakers is fear of advocating any tax increases at a time when households are struggling with mortgage payments and falling employment.

But the big pull back has created some headroom to raise tax rates and long-term energy costs while still allowing pump prices to fall in the short term.

Raising fuel taxes will therefore be a very tempting option for the new administration. It could be presented as part of an integrated energy efficiency, climate change and national security strategy, raising useful revenues to pay for some of the massive stimulus and speed the return to fiscal discipline in the medium term.

The question is less whether fuel taxes will rise substantially, but when.

Comments
14 comments so far | RSS Comments RSS

Well, the existence of robust fuel taxes and taxes based on engine size have allowed the Europeans to have a wide selection of vehicles that get 40 to 50 miles per gallon. The U.S. should have done this 35 or more years ago as the Europeans did. Taxes are a powerful incentive when there is a technological means to get around them.

Unfortunately ethanol (a mandate) may be a disaster waiting to happen. Not only does it get less miles per gallon but costs much more and is reducing cropland available for food production in a world with a growing population. Let’s just jump a step and get to electric vehicles. This is the only technical solution to the triple threat of fuel scarcity, climate change and poisoning of the entire global ecosystem.

Posted by Jonathan Cole | Report as abusive
 

I don’t think that the United States can be mistaken for a country with long term vision. Not so long as it continues on it’s current path of ignoring the needs of tomorrow in exchange for enjoying the leisures of today.

That may change, but not likely as it is now subsidizing the malfeasant, failed elements of it’s failed business philosophy.

In the US business philosophy, it is suicide to worry about tomorrow so long as it may affect the profits of today.

The USA is a mere babe of some 232 years, in comparison to China’s some 4700 years of age. China has had many revolutions, types of government, and many wars, both civil, and defensive.

As the United States seems to be more concerned with what is happening everywhere else in in the world except within it’s own borders, I fail to believe that the USA, even his holiness Barak Obama will do what needs to be done to secure long term energy security for Americans. The system is just not built for it.

When one ‘leader’ can undo the work of his predecessor to please his contributors at the expense of the nation’s interest, you will find that you will never have any kind of ‘long term’ vision.

Not only that, but as the US Government has no exclusive rights concerning the delivery of energy (“Big Oil”), it is in no position to effect any realistic change, whether you ‘Believe’ or not.

Posted by Shang | Report as abusive
 

The absolutely best step is to raise the federal fuel tax for non commercial vehicles, but only if the “polluticians” agree to use the money to fund improvements to infrastructure and for new technologies.

This pull back is like a gift and we must take advantage of it by not slipping back into our old ways of driving. The notion however that blended fuels are the answer is ridiculous. Currently blended fuels adversely impact food supplies, require more energy to produce and contribute to pollution. A better source is low resistance electric motors, battery storage technology and developing nuclear energy to charge up our drive happy society.

Posted by Reed | Report as abusive
 

Sirs:Mdms; What we really need is a gyrogenerator, to which I have plans, to supply cheap power and of course, vehicles and machines to use said power. —Artchie

Posted by Arthur Herbert Pruett | Report as abusive
 

If there is any lingering doubt in the US that the only way to spur long-term conservation of oil and increase efficiency is to raise the price, then this summer’s $4.00-per-gallon experience has to be the clincher. As fuel prices rose, people drove less and eschewed land yachts in favour of more abstemious cars. It might be nice to think that we would all do what is right based on reason and moral suasion, but the truth is no one does. Americans drive guzzlers because they can afford to.

So the next administration should set the stage for systematically increasing the fuel price as we emerge from recession, both to encourage conservation in the shorter term and spur the deployment of more efficient automobiles. That’s a much more straightforward approach then monkeying around with CAFE standards and attempting to define and ban certain classes of vehicle(eg, SUVs).

Posted by William Crane | Report as abusive
 

While I hate to agree with Chinese nationalists I have to admit that shange is corrct. We need a system that allows and encourges change for the future even if todays profits might suffer. Additionally we truely need a find away to ensure that no Bush debacle can ever occur again. That jerk has done more damage to the US then a bunch of poor arabs ever could.

Allso I would like to say that I just dont think cornfuel is the way to go. Ethanol just has to much negatives. Its costly to produce, diverts food and is just generally inefficient. Forceing our “american” automakers to increase efficiency and promoting electric (shortterm) and hydrogen (long term)would be a better solution.

Posted by Eron | Report as abusive
 

Obama will try to raise many taxes, I agree with the reasoning presented that this may become another target for our under-qualified next President. But, will he raise taxes on tobacco (cigarettes specifically)?

Posted by Austin | Report as abusive
 

I hope Obama uses an increased fuel tax to pay for his infrastructure improvement program. That is what paid for it to begin with. I remember in a transportation-planning course in college – so many years ago – that the interstate highway system was sold to congress as a defense measure. The planners of the fifties and sixties remembered Hitler’s Autobahns. The first high-speed limited access highways in the world. The fuel tax was created to pay for that defense system. I think it still does. I also hope that congress can also be even more far sighted and resurrect the rail system in this country. We still have many of the Rights of Way (sans tracks).

Rail is still heavily used to transport coal from the producing states to the cities near the Great Lakes. If they could be used for more long distance freight they could subsidize the passenger service themselves. Even in the glory days of railroads, freight subsidized the passenger service. We do nothing with high-speed rail. The Japanese and Chinese do. There are some high tech and manufacturing jobs just waiting for the nudge.

I know the Europeans have always taxed benzene heavily and also subsidize an extensive public transportation system. It effects even the development of new towns. The Europeans have never encouraged suburban sprawl. Neither do the South American Countries. There are new cities on the coast of Brazil that run for miles and would be easily serviced with public transportation. It is more efficient than moving a single person wrapped in several tons of steel and plastic.

I agree with the writer who said we should have been doing it years ago. But we built sprawling suburban areas that are slaves to the automobile. They can’t even be provided with effective bus service. Rural areas are helpless without the private auto. But even the rural town I live in has an unused railroad R.O.W. that connected it to the nearest large city. That, in turn, connected with a whole network of regional centers etc. It was still possible in the early sixties to travel coast to coast in about two days. In an age of instant communication – is it really necessary to move our bodies as quickly or as often even for business purposes? No one mentions the CO2 emissions of high altitude flights. Millions of them each year. And the noise both private jets and high altitude flights make can’t be ignored – especially in the rural areas.

I can’t think of a better way of getting around than on a train. One has nothing to do but read, work on the computer or even get something to eat. And one can haul considerably more baggage than one can on a plane. If there are enough passenger cars or one can travel off peak, it is possible to be almost alone on one. On a recent visit to Italy I missed the crowded first train to Florence from Venice and had to take a Euro star liner about two hours later. I had the entire car to myself and four other people for the entire trip to Florence. But on another leg from Rome to Naples the car was packed yet still comfortable. And I covered distance as quickly and less expensively than in a car.

The private automobile has done nothing to improve the quality of life for suburban and urban dwellers. It is an expensive nuisance in a city like Boston or New York. It can also cost more to park for a day in the city than the trip from Rome to Naples cost.

Of this I am sure, whatever we get won’t be much and will cost too much. I’m afraid the private car is the bottom line and kills almost all other options. And nothing will undo the damage of almost 60 years of suburban sprawl. Every other developed or developing country has or will avoid that mistake.

 

Tax our fuel, tax our food ( the new “cow” tax )…tax everything.

Posted by Mike | Report as abusive
 

A tax on oil imports would be a step in the right direction, but not on domestic production.

Posted by duggers | Report as abusive
 

While I do not expect my email to the Obama transition team yesterday to be read, much less acted upon, I made the case for raising the gasoline tax 75 cents.

Like it or not Americans have become accustomed to higher gasoline prices. What I and what we as a people have a problem with, I believe, is volatile prices – we can’t budget.

I suggested that along with a fixed rate and term gas tax, the price of gasoline should be frozen at about $2.25 – higher than the average right now and only so Big Oil goes along with the concept.

Wheat and oats are commodities and traded on exchanges just like oil but the price of bread and breakfast cereal doesn’t fluctuate wildly like gasoline. Whys doe oil?

I’d actually like the US government to flex its muscle and nationalize the oil industry as a matter of national security as well as taxing gasoline directly at the retail level. But our legislators are not brave enough to take that step and Big Oil is well, BIG.

I also let the Obama team know the context from which I wrote.

I was born and raised in Detroit, one of 9 children, 3 died at or near birth, the son of a WW II vet who spent 40 years working in Detroit’s auto factories. It is due to the Big Three and the UAW that I have an education, own a home, some land and live in California and between my wife and I own an SUV and a pick up truck.

Even though both my wife and I are out of work right now, thanks to eight wasted years and the geo-political influence of oil, we are as I am sure many Americans are, willing to sacrifice to help clean the air with new auto technologies, break our addiction to foreign oil and the strangle hold of, Sovereign Weal Funds and to put Americans back to work; In sort, to change the course of history.

In comparison to Europe and most of the rest of the World let’s be honest – $3 gasoline is no sacrifice at all. We can do it.

Yes we can

Posted by Carl P | Report as abusive
 

The comments generated so far are impressive. Maybe the incoming president should have surrounded himself with these folks rather than the entrenched group that he has selected. It is remarkable how much better informed this small group is compared with our representatives and bureaucrats in Washington D.C.

 

The future is uncertain. There are SO MANY DIRECTIONS WE COULD GO. Ethanol, Fuel Cell, Electric, Solar, Wind..?

Ethanol made from Corn only produces 20% less carbon emissions than gasoline and you’re wasting precious food stock to power cars while millions around the world starve. It’s kind of cynical actually. Ethanol made from Sugar Cane on the other hand requires less crop space, it produces 70% less carbon emissions than gas and it is more efficient than gas, unlike Corn ethanol which is less. The only problem is Sugar Cane generally only grows in temperate climates like Brazil which aims to power most of its vehicles by Sugar Cane Ethanol within the next decade.

I believe the approach HONDA is taking will be the ideal solution. This company is ahead of the competition at the moment and when they come out of this economic crisis they could even have the upper hand over the all-powerful TOYOTA. Honda currently has two impressive cars coming out.

HONDA INSIGHT – to be released Spring 2009. This is essentially Honda’s answer to the Prius, the kicker is it’s only $22-25k ($10 Less than the Prius). This car tells you what speed to drive at for optimum fuel efficiency and it actually recharges the battery at highway speeds!

HONDA CLARITY – already on the market. This is a Hydrogen (Fuel Cell) and Lithium-Ion Battery powered vehicle. It’s price is currently out of reach for most consumers ($100k) but as the technology becomes more mass produced and hydrogen becomes more readily available it will become the future.

And then there is the peculiar thought of what about getting Solar and Wind to enjoy the ride. Remember the last time the Sun was beating down on your car and the wind was blowing in your face while you were driving down the highway? What if we could harness these energies to power our vehicles, perhaps in unison with these other technologies? You would have the ULTIMATE GREEN CAR.

Posted by Joshua | Report as abusive
 

Has anyone heard or thought about the energy grid issue we face in the next 10 years with all the HYBRIDS? Apparently, with all the electric cars to be done, and the way they need to be re-charged – our electric grid currently cannot handle this increase. Hope Thy Holy one appointed can save us.

Posted by BUCKER | Report as abusive
 

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