A Gas Tax: Number vs. Words, ctd.
Yesterday, I wrote a post using data from Kevin Drum’s blog in which I argued that any feasible U.S. gas tax would be highly unlikely to free America from the need for sourcing massive amounts of oil from unstable regimes, or to make a meaningful dent in potential global warming damages. This is because, among other things, the price elasticity of oil is just not high enough. Ryan Avent at The Economist has written a good-faith reply that I think, ironically, reinforces this point.
Avent’s first criticism centers on long-run elasticity being much higher than short-run elasticity (essentially, that I can drive a little less this year if the price of gas goes way up, but that if it stays high over 10 years, I can buy a smaller car, and bring my usage way down). This is, of course, correct. It’s why I only quoted the long-term price elasticity estimates from Drum’s post. According to the IMF study on which these are based, “long term” here means twenty years.
Avent’s second criticism is that if one believes (as I do, and as I stated in the post) that the key to reducing ceteris paribus fossil fuels consumption in the U.S. is improved technology, “ then higher prices are a good way to encourage their development.”
They are a way to do this, certainly, but not necessarily a good way.
Start with a rigorous definition of “new technology” for this purpose. This doesn’t just mean geo-thermal powered rocket packs, but also things like better bus routing software, improved rail tracks, and more energy-efficient housing construction materials. Either consumers would or would not choose any one of these new technologies under current conditions. If you use a tax to push up the price of fossil fuels, and this changes the consumer decision calculus so that they are now willing to choose some alternative that they otherwise would not have, it is because you have foreclosed a choice they used to have that they prefer to any of the options that are available after the tax increase. Another way of saying this is that you have just lowered their material standard of living.
When I say “new technology,” then, I mean technical advances that create new alternatives that people would choose to employ instead of fossil fuel based alternatives at current prices. That is, improvements to material standard of living that also have the benefit of reducing fossil fuels consumption.
Now, to evaluate Avent’s argument that taxing fossil fuels is a good way to induce new technology, consider an analogy. Suppose that there is a chemotherapy drug that increases 5-year survival rate for a specialized type of cancer from 10% to 60%, but with horrible side-effects. Some scientists in a couple of university labs have had some promising results with basic compounds that might or might not ultimately be precursors to a new drug that could get better increases in survival rates, and without many of the awful side effects. If you believed that improving treatment for this disease should be a major public priority, would your preferred approach be to add a large tax to chemotherapy? This is, in effect, what Avent is proposing as way to encourage the development of alternative energy technologies. I’d fund NIH research into the new alternative drug.
Finally, Avent argues that a gas tax is a great idea whether or not it really reduces fossil fuels usage, because even if I’m right and it won’t eliminate that much oil consumption, then it will be “a great way to generate revenue” (i.e., will result in a ton of additional tax collections). That is an entirely different argument, which would concede the point I was making in my post.
(cross-posted at The Corner)
I don’t see why you think the gov’t would be good at picking energy winners with subsidies in the market-place. Moreover, if you tax carbon-based energy to make it more expensive, then money naturally flows to alternative energies, since you’d increase incentives to invest in them. The drug analogy is not a good one, since the drug only has bad effects on the patients that use it-not externalities on those who don’t choose to use it. The government’s job is to tax externalities. If the drug was for some reason causing awful side effects on those who didn’t choose to use it, then yes, taxation (if not regulation) would be appropriate.
— jc · Apr 26, 01:12 PM · #
I think the better analogy than the tax on chemotherapy would be job training for cancer patients in order to improve the productivity of survivors. The reason the carbon tax brings innovation is that the potential return on investment improves.
— Doug P · Apr 26, 01:42 PM · #
I think your presumption that preferences are a perfect 1:1 correspondent for quality of material standard of living assumes a little too much weight for those preferences. Many of this sort of lifestyle preferences are malleable and very much influenced by experience, preconception, and norms. I wouldn’t say that people in Europe, for example, have had their material standard of living lowered because they typically drive smaller, more fuel-efficient cars; they simply have different experiential norms regarding driving. So while a switch to European-style car from a truck, SUV, or even large sedan might fairly be called a lowering of material standard of living for some in the short term, this might no longer be true a few years later; and it is even less likely to be true as more new consumers of automobiles enter the market.
I don’t disagree that advances in alternative energy that people actually WANT to use are preferable to advances they must be cajoled into using; but a) such options seem to me to be a luxury upgrade that we may not have available, and b) I believe there are many Americans that would need to be cajoled into almost any change in driving norms (one example among other way-of-life reforms that are implicated in efficient and sustainable energy use on a broad social scale). (I acknowledge that I am merely stating a personal social perception and not providing hard data; if you have any, I’d love to see it!) Furthermore, as far as we know at this time, changes in energy use that are far-reaching and deep enough to have a real effect in terms of climate change and sustainability are simply going to involve some serious changes in the way many Americans live; we will need to become more urban, less suburban, more reliant on public transit and bikes, and we will need some fairly radical reforms in the way we produce food. I think there are many people who would rather not acquiesce to such changes, but it does not necessarily follow that such changes would represent an absolute decline in standard of living after an adjustment period.
— miwome · Apr 26, 01:43 PM · #
If you have to compare raising the gas tax with taxing chemotherapy treatments, you’ve already lost the debate.
— rj · Apr 26, 03:11 PM · #
jc makes a good point but doesn’t expand on it. A tax on the activity that is producing negative externalities is a far better way to encourage alternatives than the govt simply picking and subsidizing what appears to be a promising or politically advantageous alternative. Just look at how Germany has become a leading producer and market for solar power because of generous government incentives, despite the fact that it gets about as much sun as a cave in Seattle. Or look at how ethanol has taken hold in the U.S. despite the fact that most experts agree it actually takes more energy to produce than it yields when consumed. The best way to encourage alternative technologies, and the only way to act rationally, is to tax the consumption of fossil fuels so that their price includes the costs of their negative externalities. Only then can competition in the free market determine the best alternatives.
— be · Apr 27, 05:34 AM · #
“I’d fund NIH research into the new alternative drug.”
Except, that’s exactly what Avent proposed we do with the revenues from a hypothetical Pigovian tax on fossil fuels.
By the way your comparison to chemo is specious at best. The whole point of negative externalities is that they are not side-effects borne on the producers, but costs monetary or health wise imposed on other people who are not consumers. Pollution is not a side-effect that industries need to bear in order to gain the benefit of easier profits. It is a cost the industry puts on the surrounding neighborhoods. Reconsider, and revise your point.
— Chris · Apr 28, 04:46 AM · #
D CCTV Security is an online store of security camera systems and related products. Based in N.J., it’s a manufacturer direct supplier who provides free lifetime technical support of Surveillance System, 2 years warranty and free shipping.
— DCCTV · May 6, 07:58 AM · #