What’s Better for the Environmen​t: Raising the Gas Tax or Fuel-Effic​iency Standards?

The Obama administration recently announced that it was gradually raising fuel-efficiency standards to 54.5 miles per gallon by 2025. That’s good news for the environment, but it’s not the best possible news for the environment, argues Eric Morris at Freakonomics. That would be raising the federal gas tax:

This raises the true problem with CAFE [the fuel-economy standard]. It misses out on a potentially key part of the solution to reducing fuel use: driving less. In fact, ironically, increased CAFE standards will have a perverse and unwelcome effect; better fuel economy will increase the fixed cost of driving (i.e. vehicle prices) but will actually reduce the marginal cost (i.e. fuel expenditures). To a degree, less thirsty cars will actually cause people to increase the number of miles they drive (as I’ve written about here).

With increased gas taxes, on the other hand, less driving will be part of the consumer’s toolkit. Some who absolutely need vehicles with poor fuel economy will have the option of avoiding the tax by driving less instead. As long as their fuel use goes down, why not give them that choice? Greater economic efficiency would result. In fact, the Congressional Budget Office ran the numbers in 2004 and found that cutting fuel use through taxes was considerably cheaper in the long run than raising CAFE.

Morris makes some strong points here — without even mentioning the fact that a gas tax increase, unlike higher fuel-economy standards, will also generate revenue for the Highway Trust Fund. (If anything, raising CAFE will hurt gas tax revenues, since fuel-efficient cars don’t have to be filled up as often.) The gas tax is also better for congestion, and consequently the accident rate, and we still get the benefit of a cleaner fleet over time, because high gas costs will create a demand for fuel-efficient cars.

Let’s examine the C.B.O. report from 2004 (pdf) cited by Morris above that directly compares the two approaches. The authors estimate that raising CAFE to roughly 31 m.p.g. would reduce gas consumption 10 percent after 15 years, by which time the entire U.S. fleet would be replaced. This change would come at a cost of $3.6 billion a year to the economy (largely through higher car costs).

To achieve the same 10 percent reduction through the gas tax, it would have to be raised 46 cents a gallon. This would cost the economy $2.9 billion a year (mainly through reduced gas sales, not through the tax itself). In the first 14 years of the comparison — before the full fleet is replaced — the advantage in both cost and gas consumption goes clearly to raising the gas tax:

It’s important to note that the authors only figure on a fuel-economy of roughly 31 m.p.g., well below the 2025 mandate of 54.5 m.p.g. Still some energy economists are convinced, including Michael Giberson at Knowledge Problem. He’s ready to repeal the new CAFE laws right now in favor of a higher gas tax:

I’d like to propose the following deal: Repeal CAFE, raise the gasoline tax in stages over the next several years, and offset the revenue increases with reductions in other federal taxes. That is “Repeal” with a capital R. … Repeal CAFE and raise the gasoline tax instead. No net increase in federal taxes, and we toss out a cumbersome, bureaucratic, inefficient regulatory system that has been burdening automakers and auto consumers for years.

The entire CAFE-versus-Keyser Soze argument is as intriguing as it is moot. The CAFE raise is in the books. The gas tax, meanwhile, might disappear entirely come October. The Washington Post reports that some officials believe the Congressional debate over transportation funding is heading for a stalemate even worse than the one recently endured by the F.A.A. And if that process is any guide, then drivers should not expect any cost reprieve at the tank if collection of the federal gas tax is suspended; rather, they should expect gas companies to charge them the same price, and simply pocket the difference, like airlines did.

Image: mag3737

Eric Jaffe is on Twitter

Source: http://www.infrastructurist.com/2011/08/01/are-consumers-getting-smarter-about-hybrid-cars/

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