A triple-dividend from Pigovian gasoline taxation?

Michael Giberson

Evan Turgeon, a lawyer working for the Cato Institute, has an article on gasoline taxation in the Journal of Land, Resources & Environmental Law:Triple-Dividends: Toward Pigovian Gasoline Taxation.”

The “triple dividends” asserted are benefits to the U.S. domestic economy, the national security outlook, and the environment. In general the idea is that if we increase the gasoline tax while eliminating a host of other programs that address related issues in piece-meal fashion, overall we’d be much better off.

I’d agree that in principle Turgeon is right. In practice, it would depend on how high the gasoline tax is raised and how many of the piece-meal programs are actually eliminated. Among the programs Turgeon thinks could be eliminated are CAFE standards and renewable fuel mandates, subsidies and tariffs. Turgeon also argues that we could reduce U.S. overseas military involvement if we reduced oil imports.

But I’m not quite convinced that a higher gasoline tax will actually reduce oil imports, which Turgeon said would keep more money in the domestic economy and produce an economy boost. Higher gasoline taxes will reduce the demand for gasoline, so tending to reduce the quantity of crude oil to supply U.S. consumers and so reducing world crude oil prices a bit. But whether that reduction comes at the expense of domestic or foreign producers depends on which producers tend to have higher costs. If, as is reasonable to believe, U.S. domestic producers tend to be higher cost than many foreign producers, then as crude oil prices tend to fall the percentage of oil we import could rise. We could become more “addicted” to foreign sources of supply, with indeterminant effects on U.S. military activity.

I’d argue with a number of other points in the paper, too, though some of my objections are likely just to the way a lawyer is writing about market activity. One further substantive issue concerns OPEC, as Turgeon credits OPEC with much too much influence on the oil market. Many careful examinations of OPEC and oil markets find that Saudi Arabia may have sufficient market power to influence prices and sometimes exercises it, but OPEC as a group does not have systematic effects on prices. Turgeon’s mistake here is pretty common, but a little digging here could have helped avoid it.

I also object to the idea that federal gasoline taxes are an appropriate tool for dealing with congestion issues. I can drive for hours across Texas without encountering any congestion but for the drive-in window at the Dairy Queen. Raising the federal gasoline tax on my cross-Texas travels will provide no congestion-reducing benefits. Toll roads, HOT lanes, and hi-tech congestion pricing for roads are much better approaches.

Even with my criticisms, I’d be in favor of trading a higher gasoline tax for the elimination of CAFE standards and renewable fuels policies. A definite win-win there for taxpayers/consumers/citizens.

Citation: Evan N. Turgeon,  “Triple-Dividends: Toward Pigovian Gasoline Taxation,” Journal of Land, Resources & Environmental Law, Vol 30, No 1 (2010).

Abstract: The American public’s demand for inexpensive gasoline and indifference to the risks posed by climate change have shaped the nation’s traditional and alternative energy policies. Public opinion encourages lawmakers to implement inconsistent and economically inefficient policies, which not only fail to satisfy the nation’s energy needs but produce a host of secondary economic, national security, and environmental problems.

This article advocates replacing the United States’ current panoply of ineffective government subsidies and mandates with an efficient, market-driven solution: higher federal gasoline taxes. Whereas previous environmental tax proposals assume constant tax revenue, this article considers the potential to reduce costly foreign policy expenditures in light of decreased domestic petroleum demand. This broader view suggests that Pigovian gasoline taxes would yield triple-dividends, simultaneously benefiting the United States’ economy, national security outlook, and environment. Recognizing the incentives responsible for current energy policies provides insight into how higher federal gasoline taxes might successfully be promoted and enacted.

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7 thoughts on “A triple-dividend from Pigovian gasoline taxation?

  1. I agree with this idea, and I think that the benefits (fiscal, behavioral) outweigh the benefits of more expensive driving. Cars are consumptive or productive goods (not necessities without substitutes), so I also think more expensive is ok wrt welfare.

    Gas in the Netherlands, btw, is $8.85/gal. There’s a reason everyone rides bikes, buses and the train 🙂

  2. David,

    I don’t know where you live. However, in the metropolitan District of Comedy, for instance, many people have to drive 20-30 miles to get from homes they can afford to the train station to begin the public transit portion of their commute. In the case of the train station I used, there is no bus transportation to the station. There are many days in the DC metro area when a 20-30 mile bicycle trip to the train station would be rather difficult. 🙂

  3. I have two issues with Pigovian taxes. First, they seem based on the idea that all externalities are negative. The assumption is questionable. By taxing an activity you would expect to reduce the level of activity and both the positive and negative externalities would be reduced. In the 1980’s David Alan Aschauer did some work identifying the positive externalities of infrastructure spending.

    My second concern is the use of the revenue raised by Pigovian taxes. If the purpose of the tax is to compensate individuals who otherwise pay the negative externalities, then giving the revenue to a government fails the objective. If Pigovian taxes are to be considered and the revenue raised can’t be easily targeted to those suffering negative externalities then revenue should be rebated to the general population. Advocates of Pigovian taxes are not likely to favor such an approach because it limits the control they can exercise by not allowing subsides for chosen activities and groups.

  4. Turgeon proposes to recycle the larger gasoline tax collection via lower income tax rates. As noted, this is only a partial-Pigovian tax.

    If higher gasoline taxes could be gained in exchange for no CAFE, no ethanol policy inducements, and modestly lower tax rates, it seems like a clear winner.

    Some advocates of Pigovian taxes DO favor returning the increased gasoline taxes through a reduction in income taxes. In particular, I recall that Mankiw advocates for a such a result. But politics being what it is, there are frequently slips between what policy advocates propose and what politicians enact.

    Relevant is that in state-level greenhouse gas regulations such as that conducted through the RGGI cap-and-trade system, a substantial chuck of the funds generated are sent to state energy policy projects. Rather than trying to give the money back in some manner, the state gives them energy policy research, efficiency programs, and similar efforts.

  5. Mike,

    During the period leading up to the passage of Waxman-Markey in the House, most of the discussion appeared (to me, at least) to focus on the ~$65 trillion in new federal revenue which would result from the sale of emissions allowances; and, on how the federal government might allocate that money. The discussion regarding the partial refunding of the revenue focused on its income redistribution aspects.

    I recall no discussion of the fact that any incremental federal revenue from this source would increase the price of energy, in excess of the increases which would be driven by the new investments required to actually reduce carbon emissions. Those investments and the returns the investors would demand were not on the minds of our congresscritters, largely because the funds would not flow through the federal coffers; and, thus, would not be available for “skimming” to fund pet projects.

  6. Correction: ~$65 trillion should have been ~%65 billion; and, it would be annual.

    Note: That was not a “typo”. That was a “thinko”. 🙂

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