Christopher Knittel: Reduce fuel consumption–raise the gas tax

MIT Sloan Prof. Christopher Knittel

My latest paper* looks at the various ways in which we could reduce petroleum consumption in the U.S. The paper looks at the most prominent policies aimed at that end: providing more federal subsidies for hybrid and electric cars, compelling car manufacturers to increase the fuel economy of new vehicles coming off the assembly line, and raising the production of biofuels, such as ethanol and methanol.

The paper comes to an unsatisfying conclusion: the policies we have in place are not doing much at all to reduce our gas consumption. They are expensive both in terms of the technology they require and the social costs they incur.

The best way to lower our petroleum consumption is by getting Americans to drive smaller, more fuel-efficient cars, and by getting them to drive those cars less. We need incentives – or in this case perhaps disincentives – to make this happen. We need to raise the federal tax on gasoline.

A personal story: When I was in the market for an SUV a few years ago, I did research like any savvy car buyer would. But I didn’t read Car and Driver or Consumer Reports. I looked at the futures market for oil. Based on my findings, I bought a Sequoia, which is Toyota’s biggest SUV.

Don’t get me wrong: I care a lot about the environment. I view climate change as a serious problem. But I am also hyper-rational. I see that our society is subsidizing oil use, and I want to be able to take advantage of that by buying the kind of car that suits my needs. (One of my hobbies is woodworking so a big car with a lot of space is important.)

I don’t want gas prices to be as low as they are, but I also can’t fault consumers – myself included – for responding to the low prices by favoring big, heavy-duty SUVs with as much horsepower as they can get. The license plate on my Sequoia read: “TAX CRBN (TAX CO2 was taken).” My friends called it the ironic-mobile.

To appreciate what the world might look like if we were to raise the federal tax on gasoline, just peer across the pond at Europe. Americans pay, on average, about 49 cents per gallon in taxes — which at today’s prices, equates to about one-eighth the total price at the pump. That’s a big number, especially in recessionary times. But across Europe, the tax on a gallon of gas is much higher. In Ireland, it’s $3.41; in France, it’s $3.80, and in the Netherlands, it’s $4.19. As a result, Europeans tend to drive smaller more fuel-efficient cars, and they also drive less: the per capita miles traveled in European countries is between 35 to 45 percent of U.S. miles traveled.

I realize that we’re coming up on a big election year, and no candidate is going to propose raising the federal tax on gasoline to levels seen in Europe. I also know that the low gas tax we Americans pay is unsustainable, and that current policies to reduce our consumption aren’t doing what they’re supposed to.

Biofuels, electric vehicles, and hydrogen fuel-cell vehicles remain some years in the future. Their eventual commercial viability probably depends on a combination of technical breakthroughs, the emergence of economies of scale in production, continued high prices for gasoline, and policy. Many of these may never come to fruition.

But ultimately, the single biggest influence on whether Americans reduce their consumption of petroleum-based fuels will probably be whether the forces of supply and demand in global markets that have kept oil prices relatively high since about 2005 continue to do so. At least with a gas tax, some of the revenue generated by the higher prices we pay at the pump will stay here, rather than going to other regions of the world.

* Reducing Petroleum Consumption from Transportation

Christopher R. Knittel, December 2011, Journal of Economic Perspectives (forthcoming)

Read more in Business Insider

Christopher Knittel is the William Barton Rogers Professor of Energy Economics at MIT Sloan School of Management

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