How to create a green energy economy: Raise fuel prices

[Stephen Baker]

I know it seems foolish as we head into a painful recession, but we need higher fuel prices to attract investment into new energy technologies. The way to do this, I believe, is to put a rising floor under the price of oil (or fossil-generated BTUs, in a broader scheme). This floor could start where oil is right now, which is fairly low, say $60 per barrel. Then every year it goes up by, say, $7. A year from now, if oil is below $67 per barrel, taxes lift it to that level. The following year, $74. There's a good chance that oil will be higher than that, in which case the tax is never levied. But it gives investors the assurance that they won't have to be competing with $25 oil.

I know this will be hard to implement. Raising taxes is always tough. But to make it politically palatable, the government could use every dollar raised from an oil tax to reduce payroll taxes. That way people are taxed for consuming energy, which hurts the trade balance, pollutes, and strengthens Russia, Iran, etc., and they're rewarded for working. Another idea would be to give each state the revenue collected there, so that they can use it as they see fit, for tax reduction, education investments, etc. (But it's important to keep in mind that these energy tax dividends won't be something to bank on; they'll disappear when energy prices rise above the established floor.

[Susan Kuhn Frost]

And if oil prices rise above the floor - then, no tax revenue. I also think the price per barrel at which alternative energy becomes profitable is far higher, more like $200-$300 per barrel. The plan doesn't get you where you want to go.

Methinks this is too much tinkering with a globalized commodity; the US does not control the price of oil, oil companies do not control the price of oil. This is too big an issue to be micromanaged through the tax code.

I am very wary of government choosing which alternative source of energy to bring to market; although your proposal does not specify a technology, the odds are that a bill promoting such a tax incentive will be lobbied to the point of containing preferences for some technologies. The synfuuels failure in the 1970s is the extreme example of the folly of substituting political judgment for a true test in the marketplace.

[Stephen Baker]

But Susan, You're right. If oil prices rise above the floor, no tax revenue. This isn't a plan to insure tax revenue. In fact, that's why I would have any tax revenue be placed into a tax break, so that it was revenue neutral. As far as the point about synfuels, that's what I'd like to avoid. If through taxing we guarantee a higher price for oil, then the marketplace (and not the govt) can invest in alternatives. As far as the level needed for alternative energy to be profitable, I think a lot of investors were interested in it when oil was at $140 a gallon. The other benefit of this is that it signals to consumers that there will never be cheap fuel again. So they plan accordingly. (That, as we're now seeing with the recession, drops consumption, which brings down prices--which hurts Venezuela, Iran et al, and should be a windfall for us.

[Stephen Baker]

Charles Krauthammer writes a very (long and) thoughtful piece in support of this idea. One difference: instead of a floor under gas prices, he calls for a straight $1 per gallon tax, which would be offset by an equal-sized reduction of payroll taxes. I prefer the floor approach, but would take either.