Time for a Floor on Gas Prices?

High gasoline prices are ravaging rural Americans, particularly families with low incomes that drive relatively long distances in gas-guzzling pick-up trucks and vans. As described in today’s front-page New York Times story Rural U.S. Takes Worst Hit as Gas Tops $4 Average:

Here in the Mississippi Delta, some farm workers are borrowing money from their bosses so they can fill their tanks and get to work. Some are switching jobs for shorter commutes.

People are giving up meat so they can buy fuel. Gasoline theft is rising. And drivers are running out of gas more often, leaving their cars by the side of the road until they can scrape together gas money.

Now imagine that Congress had enacted a revenue-neutral carbon tax years ago. Instead of the current high gasoline prices combined with huge profits for the oil industry, we would have high gasoline prices offset by large dividends being returned to all Americans. And, if the revenue-neutral carbon tax had been phased in slowly as recommended by the Carbon Tax Center, drivers would have had time to adjust to the higher costs by purchasing more fuel-efficient vehicles and changing their driving habits.

That’s a missed opportunity with devastating economic consequences. What do we do now? Provide a gasoline-tax holiday to reduce the price at the pump? Impose a carbon tax and increase the price of gasoline? The gas tax holiday idea was a cheap political stunt that was effectively rejected by the voters in North Carolina and Indiana, and by most politicians.

Should gasoline prices be increased further now? Maybe not. While a carbon tax on other fossil-fuels is still necessary, maybe it’s time to just maintain the status quo on gasoline prices.

Seventeen months ago the Carbon Tax Center proposed phasing in a revenue-neutral carbon tax that would have resulted in a ten cent a year increase in gasoline taxes for each of ten years. A $1 increase in gasoline taxes after ten years would have resulted in a somewhat lower increase in gasoline prices since the full amount of the tax would not have been passed through to consumers.

We have already seen prices increases far in excess of those which would have resulted from the CTC proposed carbon tax. The good news is that we are seeing just the type of positive results we expected. People are buying smaller and more efficient cars and they are changing their driving habits. The bad news is that there has been no carbon tax dividend to help people deal with the higher prices. The oil companies and the oil producing countries aren’t giving back any of their profits.

Now is the time to maintain high gas prices and to lock in efficiency gains by using a carbon tax to create a “floor” gasoline price. If market forces (or and end to market distortions) results in lower oil prices, gasoline taxes would maintain the current pump price. Prices would remain the same, but the gasoline taxes would be returned to all Americans through a carbon tax dividend.

Coincidentally, the Tampa Tribune today published a powerful editorial favoring a carbon tax over cap-and-trade, stating:

A better way to approach the problem is to put a direct tax on carbon, then return the extra revenue to the public through lower income taxes and more federal support of proven technologies, such as public transit. Instead of trying to pick winners and losers in the private sector, Congress should increase grants for university research in clean energy.

While the Carbon Tax Center prefers a carbon tax dividend to federal support of what Congress might consider to be “proven technologies,” we welcome the Tampa Tribune’s support of carbon taxes and its recognition that such taxes make sense even with current gasoline prices:

Consider how effectively the higher price of gasoline this year has begun to change behavior. Ridership on Hillsborough’s transit system, HART, is up 7.2 percent this year. Sales are strong for smaller cars. Motor scooters are selling like hotcakes.

But consumers are right to be angry. They’re getting no help making the transition to a lower-carbon life. The profits from expensive oil are going to big oil companies, foreign producers and speculators, while most of us see our standard of living fall.

It’s time to use a revenue-neutral carbon tax and dividend to maintain the environmental benefits of today’s high gasoline prices, but to redirect the cash flow from the oil industry to all Americans.