Remember the past

What you have imagined all occurred starting in 1979 with the second Arab oil embargo. The price of oil doubled for the second time in the decade and immediately all Americans were consumed with saving oil and as a result . . .

BEHAVIOR CHANGED


So we parked our dinosaurs and drove them as carefully as possible.








We took public transportation whenever we could.












We turned out lights and turned down thermostats.














***************************************************************************
THEN PURCHASING CHANGED




We went right out and purchased fuel efficient cars.

















We insulated our homes from the cellar to the dome and took care of the windows as well.














************************************************************************
FINALLY PRODUCT DEVEPOLMENT CHANGED

Products like double-paned windows and energy star appliances were developed.































We started harnessing passive solar and wind energy for our use.






As a result of our concerted efforts our consumption of oil went from 18.9 million barrels a day in 1978 to 15.2 million barrels a day in 1983 and the price of oil went from $40 a barrel to $10 a barrel!

1979 taught us some harsh lessons. It is long past due that we profited from those lessons.

The Answer in Two Parts: Part I

The lesson then of 1979 is that you can decrease demand for oil by raising the price SIGNIFICANTLY.

d ~ 1/P


There are lots of ways we could raise the price of oil significantly. We could compel people to buy less fuel efficient cars. We could stop buying oil from the Middle East. We could start a war with Iran. All of these would raise the price of oil but they would also wreck the economy.

It turns out then that the simplest, most economically friendly, and most politically feasible way to raise the cost of energy is to tax it.

In order for such a tax to work it would have to be significant, that is high enough so that it changes behavior.

So if you are going to tax gasoline you would want a tax of about $3/gallon phased in over a relatively short period of time, say two years. You could do this by raising the tax by 75 cents every six months until the tax was $3.

So what would work would be to take gas prices that currently look like this.

Regular $2.92

Extra $3.02

Premium $3.12

In 2 years would look like this.

Regular $5.92

Extra $6.02

Premium $6.12

At this point you are saying, “Now I remember why 1979 was more of a nightmare than a dream. This is going to cost a lot of money. This doesn’t look economically friendly.”

Yes indeed, it will cost a great deal of money.

As a general rule of thumb raising the gasoline tax by a penny a gallon generates $1.50 billion dollars in revenues. A tax of $3/gallon would cost American tax payers $450 billion in new taxes. That is $1500 for ever man, woman, and child in America! This does not look politically feasible.

Well we could have a comprehensive energy policy but at what cost?
How about no cost?

The Answer in Two Parts: Part II

It looks like the only way to have an effective energy policy is to do so at an unacceptable cost. Consider the following.

What if Uncle Sam made you the following offer.

“Look I want to raise your gasoline tax by $1/gallon. That will cost you about $500. I (Uncle Sam) will give you up front $500 if you let me raise the tax on gasoline $1 for one year. I expect I will collect about $500 in taxes during that period and am willing to pay you up front.”

“After six months I (still Uncle Sam) will give you approximately $1000 if you let me increase the tax by an additional $1(now the tax is $2.00/gallon) for the next year. Now it is approximately $1000 because if I collected a little more than $500/consumer in the first six months I will give you a little more than $1000. If I collected a little less then I will give you a little less. However, every penny that is collected in tax will be returned in a rebate.”

One year later I will give you approximately $1500 and the tax will be $3/gallon.

Again every penny that is collected in the tax is returned in the rebate but it is done at a flat rate no matter how much energy you use.



So if you drive a Hummer and pay $3000 in energy taxes you get a $1500 back.



If you take the bus and pay $50 in energy taxes you still get $1500. Advantage busrider.


Everyone who pays the tax gets a rebate.

They could be rebated through:
· payroll tax reductions;
· increased social security payments;
· increased welfare payments.

The only other caveat is that the tax and the rebates would be COLAed.
That is they would increase with the cost of living, preventing the tax shift from
being diluted by inflation.

So now you have comprehensive energy plan which by design has no net cost to the consuming public. But how good a plan is it? Just about perfect.

Been There; Done That!

Is this plan really going to save energy? Well, of course it is.

To begin as soon as people are faced with the virtual certainty that energy prices are going to go up they will CHANGE BEHAVIOR.





They will drive their dinosaurs as little and as carefully as they can.



They will use public transportation a lot more.



They will turn out the lights and turn down the thermostat.


Then they will CHANGE WHAT THEY BUY


They will buy the fuel efficient hybrid cars.







Or regular cars that are fuel efficient.













They will buy the most fuel efficient appliances.




They will look for other ways to heat and provide electricity for the home.




Meanwhile the market will DEVELOP NEW PRODUCTS.




Fuel cell cars












Or ethanol vehicles












Or who knows what.

How do I know all this will happen? That's easy! BEEN THERE; DONE THAT!

But Wait There's More! ! !

Okay all these good things happened in 1979 but nobody noticed because the economy went into the tank with inflation and high unemployment. Won’t doubling energy prices hurt the economy again? Well, no. In fact it will help the economy.

In 1979 energy prices doubled. But where did the money go. It went to record oil company profits and Arab sheiks (sound familiar). America’s energy bill went from $70 billion in 1978 to $280 billion in 1980. All the money left the non-oil economy. Things cost more due to higher energy prices (inflation) but there was less money and demand for goods and services because there was less money around (high unemployment).

With a tax and a rebate the money stays in the economy so that people can continue to buy energy but in fact will invest in energy saving behavior and products to cut their energy bill.

But there’s more! As demand drops so does the price of energy. Consumers save twice. They save by using less energy and they save because the pretax price of energy declines as well.

Currently Americans consume 7 billion barrels of oil a year. If their consumption of oil dropped to 6 billion barrels (1 billion x $60/barrel) and the price of oil dropped by as little as $15 barrel ($15 x 6 billion) Americans would save an additional $150 billion per year.









That is an additional $500














for every man, woman, and child in America.








That's on top of the tax rebate.
And OPEC and the oil companies will be picking up the tab.

But They’ll Take the Money and Run

The main argument that I get against this plan from Republicans is that politicians will tax but they won’t rebate. This seems an odd argument since the taxophobic Republicans run all three branches of government.

There are at least two examples of tax neutral policies (which this is) that have been passed into law. The income tax reform act of 1986 shifted tax brackets without increasing overall tax revenues. Throughout the 90’s the federal government worked under a pay as you go system that was only abandoned by the current administration and that resulted in lower not higher taxes.

Furthermore, if the public lobbied congress for a completely tax neutral energy tax/rebate that is what the public would get. Like it or not that is the way the system works. It says so in the rule book.

The rule book gives power to the three branches of government. But you don’t have to read the fine print to figure out who it is who delegates that power.



For those who think this is the stuff of junior high school civics keep in mind every great political movement since the founding of the republic from abolition to civil rights to environmentalism was started by WE THE PEOPLE.

But it Will Hurt the Poor

The main argument I get from the left is that the tax is regressive and will hurt the poor.

If one looks at the tax and the rebate it is moderately progressive because the poor, on average, use less energy but will get the same rebate thateveryone else does. There is a rough correlation between how much people make and how much energy they use. Wealthy people tend to drive more and bigger cars, travel more for vacation, live in bigger homes and have more homes to live in. Poorer people are more likely to live in cities, in apartments, and use public transportation. In addition everyone saves from the pretax drop in energy prices.

Will there be some small number of people who have high energy costs and don’t have the means to make the adjustment of higher energy prices? Probably. However, that number will be extremely small, be far outweighed by the number of poor who benefit from a working energy policy, and the overall benefits to our environmental, economic, and homeland security.

OPEC and the oil companies are already taxing us. It is time we taxed ourselves and reaped the benefits.

Why Not Use the Money to Support Alternative Energy

There are three reasons that this is a bad idea.

1. It gives credence to the “they'll take the money and run.” crowd.



2. It puts the government in the position of having to pick winners and losers. The government is not designed for this and does a very bad job of it. In this area I can give two examples.

Ethanol from corn is not a very good deal. The net energy production from corn is very small. However, that does not keep Midwestern law makers from promoting subsidies for this ineffective solution.

Hybrid buyers get a subsidy for buying these cars. That means I can trade in my 30 mile per gallon Miata and get a 25 mile per gallon 250+ horsepower Honda Accord hybrid and get a check from you the taxpayer for doing so.

3. It is unnecessary. Imagine the following. I am going to make you my regional sales director in my air-conditioning company. I will give you the choice of two regions. For the first I will give you technical assistance to provide the best and most efficient product on the market and generous subsidies for your customers or I will give you none of that. In the first case your territory is the Arctic Circle; in the second case your territory is Arizona. Of course, you are going to choose Arizona because you are choosing the one thing that is essential to the sale of your product; a market.

Raising fossil fuel prices creates a predictable and sustainable market for every form of alternative energy. Even if/when oil prices fall the price to the consumer will be high enough to make alternative energy or just plain conservation attractive.

Is solar better than wind? How do they compete with ethanol? The preeminent arbiter of these kinds of questions will make the call: the market.

There used to be an ad by BASF on television that said, “We don’t make the rug. We make the rug softer.” An energy tax doesn’t make alternative energy. It makes alternative energy competitive.

You Can't Do It

After all the arguments have been discussed and the audience admits (seemingly against their better judgment) that in Theory this will work, people still walk away saying it is not politically feasible.

What is striking and disappointing is that the people who should support it the most the environmental movement are the fastest in running away from the idea. In 2002 I asked the Union for Concerned Scientists if they would discuss promoting the idea of a tax/rebate system. Their response was, “We don’t promote energy taxes because we don’t think they are politically feasible.”

In 2003 when I made a presentation before the Rhode Island Environmental Defense Council, a group representing all the environmental organizations in Rhode Island I was greeted with deafening silence. One person said the idea had merit but no one offered me additional forums to make my case.

In the book, Consumer’s Guide to Effective Environmental Choices, the issue of energy taxes is raised and the authors are very positive about their impact. However, in the end they walk away from them saying, “Perhaps they can become a part of efforts in Washington to generally overhall the tax system.”

While I suspect that the environmental movement has problems with market solutions, their lack of support seems to stem from a counter productive view of their role in the process.

Policy in America is changed from the bottom up. For instance if these guys with no standing or office hadn’t spoken out passionately and persistently they would still be riding at the back of the bus.





These individuals by their courage, wisdom, and example created a national grassroots movement that transformed America.

Individuals converting groups who pressure congress to change the world we live in is the way these things are done. The environmental movement has the capacity to effect these changes if they can marshal the will.

And it is quite clear that the American public is ready to hear the message. In a recent poll Americans were asked if they would support a tax on energy. Put in this way 85% opposed it. However, when asked if they would support such a tax if it helped stop global warming or improved homeland security, the public was in favor by a nearly two to one margin. This is without mention of a rebate!

While politicians never initiate great political movements celebrity can help. In this case Thomas Friedman the highly respected New York Times columnist has been very actively promoting a gas tax with his column and with a documentary on the Discovery Channel. When someone of his stature says, “ . . . a gasoline tax is the most important geo-strategic move we could make today . . .” that helps to make it an acceptable topic of discussion if not for politicians at least for environmentalists.

One other interesting matter here is that one would think that now that energy prices are rising people would be less interested in energy taxes. However, I have found that people are actually more open to the idea. They perceive it is a problem and they want a solution.

So, those who say you can’t do it are right. But We can.

The Comprehensive Answer to an Inconvenient Truth

Vice President Gore has been crusading against global warming for about the same amount of time that I have been promoting higher energy taxes (see also The Answer in Two Parts; Parts I and II). He is to be commended for his dedication to this cause and his movie is a terrific platform to get his message out. He is right to point out that there are solutions within our grasp for this vexing problem. However, in addition to having the solutions one has to decide how to implement them. In this regard Vice president Gore calls upon voluntary measures for the most part. However, this method has and will continue to be ineffectual. The reason for this can be found in human nature and the laws of supply and demand (see also The Economics of Oil).

Imagine (again) that there are two families living next to each other. One is Joe Thrifty. He and his family live in a maximally insulated home, have the most efficient appliances, drive their Prius as little as possible, and turn out lights and turn down thermostats as much as possible.
They live next door to Jane Spendthrift. Her family drives three hummers, lives in a 7000 square foot house, has every appliance known to man, and don’t seem to know where the off switch is on any of them. One day Ms. Spendthrift comes home and tells her son who is watching TV while playing video games and listening to the stereo to get off the couch and get some exercise. “Take the Hummer for a spin. But be sure to stop at Fred’s Exxon Mobil because Fred is having a sale.”

Why is Fred having a sale? Because Joe has been so thrifty that he has decreased demand. Prices drop as a result so it is easier for Jane Spendthrift and her family to be wasteful. When it comes to energy everyone has to save at the same time. Voluntary measures at best do nothing and at worst give people a false sense of accomplishment.

Are raising energy prices the best way to get everyone to save energy? Well the last time America did it we cut our oil consumption 20% in five years (see also Imagine the Future). There is nothing else that comes close to that kind of track record. If the savings aren’t that great it just means the tax isn’t big enough. And with a tax, the savings keep growing because the competitive advantage of conservation and alternatives is permanent.

If fossil fuels are the source of an inconvenient truth, taxing fossil fuels is the comprehensive answer to the problem.

Regarding Mr. Friedman

I have been supporting energy taxes since 1980. For the first two decades I did this very intermittently and sporadically. Since 9/11 I have been giving talks to anyone who will give me a forum in which I can speak.

For the past year Thomas Friedman, the eminent New York Times columnist, has been at first sporadically but now more consistently promoting a gasoline tax. To Mr. Friedman I say welcome aboard. I will also say that I wish I had something to do with his interest in the subject. I think it is terrific that someone of his stature is stepping up to the plate and supporting what could be a resolution of this problem. It will be interesting to see what kind of an impact someone like him can make. If he can get and keep the idea of an energy tax on the table that would be comparable to what Vice President Gore has done with global warming.

In his column, Seeds for a Geo-Green Party (June 16, 2006), he showcases his tax plan in the following way.

“Its centerpiece would be a $1 a gallon gasoline tax, called ''The Patriot Tax,'' which would be phased in over a year. People earning less than $50,000 a year, and those with unusual driving needs, would get a reduction on their payroll taxes as an offset.
“The billions of dollars raised by the Patriot Tax would go first to shore up Social Security, second to subsidize clean mass transit in and between every major American city, third to reduce the deficit, and fourth to massively increase energy research by the National Science Foundation and the Energy and Defense Departments' research arms.”

Such a plan has the following advantages. The tax is small and less intimidating than the one I have proposed. The rebates more clearly benefit the poor. Monies spent to promote alternatives capture the collective imagination of the conservation set. Such a plan would set America headed in the right direction.

Unfortunately, such a plan would only be a down payment on the road to an effective tax. The tax itself is too small. Gas prices have gone up $1 in the last year with only a minimal effect on behavior. Furthermore, if it is not COLAed (increased with the cost of living) its impact would be gone in a two or three years.

Figuring out who is poor is hard enough but figuring out who has unusual driving needs is legislatively impossible.

At the present time there should be less money collected in the name of Social Security not more. That is a story for a different blog. As for subsidizing clean mass transit and supporting energy research this is the perfect grist for the “there go those tax and spend guys again.” (See also Why Not Use the Money to Support Alternative Energy) Finally, reducing the deficit is a noble goal but the total tax here is $100 billion dollars a year after all the above proposed spending what would be left could be taken up by a middling earmark.

If Mr. Friedman can capture the imagination of the American public I will be on the front lines supporting him. I hope that in the interim he develops an even stronger plan for America.

The following is a link to his website.
http://times.discovery.com/convergence/friedman/addictedtooil/addictedtooil.html

Summary to Date

This blog is based on a talk I give on this subject. Up to this point I have given the narration of my talk, addressed questions that I usually get in the ensuing discussion period, and commented on the work of Vice president Gore and Thomas Friedman. At this point I am going to let people take in what is here.

I would ask if you visit the blog that you do one of the following.

If you have a question, concern, comment please comment in the blog or email me directly.

If you like the blog I would ask that you consider the following.
If you are a member of a group that would be interested in hearing the talk please contact me. I would be happy to present it.
Please consider sending it along with your endorsement to four friends.
Please consider sending it your congressman or senator with a note, “I support these ideas and would like you to as well.”

Below is a summary to date to help you navigate through the blog.


The nature of the problem Entries 1 to 4

Proposed solutions and their problems Entries 5 thru 8

The energy answer Entries 9 thru 12

Benefits Entries 13 &14

Answers to FAQ’s Entries 15 thru 18

Mr. Gore and Mr. Friedman Entries 19 & 20

SetAmericafree - More Quickly

SetAmericaFree.org is a website dedicated to weaning us from our dependence on (foreign) oil. They do a terrific job of outlining the problems that this dependence causes for all of us. They have a lengthy solution to the problem. That solution involves a host of subsidies to every manner of alternative energy source. They proudly announce that there plan will result in the decrease of our utilization of oil be 8 million barrels a day by 2025 a span of 19 years.

The problem is that they still don’t address the underlying problem which is too much demand. A significant tax on energy combined with a rebate would curb that demand and steer people toward the alternative fuel of their (not the government’s) choice and set America free a lot more quickly than the plan proposed by those for whom it is their stated purpose. When market forces came into effect between 1978 (the last year before the second oil embargo) and 1982 our oil consumption dropped from 18.9 million barrels a day to 15.3 million barrels/day. That is 3.6 million barrels in only four years! That occurred without any of the expense and inefficiencies of government subsidies. (See Why Not Use the Money to Support Alternative Energy).

We all want to get to the same place; I just want to get there a whole lot faster, and we can.

Dam Demand

The Energy Answer offers a comprehensive solution to one of our most important and pervasive problems. One can quibble about details, like what to tax, how to tax it, how much to tax it, and what to do with the revenues. However, the underlying premise - that we must address demand for fossil fuels as opposed to increasing supply - is unassailable. Expanding domestic energy production at the expense of the environment or lavishing subsides for alternative energy at the expense of taxpayers only will increase supply for an ever expanding void of demand made worse by the very increase in supply that these policies promote.

There is really only one way to dampen demand for energy and that is to raise the price of energy. Raising energy prices will dampen demand as surely as water runs down hill. Whether one remembers the history of the 70’s or looks at the ups and downs of current energy prices this principle is demonstrated over and over again to all of us.

Taxing energy reliably and consistently raises the price of energy. This is a very good thing. It dampens demand, the most important thing we want it to do. The money goes back at least to our government (and in this proposal back to the people) as opposed to people and governments that hate us. By creating a consistent market, one that we control, not OPEC, we can develop our energy future. This simple example will illustrate how important consistent markets can be. It takes 3 to 5 years for a car company to tool up and market a new car. Should Ford be designing cars for a world of gas at $3.25/gallon or for gas at $2.25/gallon? Two months ago when gas was $3.25 that would appear to be a no brainer. Now what should Ford be betting what might be it’s last chance on?

This fall, when you hear candidates say we should open up ANWR or subsidize hybrids you can just shake your head and say, “You just don’t get it,” because the problem is that Damn Demand.