The Energy Puzzle, solve it for the energyanswer

America uses 7 billion barrels of oil a year. The price of oil for the foreseeable future will be at or above $100/ barrel. So Uncle Sam’s oil bill is $700 billion annually. Right now we are on the verge of a double dip recession. To stimulate demand the president has proposed a package of tax cuts and new spending worth $450 billion. However, for every 10% we cut our oil consumption we save $70 billion! For every $10 decline in the price of a barrel of oil we save $70 billion!

If we could cut our oil consumption by 20% and drive down the price of oil to $50/barrel we could save $420 billion dollars essentially the equivalent of the president’s proposal every year. If we could do it without raising taxes or spending, that is it was revenue neutral, it be like found money!

So let’s see if you can come up with a plan that would cut consumption by 20%, drive down the price by 50% and be revenue neutral.

Before you start you will need to understand the laws of supply and demand but these are pretty simple. There are two.

The first says that Price is proportional to demand and inversely proportional to supply.
P ~ D/S
This just says the more people want something the more you can charge.
The more of it there is around the less people will have to pay for it.

The second say demand is inversely proportional to price.
D ~ 1/P
The cheaper something is the more people will want to buy it.
The more expensive it is the less people will buy it.

Using these simple principles see if you can come up with one or more solutions and literally save the country.

Shifting taxes; Creating Jobs

The results of President Obama's attempt to recover from recession are compared to those of Ronald Reagan. One of the most important differences between the two administrations is what happened to oil prices during their respective first terms. When Reagan came to office oil prices were at an all time high. As a result of conservation measures inspired by those high prices we cut our consumption by 20% and oil prices dropped 75% by the end of his first term.
Since President Obama came to office, oil prices have gone from $40/barrel to $90+/barrel. The stronger the recovery the higher that number will go. we can probably expect that oil prices will TRIPLE by the end of Obama's first term. Since OPEC is going to be taxing us anyway let us beat them to the punch by shifting taxes from income (productivity, good) to oil (consumption, bad). Tax gasoline at $1/gallon or oil at $20/barrel (it amounts to about the same dollars), add $1/gal or $20/b at one year and again at two years (total $3/gal or $60/b). Every dollar is rebated back to the consumer at a flat rate to his income tax.
The price at the pump may be $4.50-$5/gallon but $3/gallon comes back to us instead of going to OPEC.
If in response to higher prices we forced down the price of oil back to $40/barrel we would pump more than $400 billion back into the economy annually. That is more than half the one time stimulus package every year without raising spending or taxes.
$400 billion/year would get a lot of people back to work.

A Bump in the Road to Recovery

Sometime next year we are going to notice that a funny thing happened on the way to the economic recovery; we got hit with a massive tax. The tax will be at least $400 billion dollars annually, about half of the one time stimulus package. However, instead of building electric grids and roads and paying policemen and teachers this revenue will fund such destructive enterprises as global terrorism, the Iranian nuclear program, and Russia’s rearmament. OPEC will impose the tax when our oil appetite returns and oil prices go back above $100/barrel.

However, there is a solution; it requires some foresight and political will on the part of the public. It requires that we understand that our American love affair with cheap oil is actually more like an abusive relationship. We need to get out.

The solution is as follows. Tax gasoline starting at $1/gallon and raising that $1/year until the tax is $3/gallon (revenues $450 billion). Rebate the tax at a flat rate to all consumers so that every man, woman, and child in America gets a check for approximately $1500/year. The rebate goes up or more probably down because the rebate solely comes from the revenues from the tax. However, under any circumstance, we have an energy policy at no net cost to the taxpayer.

The day such legislation is passed oil prices drop because we the people, not politicians or pundits, would be saying we are finally going to get serious about our abusive relationship with oil. The price would continue to drop because of the effect such a tax would have on demand. After say a $20 drop in the price of a barrel of oil the government says it will collect the next ten-dollar-a-barrel drop as a tax. (Essentially, OPEC would be paying the bill.) With that $50 to $70 billion/year we build a 21st century power grid, help American car manufacturers retool to build cars that get 75+ mpg, fund renewable energy research, and expand public transportation.
With such a plan, we could be free of imported oil by 2025 and free of oil in any form by 2040. With these billions re-channelled, we can finally get out of bed with the people who are trying to kill us, and cozy up with a healthy, homegrown relationship to energy—one that gives back at least as much as it takes.

Making the world a cleaner, safer, and yes freer place

One of the great problems with our addiction to is that the money goes to unsavory people. That problem was highlighted on two different stages in the last month.

First, Russia welcomed President Obama warmly on his first trip to Moscow. Think back to a year ago when Russia was invading its neighbor and our ally Georgia. Since then the Russian economy has gone into the tank in large part to collapsing oil prices. As a result Russia is a lot more willing to be accommodating with us and the rest of the world. This will last as long as oil prices are down which in turn will last only until the economy recovers.

Even more striking are the events in Iran. Without high oil prices to prop up the economy the true nature of Ayatollah Khameni’s militant theocracy stands out in sharp relief for all the world to see. Going forward it will be hard for world sanctions to have an effect if oil prices rise back to above $100/barrel and Iran is awash in petrodollars (or euros).

But we can make a difference. We can cut our use of oil and keep down the price if we are willing to tax it. Taxing oil will make America a cleaner safer place. It will also make Iran a freer place.

The one minute summary

This is a one minute summary of everything else on this blog.

Give every man woman and child in America $500 in exchange for raising the tax on gasoline $1/gallon. At the end of one year the tax is raised to $2/gallon and each person gets $1000 plus or minus the difference between the tax and the rebate of the first year so that not a penny extra tax is collected or a penny extra rebate is paid out. With such a plan you take a huge leap forward on the road to oil independence at no net cost to the consumer. As you suggest the tax is COLAed so that its impact is not diminished by inflation.

The day such legislation is passed oil prices drop because the public would be saying we are finally going to get serious about our addiction to oil. The price would continue to drop because of the effect such a tax would have on demand. After 6 months when the price of oil is below $60/barrel tax oil at $10/barrel. If oil rises above $70/barrel the tax is put on hold. This ceiling however would also be COLAed so it would drift up with time. While consumers will be paying this tax it is part of the mechanism that will keep oil from once again going back to $100+/barrel so essentially, OPEC would be paying the bill. With that $50 to $70 billion/year we build a 21st century power grid, help American car manufacturers to retool to build plug-in hybrid carbon fiber cars that get 75 + mpg, put money into renewable energy research, and rebuild our infrastructure with emphasis on public transportation.

America is REALLY addicted to oil!

America is addicted to oil. No really, America is addicted as in physically and psychologically dependent on oil.

For nearly 30 years the world has been flush with oil and the signs of addiction weren’t there. However, when supplies got harder to find we started behaving like the addicts we are. While trying to maintain an air of respectability we would find ourselves, hat in hand, begging the world’s biggest pusher, Saudi Arabia, for a bigger fix. We let lesser drug lords, Venezuela, Russia, and Iran have their way for fear of a drop in our mainline.

Meanwhile at home we are willing to tear up the yard - off shore and ANWR - looking for that stash we know is there. Even though it will be years before we can get our fix, just the knowledge it is coming is somehow comforting.

No matter what the price, we pay. We accumulate massive unpayable debt, reflected in our trade deficit, and ruin our credit, reflected in the shrinking dollar. No monetary price is too great as long as we get our fix.

All the while we realize our dependence on fossil fuels is causing long term and perhaps terminal damage to our environmental health. Nonetheless, we can’t seem to bear the pain of withdrawal or the process of transition to new alternative behaviors so we continue to look for new ways to feed our habit regardless of the cost to ourselves and our children. Given that America is addicted to oil, what is the solution?

Increasing supply in any form is certainly not the answer. Opening offshore drilling or the strategic petroleum reserve or gas tax holidays only obscures the problem and delays the solution. This is like relaxing border restrictions or releasing contraband onto the street to help with a crack epidemic.

We believe, as has been advocated in editorials, Op-Ed columns, and letters to the editor that a good place to start would be with a healthy increase in the gasoline tax. We believe that this would act like an Antabuse for our oil addiction. Antabuse is a drug given to alcoholics to discourage them from drinking. In the same way a healthy increase in gasoline prices would discourage our oil addiction as has been repeatedly shown to happen wherever they have been applied.

We understand that such taxes would precipitate withdrawal symptoms as they did when OPEC raised prices. Therefore we advocated rebating the tax back to the consumer at a flat rate so the tax is revenue neutral but those who use less energy are rewarded by those who use more thus incenting everyone to seek recovery.

We realize that his would be the first step in a long and at times arduous task of recovery. As a people we would have to transform habits practiced for generations. There will always be the seductive sirens of oil tempting us back to our old destructive habits.

Nonetheless, we believe that a gasoline tax would have an impact far beyond its inherent effectiveness. The most important step in recovery is when the afflicted acknowledge the problem and make a sincere commitment to change. By making a commitment to permanently higher gasoline prices Americans would be acknowledging to themselves and the world we are finally willing to honestly deal with our addiction to oil.

Addiction can be a chronic relapsing disease whose outcome is never certain. Repeatedly, we have sought to change our behavior in 73, 79, 91, 2001 only to relapse when oil prices eased.

Addiction can lead to financial ruin and even be fatal. We are on our way to the former and perhaps headed for the latter.

The longer one lives with active addiction the harder it is to change. It is long past time we acknowledge the clinical reality that is our addiction to oil and made a concrete commitment to our own recovery.

Finally, when one does control their addiction they find themselves in a better place. An oil independent America would not be a land of hair shirts and ox carts but one of homegrown 21st century technology powering us into the future. We believe that future could and should start with a national pledge, in the form of a gasoline tax, to acknowledge and start treatment for our addiction oil.

Those good ol' high gas prices

Gasoline prices have hit record levels and that is a good thing.

Because gas prices are high, 20% of new car sales consist of high mileage compact cars. One Ford executive said that was the highest percentage he had seen in his 31 years in the industry.

Because gas prices are high, all around the country public transportation is seeing unprecedented growth in rider-ship. Buses and train that were nearly empty last year are filled to overflowing in the last month according to the New York Times.

Because gas prices are high, people are driving differently thinking about where they will drive, if they will drive, and how they will drive.

As a result of the high price of gas we are beginning to use less oil which will improve our homeland, economic, and environmental security. If we keep these behaviors up we will become less dependent on foreign oil and we will see the price decline.

But therein lies the problem. It is the price of oil that gets us to behave in a way that is good for all of us but when we behave that way the price signal goes away and we go back to our dangerous, wasteful ways.

However, there is a solution. Instead of letting OPEC set the price of oil we should. Here is how we can do that.

To begin with gas is going to go to somewhere between $4.50 and $5/gallon. In fact it will keep going up until we cut our consumption enough so that prices stabilize. This will hurt so to begin with lets give every man, woman, and child in America $500. That means reducing payroll taxes by that amount, increasing social security payments, and even increasing welfare payments because all Americans are hurt by higher gas prices. (Cost: about $150 Billion dollars.)

After that has happened then let’s raise the tax on gasoline by a dollar a gallon. (Income: about $150 billion). OPEC is going to let gas prices get that high anyway so lets beat them to the punch. Instead of OPEC collecting that $1/gallon we will have already given it to ourselves.

Because gas prices are high, people will batch their errands, car pool, and drive 55. They will find public transportation attractive as well as high mileage cars. As a result of our success in weakening demand the price of oil will begin to fall.

Next year we could do the same thing or better, because of a weakened price signal from the lower price of oil we could give everyone approximately $1000 and increase the tax to $2/gallon. If Uncle Sam had collected more than $500/person people would get more than $1000 but if he collected less then they would get less. However, every penny that was paid as a tax would come back in the rebate.

There is no question that this would work because it has worked before. In 1979 when oil prices doubled for the second time in a decade Americans did all those things that save energy. As a result we cut our oil consumption by 20% in four years, and the price of oil dropped by 75%!

Richard Haass, president of The Council of Foreign Relations, writing in the most recent issue of Foreign Affairs about America regaining some of its influence in the world states, “Energy is the most important issue . . . Reducing consumption would lesson the pressure on world oil prices, decrease U.S. vulnerability to market manipulation by suppliers, and slow the pace of climate change.”

In 1979 John Anderson proposed a $.50/gallon tax on gasoline rebated through lower payroll taxes. If that tax had been implemented and rose with inflation we would all be driving 50+ mpg cars and we would have modern public transportation nationwide and as a result be in control of our energy future.

Again, we are presented with the opportunity to slash the price of oil by keeping gas prices high. We ought not miss the opportunity again.

Corrections

In Addicted to Oil I said the United States has 3% of the world’s population. The correct amount is 4.5%.

The rule of thumb has been that one penny/gallon tax on gasoline raises $1 billion in revenue. However, the US consumed 146 billion gallons of oil in 2006 so a more accurate number is 1 penny/gallon raises $1.5 billion. This has been changed in the Answer in two parts Part I.

Because of the above adjustment the tax and rebate were changed so that the tax is $1 increase per gallon per year to three dollars and the rebate is $500 for the first year, $1000 for the second year, and $1500 for the third and subsequent years. The tax is fixed; the rebate goes up or down depending on how much tax is actually collected. Still every penny that is collected as tax goes back to the consumer in the rebate.

One should also keep in mind that this is per person so that is $6000 for a family of four.

Tax or Cap and Trade? No!! Tax AND Cap and Trade!

Recently it has become fashionable in the environmental community to argue the merits of taxing energy versus cap and trade schemes. This is at best a waste of, well, energy and at worst counterproductive to environmentalists' ends. Both taxing and cap and trade have their merits and in no way are they mutually exclusively. After years of trial, Europe is trying to get through the many complexities of cap and trade. But before the concept of cap and trade was developed they had high energy taxes. And as a result of that tax structure Europeans per capita use half the energy that Americans do.

It has been said of energy taxes that they would end up being just as complex as cap and trade. That depends on where they are applied. The tax that more Americans pay more often and with less hassle than any other is an energy tax. We pay that tax every time we buy gas at the pump. Cap and trade to regulate auto emissions would be a nightmare whereas taxing gasoline is demonstrably the simplest of solutions. On the other hand cap and trade might be the best solution to curtail industrial carbon emissions.

In the end everyone in the environmental community thinks that energy taxes work; they just think they are not politically feasible. If people in the environmental community don’t think energy taxes are feasible, they are right. They are right precisely because they don’t think they are feasible. If the people who every day are telling us we are on the verge of an environmental apocalypse won’t support this fast effective tool to fight global warming then no one will. If environmentalist question the feasibility of energy taxes then the debate should center around how to make them feasible not how to abandon them.

Who then is the winner tax or cap and trade debate? Why it’s Exxon Mobil.

Automakers for Energy Taxes! READ ALL ABOUT IT!

Recently, congressman John Dingell (D-Michigan) introduced legislation for a gasoline tax. Cynics feel that this was done at the prompting of the auto industry to introduce a bill that is sure to go down to defeat and sink its future prospects. If that is the case how should those who support gas taxes respond? I would suggest with gratitude to both Congressman Dingell and the auto industry.

Obviously, a gas tax is a sure way to save the domestic auto industry. The greatest enemy of any industry is uncertainty. Car makers are designing cars for the future. Will that future have gasoline at $2/galoon or $12/gallon? What that price is will determine what kind of cars Detroit should make. It would be a lot easier for Detroit to be designing cars at a stable energy price. A gasoline tax would do just that! With stable energy prices Detroit would know just what kind of car to design.

At the beginning of the decade Ford promised higher mileage cars but the market wouldn’t support this strategy so they stuck with their traditional models and then got really stuck when gas prices went up. The next car Ford designs may be its last. So they need to know what to shoot for.

Auto makers have history of supporting gas taxes. When China established its very strict CAFÉ standards the energy companies asked that they pass a gas tax instead.

In the end whether automakers want a gas tax or not the environmentalist response should be to congratulate them on their corporate wisdom, point out how beneficial it is for them, and encourage them to more openly support gas taxes for everyone’s mutual benefit. Giving them a reason to back gas taxes and forcing them to repudiate them at their peril might be a way to the auto industry to back something that is good for them even if they don’t realize it

Taxing Coal - It's Electric!

It has been a long time since I published but here is a new wrinkle on an old problem.

Taxing gasoline or oil and rebating the tax back to the consumer has the advantage that it immediately incents people to save energy as well as give them the opportunity to purchase energy or its utilization in a way that is most economical for them. They can choose plug in hybrids or biofuels or public transportation based on how it suits their demands and the cost of the supply. However, when it comes to electric generation the purchase and utilization is collective. The consumer doesn’t have control over the source of the energy generation. Higher energy taxes would promote conservation but the end consumer would have no power to decide how the power he uses is generated.

To solve this problem I would propose the following. This solution would use energy taxes to increase the cost of fossil fuels and return every penny back to the consumer in a way that promoted conservation as well as provide funds to develop alternative energy sources quickly and efficiently.

1. Tax electric generation based on the carbon emissions of the fuel used. Coal goes from least expensive to most expensive. Renewables are the cheapest.

2. Rebate half the tax to all consumers at a flat rate no matter how much energy they use. People get a break on their bill with the biggest breaks going to the most conservative.

3. The other half of the tax is invested in renewable or non-carbon producing energy generation by the energy companies. The consumer gets stock in the company equal to his or her energy rebate. Interest and dividends can be use to further decrease their energy bills or the stock can be sold, traded, given away, or inherited.

All the tax reverts to the consumer. Half comes back in a flat rebate; the other half comes back as a real asset in a conservative investment vehicle. Energy companies have large sums of money and mandates to invest in non-polluting energy sources. Another benefit might be less NIMBYism. The windmill in your harbor is a lot better looking when it is YOUR windmill.

This plan would probably best be suited for residential electric customers. An alternative tax structure or Cap and Trade might be a more suitable model for industrial energy consumption.

How to view this Blog

The purpose of this blog is to give another venue of a talk on the subject of energy independence. The blog is set up so that if you start with the latest entry and work down you will go through my entire presentation with some additional material addressing frequently asked questions. The premise of the talk/blog is that adequate energy taxes provide a complete answer to our energy problems. So if you are interested start with the next entry and work your way down. I think you will find the topic and the solution intriguing.
Geoff Berg

Addicted to Oil

This is the phrase made famous by our President in his 2006 State of the Union address. What does he mean by this?
Well America has 4.5% of the world's population but uses 25% of its oil. Per capita we use between 50 and a100% more oil than Europeans do. Furthermore, 60% of that oil is imported. This is an increase from 40% 25 years ago. This significantly impacts three factors that effect our long term safety and well-being.

Geoff Berg

Environmental Security

Our profligate use of energy is the single biggest threat to the global environment. Burning fossil fuel is of course the source of global warming. What is more this is also the thing that collectively we as consumers have control over. This was borne out in a book published by the Union of Concerned Scientist, The Consumers Guide to Effective Environmental Choices. In this book the authors looked at all the things that we could do that would have the biggest impact in protecting the environment. The 200 page book is summarized in the following table that appears in the book.

Priority Actions for American Consumers

1. Live close to work.
2. Think twice before purchasing another car.
3. Choose fuel-efficient cars.
4. Reduce travel.
5. Use alternative transportation
6. Eat less meat.
7. Buy certified organic produce.
8. Choose your home carefully.
9. Reduce costs of heating and hot water.
10. Install efficient lighting and appliances.
11. Choose renewable energy.

These are the things that we can do that will have the biggest impact in improving the environment. What is striking is that 9/11 items on the list have to do with conserving energy. Further in the text of the book the authors note that while they did not want to assign priorities, our use of cars and light trucks has the most significant impact.

So if we want to do the most we can to protect the environment we need to reign in our use of fossil fuels.

Homeland Security

Most of the threat from terrorism comes out of the Middle East. Not surprisingly so do most of the funds that finance those activities. In 2002 the Council of Foreign Relations did an extensive study of the sources of terrorist funding. One of the more damning findings they reported is spelled out in the following quote from that study.

“However, it is worth stating clearly and unambiguously what official U.S. government spokespersons have not: For years, individuals and charities based in Saudi Arabia have been the most important source of funds for al-Qaeda; and for years, Saudi officials have turned a blind eye to this problem.”

The Council on Foreign Relations

Since most of this money moves through non-conventional channels this seems to still be true today. But the real problem is where does all that money originate? It starts with us the consumer. Every time we fill-up some portion of that money ends up in the Middle East and inevitably some of that ends up in the hands of terrorists. We are the source of terrorist funding; we are paying for both sides of the war on terror.

As Pogo said many years ago, “We have met the enemy and they are us.”



YOUR OIL DOLLARS AT WORK.

Financial Security

Recently we have seen how volatile oil prices can effect the economy. Last Fall, when supplies tightened, prices went up contributing to the largest trade deficit in the nations history. Today prices remain high making financial markets nervous with the threat of inflation and higher interest rates.

These disruptions, of course, are nothing compared to the oil shocks of the 70’s. In 1973 and 1979 Middle Eastern conflicts prompted oil-producing nations to turn off the taps. The transportation sector ground to a halt. The pictures we saw of long gas lines after Katrina were the norm all across the country.

The rest of the economy followed transportation into the breakdown lane. There was double-digit inflation coupled with high unemployment, stagflation. These were the worst economic downturns this country had seen since the Great Depression. While today a smaller portion of the overall economy is dependent on oil, a larger percentage of that oil is imported. The bottom line is that a significant disruption of oil supplies could once again have the country running on empty.

Our continued dependence on oil leaves our country vulnerable to economic blackmail. For instance, if we are going to threaten the political survival of the current regime in Iran, they are certainly in a position to threaten the economic survival of this country.

Current Solutions

A comprehensive energy policy should protect the environment, and decrease our dependence on foreign oil. It should do these things without hurting the economy and it would be helpful if it cost as few tax dollars as possible.

Proposed solutions are generally multi-faceted and have elements that either increase the domestic supply of energy or decrease demand.

Solutions that increase supply include.

1. Relaxing restrictions on domestic energy drilling.
2. Subsidizing domestic energy producers.
3. Sudsidizing/supporting research in alternative energy sources.

Solutions that are aimed at decreasing demand include:

4. Subsidizing/supporting research in greater fuel efficiency.
5. Compulsory increases in fuel efficiency standards for the nations cars and light trucks.

The first four policies are part of the most recent energy bill to pass congress. The fifth solution is something that has been promoted by the environmental community for the last decade. Unfortunately, these solutions collectively or individually do not offer much hope of solving our addiction to oil. In order to understand this one needs to understand the economics of oil.

The Economics of Oil

The first thing to realize about oil is that it is a fungible commodity. All this means is that the price of oil is the same no matter where it is traded in the world. As a result anything that effects the supply or the demand for oil anywhere in the world will predictably affect the price of oil. Therefore, for oil the laws of supply and demand are universal. So if we understand the laws of supply and demand we can easily see how policy will effect how and how much we use of it. So let’s look at the laws of supply and demand. There are two.

The first law of supply and demand says that price is proportional to demand and inversely proportional to supply.

P ~ D/S

This is just common sense. The more people want something, the more they are willing to pay for it. Conversely the more readily available something is, the cheaper it will be. Whenever, we hear about the price of oil we hear about factors of supply and demand that are effecting it. The latest manifestation of this is, prices are high because the summer driving season is coming up (increase demand) and there is uncertainty in Nigeria and Iran (decrease supply). Note: factors in the North America coupled with factors in Africa and Southwest Asia affect the world price of oil because it is fungible.

The second law of supply and demand says that demand is inversely proportional to price.

D ~1/P

Again, this is just common sense. The more expensive something is the less likely people will buy it. Conversely, the cheaper is is the more people will be willing to buy it.

Using these very basic economic laws we can see what how effective the proposed energy solutions really are.

Increasing Supply; Increasing Demand

It would be hoped that increasing the supply of domestic energy would make us freer of foreign energy sources. Therefore, the administration has promoted:

Relaxing restrictions on domestic energy drilling.



Subsidize energy producers.



Subsidize and support research in alternative energy sources.

All of these ideas would take time to bear fruit and at least the first two are harmful to the environment. More importantly however is the fact that they would be ineffective. The laws of supply and demand make this obvious.

If you increase supply then price declines.

p ~ D/S

But when price declines then demand increases

D ~ 1/p

Therefore, when supply increases then demand increases. We end up using more energy because we have more energy to use.

Moral: We can’t grow our way out of the problem.

I May, I Must, I Want

If we can’t solve our problems by increasing supply, then we need to decrease demand.
Ideas that have been proposed to decrease demand include:





Subsidizing and supporting research in improved fuel efficiency.






Compulsory increases in fuel efficiency standards for cars and light trucks.









The problem with these solutions is they don’t decrease demand.
Demand is, “I want.”
In the first case creating vehicles that have improved fuel efficiency gives people the means but it doesn’t necessarily make them want to use such vehicles. If they are unfamiliar, less safe, less reliable, harder to find fuel for, or the price of fuel falls then people may not be inclined to buy them. Improved fuel efficiency means, “I can.” not “I want.”

Compulsory fuel standards are just that, compulsory. If people aren’t inclined to cram themselves into fuel efficient cars then they won’t. After 9/11 when energy policy was being debated, environmentalists were promoting increased standards. The auto industry pointed out that 15 % of the cars they made would meet the higher standards that had been proposed but those car represented only 4% of their sales. Compulsory standards means, “I must.” not “I want.”

In order to decrease demand we want people to want to save energy.

Imagine the Future

Try the following thought experiment.

Imagine you wake up and you and practically everyone else in America are conscientious about how they use energy. They don’t dally in the shower; they turn out lights when they leave the room (even the teenagers); they keep the thermostat at 65 and put on a sweater if they are cold.

When before they go out they think if they have to go; how they are going to go; if they are going to drive; and even how they are going to drive.

When they go to the store the first thing on their mind is to buy whatever is avaible that is fuel efficient or helps to save energy. Meanwhile scientists and engineers all over the country and indeed the world are working feverishly to develop products that will help Americans in their quest to save energy. Entrepreneurs are investing in these ideas in the hopes of cashing in the next great energy saving device.

As a result of all this concerted interest in saving energy within a few short years our consumption of oil falls by 20% and the price of oil falls by 75%!

You can stop imagining now. If you are over 45 all you have to do is remember. If you are less than 45 ask your parents.


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.

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.