I urge you to read this post by solar entrepeneur David Bergeron, explaining why if you are in favor of alternative energy you should oppose subsidizing it:
Here is the real problem: Subsidies make solar appear viable today, so where is the motivation for an entrepreneur to risk money, or even focus on developing real energy alternatives when solar is “almost†there? How can an inventor justify striving with the effort it takes to really develop something great when he is competing against a straw man technology which can provide power at almost the same cost of traditional power sources today? But of course it really doesn’t.
The answer is he can’t justify the effort, so the next great thing is not developing, at least not with the sense of urgency it should be. Why enter a contest when you are competing against someone with an unfair advantage? You may be the faster swimmer, but your competitor is using flippers.
Read the whole thing.
This is exactly correct.
This is why I’m a member of the Pigou club. The most efficient way to accelerate alternatives is to bring up the price of conventional energy. (offset by reducing inefficient taxes elsewhere)
I am with Sam here. We subsidize energy in many ways that are not obvious, they are just already built into our system.
Steve
Artificially raising the cost of energy, results in more expensive energy, and this means more money is spent on energy. The only result is less money will be spent on other goods. Manufacturing requires cheap energy, and manufacturing will be done where there is cheap energy. China is manufacturing alternative energy hardware because of cheap energy. We pay more for energy, and we cannot afford to manufacture the hardware.
Seems like a plan.
Manufacturing relies on cheap electricity, which is a bit different than what Sam and steve are talking about. The Pigou Club is something started by Greg Mankiw. The basic idea is to do away with the social security/payroll tax and replace it with a gasoline tax that is essentially revenue neutral.
Would this impact the price of electricity? Probably to some degree, but only indirectly since we don’t use gasoline or even oil (that much) to generate electricity. Also, there are two effects from raising the price of gasoline. The first and probably the larger of the two (at least in the short run) is the income effect which will be to reduce not only consumption of gasoline, but probably other goods as well. Note however, that this would be offset by an increase in incomes due to removal of the payroll tax. The other effect is the substitution effect. That is people would find ways of still accomplishing what they did at the lower gas prices at the higher prices by switching to other options.
Also, raising the relative price of currently cheap methods of producing electricity (as opposed to subsidizing the alternatives) not only makes the alternatives look more attractive it makes investing in developing better/cheaper methods of providing energy via the alternatives more attractive as well.
Yeah, ignoring externalities (especially negative ones) can be great…for awhile.
Or to put a bit of snark on it…are you really arguing for more pollution not less?
@Steve Verdon
… The basic idea is to do away with the social security/payroll tax and replace it with a gasoline tax that is essentially revenue neutral.
I am baffled. Is the purpose to lower gasoline use? If so, what about diesel? What about the other petroleum products? As gasoline use decreases, does the tax increase?
The problem with the alternatives is the amount of stored energy. Fossil fuels have millions of years of energy stored in them. Wind and solar will never be able to match fossil fuels. Nuclear is able to compete with fossil fuels, but it is deemed undesirable. Natural gas is the cleanest fossil fuel, but it has the least stored energy. Hydrogen is an alternative, but it will require an undesirable energy source to make it.
Artificially raising the cost for conventional fuels will have the same effect as burning half the crop production. It may raise the price, but the time and materials to produce the burned crops has been lost.
Or to put a bit of snark on it…are you really arguing for more pollution not less?
If the idea is more electric cars, this will generate a lot more pollution. Batteries are one of the dirtiest products being manufactured, and their disposal is another pollution problem. In addition, batteries leak.
Yes, to the extent that gasoline consumption is a factor in GHG emissions and global warming, the idea is to reduce consumption and thereby reduce GHG emissions. I’m not sure of the details of the proposal, so not sure if it covers diesel.
Nobody has advocated replacing fossil fuels entirely via this approach.
I’m calling Bravo Sierra on this.
You weren’t talking just about gasoline in regards to china, but cheap electricity as well. How much coal does china burn? I have no idea, but if they have cheap electricity, I wouldn’t be surprised if they use quite a bit…an extremely dirty energy source.
So it really comes down to the numbers in terms of pollution, and it isn’t just electric cars, but also just more fuel efficient cars, or less consumption on the whole.
And there are other factors besides pollution as well, such as tax incidence, road congestion, and even national security.
@Steve Verdon
My original comment was a response to @Sam’s:
… The most efficient way to accelerate alternatives is to bring up the price of conventional energy. …
I googled Pigou, and I found the economist. It looked like he had a theory about something similar to @Sam’s comment, but I am tired of going through all the economic theories.
The “Pigou Club” proposal seems daffy to me. If it advocated raising gasoline taxes, it would make some sense. Those who can afford to switch fuels will avoid any taxes, and those who cannot will bear the entire burden of government spending. This would be a regressive tax on steroids.
If they want to raise fuel efficiency, the CAFE standards are a better method. I personally am not thrilled with this approach, but it has proven effective.
I suspect the advocates of the “Pigou Club” do not understand the science. I also suspect they do not understand the refining process. The gasoline produced during the refining process will either be sold or burned off. If necessary, refineries will move out of the country.
Artificially raising the cost of gasoline will drive users to alternative fuels, and it seems like the alternatives should not produce CO2. Most alternative fuels require substantially more energy to produce the equivalent conventional fuel. The result is throwing away energy similar to burning crops.
Having China manufacture the hardware for lower emitting CO2 automobiles may be a net increase through their coal use. The surplus gasoline will also be used by somebody, and they will probably spew more CO2 than US automobiles.
I usually try to avoid Global Warming debates, and if I had known about the “Pigou Club”, I would have stayed out.
A gas tax to pay for social security seems like a questionable proposal to me. A tax on one commodity to fund an $800 billion social program? Not sure how anyone could accurately predict how much revenue the tax would raise over the long term, much less the inevitable variations in revenue.
@Andy- The idea, as usually expressed by Mankiw, is to stay revenue neutral. Tax gasoline to try to make up for its negative externalities and reduce its usage (which would also level the playing field with other energy sources), then reduce other taxes that we know cause economic inefficiencies, like the income or payroll taxes.
Steve
steve,
I understand the concept, I’m questioning whether it would work. How is it possible to stay revenue neutral when one goal for the tax is to reduce gasoline consumption? It seems to me that those two goals are not compatible. At some point revenue from the tax will decrease due to decreased consumption. If the tax is raised to maintain revenue then that would create a feedback loop where tax increases would keep chasing reductions in consumption. That can’t last for long. The alternative is that you can’t stay revenue neutral and so you’d need revenue from somewhere else to fund social security.
I dont think the idea of a Pigou tax is to raise a constant amount of revenue. You choose your metric for taxing, as an example, gasoline. You figure that externalities mean that gas should cost 50 cents more per gallon. You add that tax then adjust other taxes as needed for neutrality. You would not, by my understanding, raise that 50 cents if consumption went down. I dont think the goal would be to eliminate gasoline consumption, just makes its consumption based more upon its true costs, however you determine that. In practice, it would require some fiddling with the other rates methinks.
Steve
The idea underlying a Pigouvian tax is to reflect the negative externalities of a good in its total price (including tax).
In general if you tax something, less of it will be produced than would otherwise. Our present system of taxation taxes employment and income which seems perverse.
I agree w/ Andy, a consumption tax set at levels intended to reduce consumption works at odds with revenue-generating purposes. States raise their taxes on cigarettes and gambling and booze, and yet somehow don’t increase revenue.
It would be one thing if the taxes were earmarked to go into infrastructure maintenance and improvements or towards whatever other social costs people have convinced them selves are caused by automobiles, but to use it to replace the under-funded old-age pension programs is a bit unsettling.
For a gasoline tax to change behavior, it would need to be very, very, very high. The tax would need to be high enough to make purchasing a new car economically attractive. It would probably need to add about $5.00 to each gallon of gas, but if other taxes decrease, that number would need to be higher.
I think it takes 5-10 years to turnover the automobile population. This may speed it up, but some people cannot afford to buy a new car every four years. I keep a car until it costs more in repairs than a new car. I could probably absorb the added costs, but a lot of people could not. For these people, an electric car is not an option.
Does anybody consider these factors? It seems to me that most economic theories have little or no relation to reality, but I really do not know.
Just to be clear, I understand Pigouvian taxes, I support the concept generally, and support such taxes on gasoline specifically. What I’m skeptical about is the notion that Pigouvian tax on gasoline (or Pigouvian taxes generally) can replace payroll taxes. I was specifically responding to this by Steve V above:
I haven’t researched the details of what Mankiw proposed, but I’m skeptical of that statement.
I think Steve V was just paraphrasing Mankiw. The idea is not to replace income/payroll taxes, but to tax gasoline to reflect its true costs. That revenue allows you to reduce some other inefficient tax, though I suspect Mankiw would also support taxes aimed more at consumption than income.
@Tasty- It is pretty inelastic, but not totally. There are still movements around price. but since we started out talking about alternative energies, if gas prices reflect real costs, then alternatives might look better.
Steve
The idea underlying a Pigouvian tax is to reflect the negative externalities of a good in its total price (including tax).
Thank God someone stepped in.
No one in their right mind should have a problem with this conceptually. The trick is to accurately estimate the externalities, and to prevent the zealous little bastards with an agenda from monkeying with the estimate.
CAFE standards have proven to be remarkably ineffective at reducing gasoline consumption. For example, light trucks have laxer standards…and that has led to….? SUVs, a notorious group of cars with piss poor gas milage. Also, a more efficient car may in fact induce more driving, not less…Jevon’s Paradox and all that. That in turn could increase congestion on the roads and reduce the efficiency gains…possibly even wipe them out.
You seem to have this implicit assumption that the amount of oil that is going to be refined is fixed and cannot be changed. This is a faulty assumption, if that is indeed what you are assuming. Another option is to refine less oil.
Or simply consuming less gasoline. For example, a more carefully planned route for running errands could save gasoline. Carpooling to work, taking mass transportation, and when buying a car going with a more fuel efficient model. Just because you can only think of one, buying a new car, does not mean that is the only option.
Depends on the price elasticity of demand. You are basically stating that the elasticity is near zero, that is for a given percentage increase in price there would be nearly no decrease in demand. Frankly this flies in the face of empirical studies on this. Short run elasticity is around -0.25 that is a 10% increase in the price would result in a 2.5% decrease in demand. The long run elasticity is higher probably in the -0.5 range. If those estimates are reasonably close and the Pigou club would raise prices say, 25% the long run decrease in gasoline consumption would be about 12.5%.
This is laughable, the point of the tax is not to induce the purchase of a new car, but to reduce consumption. When a household/individual is looking to buy a new car the tax might induce the purchase of a more fuel efficient car, but there are other ways to reduce consumption. You are looking at the most extreme case, saying it wont happen, and concluding there would be no impact on demand absent a high tax.
Seems to me when it comes to economic theories you are talking out of your fourth point of contact.
Exactly the point. Taxing labor and income derived from labor is a good way to reduce labor and the income derived from labor. Why should we want to do that? Why not tax something else that has undesirable consequences that are almost surely not reflected in the cost function of the firms producing that commodity? That seems like a far more reasonable policy prescription…which is one reason why you’ll never ever see it made into actual policy.
Ben once said you don’t start out with the view that government sucks and the seek to prove it. No, you don’t even have to try and prove it…government does a great job of showing that in general it sucks at coming up with good policy.
@Steve Verdon
I am not necessarily in favor of increasing CAFE standards, but it is not the worst regulation. The problem with CAFE standards is that a manufacture’s fleet is averaged, and the manufactures game the system. Gasoline consumption will rise with the population. Would the gasoline consumption without CAFE standards have exceeded consumption with them? I do not know, but I would guess it has been less. This is probably the best way to increase fuel efficiency.
It has been a while since I have had any experience with oil refining, and there may be better processes since then. Not refining as much oil is not necessarily as simple as it seems.
Changing behavior will help to lower gasoline consumption, but I doubt it will have a great impact. Lifestyle changes take a while to become permanent, and even then, many people will not necessarily consume less gasoline. Adjustments are made in other areas of one’s life. If safety is someone’s concern, then a large heavy vehicle (SUV) is going to be their choice.
I am not saying that fuel consumption will not be lowered through lifestyle changes. I am saying the impact from lifestyle changes will not be as dramatic as expected, and purchasing a more fuel efficient vehicle is a better option for the consumer. Changes for commercial trucks and fleet vehicles would have a much greater impact. This would include more efficient driving, routing, and vehicles.
Over the past 3.5 years the price of gasoline has increased somewhere around 80%. Has consumption decreased accordingly? If so, then raising it higher does have the intended effect, and there does not need to be any tax increase.
Seems to me when it comes to economic theories you are talking out of your fourth point of contact.
It does not surprise me, or I could be getting confused with what economics really entails. I understand engineering and the hard sciences. I expect the theory to produce better results or be thrown out. Economics never seems to take into account real people. Some are crooks, and others are lazy.
… Taxing labor and income derived from labor is a good way to reduce labor and the income derived from labor. …
I am all for reducing or eliminating all the various taxes on income, but I do not understand where the money needed by the government will be raised. I am an idiot, but it seems to me that any tax will have some impact somewhere. More importantly, who gets to decide what is undesirable or negative?
Other than the fact that it has huge loop holes which gives rise to things like the SUV. Regulations of that nature often have a “rebound effect” reducing various gains in things like MPG. That is may actually encourage more road congestion not less….then yeah, it is swell regulations.
Speculation piled on top of conjecture. Impressive.
Taxes are simple and direct ways to reduce the amount of something. It is also a way to raise revenues for other government spending. Using taxes on commodities/services that have a negative external effect is win/win in that it reduces the amount of the commodity that is producing the negative impact and raises taxes for government expenditures…okay, that last win could be questionable depending on the spending, but if it is on something that has a positive external benefit (inoculations, or maintaining sewers) it is probably a good thing.
You base this on, quite literally, nothing other than your introspection and conjecture. However, the empirical literature suggests that there will be a decrease in the short run of about 2.5% for every 10% increase in the price of gasoline. The longer run effects would be even larger, about twice as large.
Keep repeating your beliefs, but that will not transmogrify them into empirical results.
Consumption has indeed decreased quite a bit, both for gasoline and petroleum distillates. Even gasoline deliveries are down. Part of that is probably due to the economy, but part is probably due to price increases.
Of course, it is going to have an impact, that is the point of the Pigou Club, to have an impact on something that is undesirable. As for determining what is undesirable, here is a simple test with gasoline….turn on the engine to your car, close the garage door, and sit in the car. If you don’t find the outcome there undesirable, then there are some serious problems here, a major disconnect. The output of running your car is not desirable. It is a a bad side effect. A bad side effect you do not bear the full cost of. Nor do I, or anyone else who uses a car or relies on gasoline either directly or indirectly. Admittedly there are some things that are not so clear cut, but if we can’t agree that the exhaust from your car or mine is not desirable…well, just stop commenting as further discourse is pointless.
Oh and on the regressive nature of a gasoline tax…yeah it probably is, but so are payroll taxes and they are far, far worse. The low income worker has little choice but to work at the reduced wage. But with a gasoline tax they have many more options for reducing their gasoline consumption and thereby avoid the tax…is it perfect? No, probably not, but it is better than the current situation.
But like I said, you can line up a million good reasons for a policy, but given how non-rational most of the preferred government systems (i.e. something democratic) are it is unlikely that such policies will be implemented.
@Steve Verdon
But like I said, you can line up a million good reasons for a policy, but given how non-rational most of the preferred government systems (i.e. something democratic) are it is unlikely that such policies will be implemented.
Keep this up, and you will restore my faith in economics. I really am not trying to disrespect you, but trying to understand all the economic theories, rules, equations, etc. make my head explode.
That stuff comes from the nexus of political science and economics. Some of the stuff I found most fascinating…and still do.
@Steve Verdon
Speculation piled on top of conjecture. Impressive.
I did not really feel like going to the refining process. While you may be familiar with it, most people are not.
Refining oil begins by distilling it into fractions. One of the fractions is gasoline. Refining oil produces gasoline in addition to other petroleum products. Heavier fractions can be cracked into lighter fractions by breaking apart the hydrocarbon chains. Gasoline is a lighter fraction, and heating oil is a heavier fraction. Between the two are additional fractions, and these include plastics, jet fuel, kerosene, and others.
Producing more heating oil leaves less heavy fraction to be cracked into gasoline. This is the reason why changing production ratios can impact gasoline/heating oil output, and most refineries are configured to produce these two mainly.
Unification uses lighter fractions to create heavier fractions. Heating oil or petrochemicals can be created from gasoline manipulating the hydrocarbon chains.
No speculation. No conjecture.
I do not know how much capacity the existing oil refineries have for unification. I am speculating that it is limited due to gasoline being a main product.
… if we can’t agree that the exhaust from your car or mine is not desirable…well, just stop commenting as further discourse is pointless.
In an earlier comment you referenced to GHG. I assume you mean Green House Gas, and GHG is CO2. I do not consider CO2 to be a pollutant. Carbon monoxide (CO) is considered a GHG, but it is considered to be a small contributor to Anthropogenic Global Warming (AGW). Water vapor, hydrocarbons, and particulate matter are other components of automobile exhaust, but their contribution to AWG is considered minimal.
Automobile exhaust does contribute to smog, and that is why there are EPA regulations for it.
I still do not understand the purpose of the Pigou Club. Is reduction of GHG the purpose? Is reduction of conventional exhaust pollutants the purpose? Is adding a cost (tax) to adjust the price of gasoline to pay for the undesirable effect? Should the cost be increased an additional amount to further inhibit the undesired effect? If the purpose is to reduce the undesired effect and to raise revenue how is this to work? If my income rises from reduced income taxes and I decide to produce less of the undesired effect, how will this work?
I understand how separately these could work, but it seems like all these goals cannot work simultaneously. I am used to being in a small group, and we are not usually considered to know very much.
I know and have known too many people on the lower end of the economic spectrum. These folks usually are negatively by these type of plans, and they tend to be the eggs that get cracked to make the omelette.
This is laughable, the point of the tax is not to induce the purchase of a new car, but to reduce consumption.
So, the point of this tax is for the few people setting policy to control, centrally, millions and millions of individual economic decisions on a daily basis in order to make everyone else do what the few people in charge think is the “right thing”. With all the threat of a government to coerce, to jail, to confiscate and to kill if need be. Please explain to me how you guys are all in favor of central planning of the economy while decrying the idea of central planning of the economy?
TB, the people eating the omelet don’t care about the eggs. Bon appetite.
Yep, that is pretty much the point of any economic policy.
This is not central planning. Central planning would be much, much more invasive. It would determine when you can drive your car, where, and what distance. It might even determine what car you can drive, when to get it tuned up, etc.
This is merely adjusting the price to reflect costs that are not embedded in the firm’s costs.
While you may understand the refining process you don’t seem to grasp even the rudiments of business. If demand for a product goes down, firms produce less. How this is accomplished is in a variety of ways, such as scaling back production and even shutting down some of the existing firms.
It is to address a number of issues. Pollution, congestion, tax incidence, and even things like economic growth. It is a pretty simple policy proposal that has a number of desirable aspects to it, and few negative aspects.
@Steve Verdon
While you may understand the refining process …
I may know more than you, but what I do not know is much greater than what I do know.
… If demand for a product goes down, firms produce less. …
I understand this, but if you sell egg whites, egg yolks are a byproduct of the process. My point is that economics theory does not account for these, and this includes the economic theories I support.
I was responding to the sentence following the Pigou club.
This is why I’m a member of the Pigou club. The most efficient way to accelerate alternatives is to bring up the price of conventional energy. …
I am guessing that @Sam intended the second sentence to be in relation to the first, but I missed it.
I am NOT a petroleum engineer. I have SOME knowledge of refining, but it is probably out-of-date by this time. I do know that it is more complex than most people imagine.
No you assume economics does not account for these. For example, maybe the egg yolks are put into other products…maybe dog food, or some other product that relies more on egg yolks than egg whites (how about pre-made hollandaise sauce?). This website indicates that the egg yolks are used in making salad dressings, ice cream, mayo, etc. The egg shells are even sold to companies that make pet food as a calcium additive.
All through out this thread your problem has been, “I can’t conceive of how this would work, therefore it must not work.” Case in point, the tax has to be high enough to induce everybody to buy a new car. Even though there are alternative ways to reduce gasoline consumption that buying a new car, and even if only those people who were already going to buy switch to a more fuel efficient automobile that would result in a fuel savings (holding all other variables fixed–of course not all the other variables are fixed so on net we might not see the savings). It is sort of like a bizarre sort of nihilism.
What Sam is talking about are relative prices. In economics, the absolute price is not the only measure…in fact the relative price maybe of far more importance.
When a consumer maximizes his utility subject to a budget constraint the following is obtained
MU(1)/p(1) = MU(2)/p(2) = … = p(n)MU(n)/p(n)
MU(i) is the marginal utility for good i, and p(i) is the price of good i.
Now if MU(1)/p(1) > MU(2)/p(2) then that implies the consumer can increase his utility for the same budget simply be re-allocating the quantities of goods 1 and 2 that are consumed.
A similar relationship holds for the firm as well. That is where Sam is going. In economics everything happens at the margins. Changing the price of one good, exogenously–e.g. via a tax–is going to change how consumers and firms behave. Similarly with a subsidy.
As for the topic in this thread, the problem with a subsidy is that it makes the good more widely consumed, but at the same time it reduces the incentives for further research and development. If the subsidies go away, then consumption will decrease. With a tax however, it increases the incentive for research and development and makes the alternative look relatively more attractive.
More about eggs, egg whites, and where the yolks go.
They even make special blends where they’ll had more white or yolk as needed.
Yes, economics can handle this quite easily…because eggs are like any other product. There really are no “special products” out there that are “different” from all others when it comes to economics, IMO. Some have asserted that, but frankly I think it is a load of rubbish.
Really TB, google….it is your friend.
@Steve Verdon
The egg white/yolk was an example. If economics takes this into account, I stand corrected.
I understand “alternatives” to be alternatives to carbon based energy – coal, natural gas, petroleum. Decreasing the use of these is different, and taxes could be used to accelerate that process. This would not require an automobile with a non-carbon burning engine. If the tax is to add the negative/undesirable effect to the cost, I get it, but as a revenue source, I suspect the result will be similar to cigarette taxes.
I agree with the subsidy causing problems, but I am sure that its supporters would. I am only guessing, but any new business will not have any revenue until the have a salable product. Since it will be difficult to obtain private investment funds, the government uses subsidies to carry them until they have a product. I think they use nuclear reactors as a model. They would not have a problem with increasing taxes for the negative/undesirable effects.
We know how to increase fuel efficiency, and over the last 20 years, we have been able to increase safety in small cars. Composite materials could be one way to decrease weight and increase safety. Auto makers can improve the fuel efficiency of the engines and make other design changes.
My issue with existing alternatives to carbon based energy is scientific. Economics, subsidies, taxes, and regulations cannot change that. It is a ratio thing.
Eo/Ei = En
Eo = Energy Output
Ei = Energy to produce Eo
En = Net Energy
For a productive fuel source, En must be greater than 1, and a larger En will produce more “bang for the bang”. Using carbon-based resources to produce carbon-based products will result in a high En. Using carbon-based resources to produce non carbon-based products will result a lower En. Using non carbon-based resources to produce non carbon-based products will result in the lowest En.
Alternative energy sources will eventually be developed, and it could be soon. The military and NASA have an incentive to produce small, effect, and cheap power sources, and they would be a better use of government money.
The list of products that were brought to market without subsidies is miles long. The list that made it to market via subsidies is not.
Consider most products brought to market prior to the say 1930. Subsidies back then were rare.