Tradeable Gas Rights

The econbloggers are all abuzz with a proposal in the WSJ from Martin Feldstein for tradeable gas rights as a means of restraining the amount of oil consumed in this country:

In a system of tradeable gasoline rights, the government would give each adult a TGR debit card. The gasoline pumps at service stations … would be modified to read these new TGR debit cards… Buying a gallon of gasoline would require using up one tradeable gasoline right as well as paying money.

The government would decide how many gallons of gasoline should be consumed per year and would give out that total number of TGRs. In 2006, Americans will buy about 110 billion gallons of gasoline. To keep that total unchanged in 2007, the government would distribute 110 billion TGRs. To reduce total gasoline consumption by 5%, it would cut the number of TGRs to 104.5 billion.

The government could distribute TGRs to reflect geographic differences in driving patterns. … Businesses that use trucks would also get TGRs.

A key feature of these gasoline rights is that they are tradeable. Individuals with more TGRs than they need could sell the excess, while those who want to use more gallons than their allocation would have to buy extra TGRs. The gasoline companies could act as clearing houses for these trades, using their gasoline pumps to sell TGRs in the same way that they sell gasoline or to buy TGRs in exchange for the cash needed to purchase gasoline. Other institutions like banks could also trade TGRs for cash. And individuals could of course buy and sell TGRs among themselves by letting others use their card.

Mark Thoma at Economist’s View has a number of questions about the plan:

Getting over my surprise at the Feldstein’s call for government intervention in the marketplace, particularly for the government to set a national cap, I’m not fully convinced. Would the cap on gasoline usage be as easy to lift as the debt limit?

In addition, while this proposal does provide the correct incentive at the margin, I can envision an endless political fight over the allocation of credits. Should LA residents get more credits than NY or SF in the zero-sum allocation? Will cities or regions with more credits per person relative to average distance traveled see people moving in to take advantage of the chance to earn extra income? If I don’t own a car, am I out of luck? Is it per person as in Feldstein’s proposal, or will it be changed to per household? Do households with more kids get more coupons? Will rural residents get more credits? If so, how much more? Over time, will the credits per person be decided based upon political considerations rather than economics?

I have a more basic question. Perhaps I’m being dense but how is this approach better than any other fiat system (it is a fiat system: the government is setting a quota)? Why not just let prices rise? Are they convinced that the demand for oil is infinitely inelastic?

Others commenting on the plan include Brad DeLong:

I think Marty’s right. I think it’s a clever idea–and much better than tightening CAFE. Tom Kalil was talking about higher gasoline taxes with the revenue dedicated to paying the first X thousand of individuals’ Social Security taxes. But I think Marty’s scheme is more transparent, which gives it powerful political-economy advantages.

Angry Bear:

I think this idea has merit, so its probably the last we will hear of it. I’d suggest allocating the same number of TGRs to all registered drivers and letting the martketplace do its magic.

Arnold Kling:

Feldstein’s article does not really specify a “benefit function” for curbing the use of gasoline. One gets the feeling that his main concern is to fend off fuel economy regulations, which are indeed exercises in moral vanity–they do little to reduce gasoline consumption but they do help to brand auto companies as villains.

Why won’t this system create a large federal bureaucracy and an industry in fraudulent TGR cards? Why would this approach be more politically acceptable than increased gas taxes? I’m not asking rhetorical questions—I really want to know.

James Hamilton? Lynne Kiesling? Comments?

ANOTHER UPDATE

Lynne Kiesling brings up a good point:

n any case, such a policy has to start from a primary objective: is the primary objective here to reduce emissions, or simply to reduce the use of gasoline? I contend that those different objectives have different policy implications.

while Greg Mankiw echoes some of the questions I proposed above:

As I am sure Marty would agree, this system is functionally equivalent to an increase in the gasoline tax, with the tax revenue rebated lump-sum to the public. I have said many times that I like the idea of higher gasoline taxes, but Marty’s scheme leaves me cold. Do we need to create a new administrative bureaucracy because politicians are afraid to use the word tax? I hope not.

3 comments… add one

  • I was posting on it even as you wrote … :

    http://www.knowledgeproblem.com/archives/001635.html

    I think your questions are the same kind that I had.

  • Jeanette

    I agree, another bureaucratic system is unfavorable. If we think the DMV is bad, could one imagine trying to get The Bureau of Gasoline Rights on the telephone? But higher taxes will hurt those who can barely afford to transport themselves (especially in rural areas) and business that depend on freight (therefore raising the price of tons of consumer goods). Not to mention that American’s with a lump-sum tax return in their hands are more likely to finance that new SUV, or fill up thier existing tanks for a few weeks — reversing the intended effect, if only for a few days or weeks.

    Why not just charge tax on a sliding scale? Those with low income pay less or no tax, where those with higher income pay more tax. Businesses are judged on profit as well. Cards (like TGR cards, but ‘tax rate’ cards) could be issued with one’s tax return information, which seems easier to keep track of. Hopefully, a 16 year old with a car is more likely to file some sort of tax return, rather than none at all. Yes, another annoying government bureau, but if anyone is organized to do it, it’s the IRS.

  • Jeanette

    By tax, I mean tax on gas, and/or sales tax. Sorry.

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