Can taxation speed our energy transition?

Some time ago an economist with whom I had an extensive exchange suggested that the best way to incentivize an energy transition would be to tax what we don't want and let the market do the rest. It was really such an elegant approach and an impractical one, I thought.

The economist's view was that if we don't want people to burn carbon-based fuels, then we should just tax those fuels heavily. What he opposed was any direct subsidies to alternatives such as wind, solar, and biomass. This would only serve to distort the economy, he said, and it is too hard to figure out the quickest path to an energy transition from the vantage point of a central government.

Indeed, one of the proposals before the U.S. Congress would be to tax carbon and rebate a substantial portion of the revenues to the taxpayers. This increasingly seems like a better idea than so-called "cap and trade" schemes which may not be able to cover all types of carbon-based energy and will likely be gamed by the same financial wizards on Wall Street that brought us the crash of 2008.

And so, I do agree with my economist acquaintance that taxation could be an elegant method for facilitating an energy transition. But is such taxation practical and even adequate? One might point to Europe where extremely high fuel taxes have been part of the reason that the average European uses one-half the amount of energy of the average American. Whether high fuel taxes could become a reality in the United States is an open question. So far no American politician has dared to propose a level of taxation comparable to Europe.

The main reason for this is that the United States still has enormous fossil fuel reserves and as a consequence a well-funded fossil fuel lobby that has a stranglehold on the U.S. Congress. Europe is now largely bereft of fossil fuels and therefore has a fossil fuel lobby without the necessary influence to prevent high energy taxes and heavy expenditures on public transportation.

And what about promoting public transportation? I asked my economist. If automobile and highway transportation had not been so heavily subsidized by the government, he explained, what we call public transportation today might have remained excellent and in private hands just as it was before automobiles supplanted rail and streetcar transportation. In addition, air travel has been heavily subsidized through airport construction and maintenance and a federally supervised air traffic control system. Take away all the subsidies, the economist suggested, and the price of air and automobile transport would rise to the point that privately maintained rail and bus transportation would likely be competitive.

Perhaps. But we cannot run that movie backwards and start over again. The subsidized infrastructure for automobiles and airplanes is already in place. And, periodic attempts to hike energy taxes in the United States to achieve various objectives including reducing the federal deficit, reducing oil imports, increasing energy efficiency, and reducing pollution have only met with failure. In 1970 President Richard Nixon briefly entertained the idea of an oil import tariff, but then dropped it. In 1980 independent presidential candidate John Anderson proposed a 50-cent per gallon tax on gasoline and finished with just 7 percent of the popular vote. President Bill Clinton tried to tax fuels based on their BTU content. But the plan was ultimately shot down in the Senate. Certainly, some energy taxes have risen such as state gasoline taxes, but only to keep pace with the need to maintain and build roads and bridges which, of course, encourage yet more fossil fuel consumption. (And even the increases in these taxes have largely failed to keep pace with the need for repairs of America's crumbling transportation infrastructure.)

The only taxes in the United States which have risen sharply are those on things which the public has long since categorized as a menace. So-called "sin" taxes have been popular with state governments attempting to balance their budgets. For example, taxes on cigarettes have risen steeply in most states.

But it is probably a vain hope that Americans will come to regard our fossil fuel addiction to be as serious as our addiction to cigarettes and decide to levy high taxes both to discourage fossil fuel use and to encourage alternatives. Taxing fossil fuels heavily and ending subsidies that encourage their use would be an elegant approach for sure. But I believe such an approach continues to be politically very difficult to implement in the United States. Therefore, we in America must work with what is currently feasible--a hodgepodge of government subsidies and tax incentives for alternatives to fossil fuels and for energy efficiency that unfortunately are subject to attacks from the fossil fuel lobby on a regular basis.