Taxes versus Subsidies

The RAND Corporation, a nonprofit research organization, has just issued a report comparing the effectiveness of fossil-fuel taxes versus renewable energy subsidies for increasing the usage of renewable energy:

Impacts on U.S. Energy Expenditures and Greenhouse-Gas Emissions of Increasing Renewable-Energy Use

From their concluding remarks:

Our analysis also indicated that increasing to 25 percent the share of renewables can significantly reduce CO2 emissions. However, the incremental increase in energy cost per unit of CO2 reduction varies widely depending on circumstances, reaching very high levels unless there is very substantial cost-reducing innovation in expanding renewables. Fossil-fuel prices that are higher than the baseline levels assumed in this analysis would induce greater use of renewable energy and thus reduce the incremental cost of achieving 25 percent renewable energy (thereby also lessening the need for setting this as a policy target). High fossil-fuel prices also improve the economics of other alternatives that can reduce GHG emissions and improve energy security, such as energy efficiency and unconventional energy sources.

The latest issue of Subsidy Watch also weighed in:

Rand Institute study favours fossil-fuel tax over renewable energy subsidies

A fossil-fuel tax would increase the cost of fossil fuels, making renewable energies more competitive; subsidies would lower renewable-fuel prices, allowing renewable energies to better compete with fossil fuels; while the revenue-neutral tax-and-subsidy mechanism splits the difference, using a fossil-fuel tax to fund renewable-energy subsidies.

Michael Toman, the study’s lead researcher, told a meeting of congressional staff on Capitol Hill that a fossil-fuel tax would encourage conservation, while also raising revenues which could be returned to the consumers to help offset higher fuel costs. In contrast, renewable energy subsidies shield consumers from real prices, giving them little incentive to conserve. Subsidies would also lead to an increase in government expenditures.

Their conclusion is the same as my oft-stated position: It makes more sense to raise fossil fuel taxes than to subsidize specific biofuels. The reason, as I have argued, is that subsidies attempt to pick technology winners. Taxes simply increase the cost of unsustainable fossil fuels and encourage competitors. In this manner, competitors can compete on a level playing field. A carbon tax should also minimize the kinds of political games we have seen where subsidies are denied for one biofuel and allowed for another.

Maybe the solution is not a biofuel at all. Maybe it is PHEVs powered by solar thermal electricity. But all alternatives are not treated the same with the current subsidy system we have in place.

15 thoughts on “Taxes versus Subsidies”

  1. I agree, but the political difficulty of raising fossil fuel taxes argues against this strategy. Especially now. We need a strategy that is implementable, which might lead us to adopting the second-best choice out of expediency.

    However, it might be possible to package a tax on oil in a way that was politically acceptable. What if we, for example, put a tariff on oil from any OPEC nation? This would effectively drive up the price of oil domestically, but it oculd be justified to the public as a measure to reduce our dependence on foreign oil and improve our balance of trade with the world. Republicans could get behind it because it punishes Venezuela and various Arab countries, Democrats because it increases government revenues while pushing conservation and alternatives.

  2. I agree with both Rapier and Boyd in that the best option may not be politically feasible. That is why I tend to favor the Cap and Dividend approach that would substantially increase the price of FF but be more acceptable since the money is returned directly to every American.

    The poor should use less energy than the average American and would thus benefit monetarily from this policy and hence Democrats should support it. Republicans could favor it because it is not a top down approach and the federal government does not expand even though there is a new tax.

  3. The best way would be to directly tax and rebate, giving every American citizen an equal share.

    But that eliminates the need for politicians to use the money to buy votes – so it won’t be done that way. As I’ve said before, this isn’t about solving energy or environmental problems. It is all about expanding government control over more areas of our lives.

  4. King-
    Government control? How about the government sticking its hand in your pocket to take money to build roads for a bunch of lulus who insist on living in the sticks?This is from thre Texas Dep’t of Trans:
    “Applying this methodology, revealed that no road pays for itself in gas taxes and fees. For example, in Houston, the 15 miles of SH 99 from I-10 to US 290 will cost $1 billion to build and maintain over its lifetime, while only generating $162 million in gas taxes. That gives a tax gap ratio of .16, which means that the real gas tax rate people would need to pay on this segment of road to completely pay for it would be $2.22 per gallon. This is just one example, but there is not one road in Texas that pays for itself based on the tax system of today. Some roads pay for about half their true cost, but most roads we have analyzed pay for considerably less. To conclude, in the SH 99 example, since the traffic volume for that road doesn’t generate enough fuel tax revenue to pay for it, revenues from other parts of the state must be used to build and maintain this corridor segment. The same is true across the state, meaning that, as revealed by the tax gap analysis, overall revenues are not sufficient to meet the state’s transportation needs.”
    I am sick and effing tired of government seizing my money to pay for other people driving down the road. We need much higher gasoline taxes, so road-users pay their freight, and are not a bunch of subsidized weakling weenie-mooch freeloaders. Freaking socialist worms.

  5. Benny – funny you should pick that particular road. It is just 5 miles from my house. Section “E” of the Grand Parkway will actually save travelers between 10 and 20 miles when travelling between I-10 and US290. So if anything it NEGATIVELY impacts highway funds.

    I get upset about highway funds used to maintain remote roads and highways to rural property that benefit only a few people.

    What also gets me is using federal highway funds for public transportation. I’ve seen the figure (but don’t have a reference) that 20% of the federal highway money that comes back to Houston goes straight to Houston Metro . Yet Metro only serves about 1% of the commuters. In addition to federal funds, those living in the area served by Metro pay additional property taxes.

    So one could make the same argument about public transporation not paying for itself.

  6. What if we … put a tariff on oil from any OPEC nation?
    Republicans could get behind it…
    Democrats (could get behind it)…

    And non-OPEC oil companies could really get behind it because every dollar increase on competitive oil is a dollar of pure profit in their pocket!

    Actually, this scheme doesn’t work. Oil is pretty fungible. Instead of shipping to us, OPEC countries would ship all their oil to Europe and Asia. Non-OPEC exporters (e.g. Norway, Brazil, Russia, etc.) would then direct their exports to us. It’d be great for people who build oil tankers, but that’s about it.

  7. I am not sure I am a fan of mass transit. It does help with pollution, congestion and decreasing oil imports, and those positives are not captured in the price system. (I love the price mechanism, but it needs help sometimes). So some level of subsidy makes sense.
    On the other hand, it is obvious we are subsidizing roads bigtime, and I suspect additional costs (pollution, dependence on foreign oil thugs) are not included in price.
    That being said, I would prefer we go Thai style. In Thailand, guys with p/u trucks place slats the longway over wheel wells, and they become taxis on routes (sort of). There is roof over the back. That’s it. No fancy seats, intercom, pull wires etc.
    I guess we have to shoot all the personal injury lawyers first, and the handicapped advocates and so on. Some people will get injured on these “baht busses.”
    But first we should go after the socialized, freeloading worms that are driving down roads paid for by you and me.
    The gas tax has to be bumped up by $3.

  8. King- of course your revenue neutral tax is the best option but its still political suicide.

    Can you imagine if Obama proposed this tommorow- everyone would loose their minds- “Another tax! He just wants to take your hard earned money! SOCIALITS!” No one would even hear the part about getting money back.

  9. A carbon tax should also minimize the kinds of political games we have ….

    Maybe. But note ag is excluded from gas taxes. Carbon taxes promotes offshoring — manufacture here and pay the tax or manufacture there and avoid it. To fight this you have to tax embedded carbon on imports and rebate embedded carbon for exports. US Department of Embedded Carbon? A pure carbon tax also doesn’t handle sequestration, so you have to add rebates/credits for that.

    Despite all this a straight carbon tax is cleaner than most approaches. It has to be high, though. The $20/ton often used in studies and such is about 20 cents/gallon of gas, 1-2 cents per kWh. Doesn’t move the needle.

  10. With the commodity bubble punctured,we’ll have to do something to keep from returning to what happened in the 90’s. .99 gas would kill alternative research once again. Billions are going into green start-ups out in silicon valley. I’m counting on companies like LS9 to wean us off fossil fuels. Maybe we could expand the luxury tax to cover everything that got sucky mileage.

  11. My idea is to commission a panel of scientists, engineers, and economists to set a plan or at least a strategy to transition away from fossil fuels as smoothly as possible. They can develop well thought out short, mid, and long term plans or strategies.

    Its best to have multiple types of scientists, otherwise you will get biofuel zealots, or ethanol zealots, that will skew the development of practical solutions. The same goes for the engineers and economists.

    The scientists can tell you what’s possible, the engineers can tell you what’s scalable and feasible with current and near-future technologies, and the economists will tell you how much it will cost and how to finance the transition.

    Any strategy or plan will be brutally tested and scrutinized to determine how well it stands up to the best arguments and well documented counter analysis of opponents. The plan or strategy that stands up the best against such scrutiny will be the one we should follow.

    Every plan or strategy will have faults, but as long as we know what they are and how minimize the number and severity of the faults we should be able to develop robust solutions to our energy problems.

  12. It sems clear, based upon the Texas State Dep’t of Transportation, that we are heavily subsidizing roads. We have created a socialist paradise for ICE parasites, and their cars. They ain’t paying the freight.
    So? End the subsidies. Declare that roads must be paid for by users, and we will collect enough gasoline taxes to make it so.
    That means another $2-3 a gallon in taxes. And we can rebuild our bridges.
    The GM Volt and other EV cars will come to the fore, and reliance of imported oil will fade. The world price of oil will likely collapse, due to shrinking US demand.

  13. Declare that roads must be paid for by users,…
    The GM Volt and other EV cars will come to the fore…

    If roads truly must be paid for by users, you’ll have to tax Volt and EVs just as much.

  14. Doggydog. Um. So, if we migrate to EVs, there won’t be much tax revenues from gasoline, because we won’t be using much….and EVs will be subsidized by ICEs….
    Solution? Raise gasoline taxes even higher! I like the results.

  15. Doggydog, Benny, others…

    It doesn’t (to me) make sense to overemphasize the “let the market choose” approach (of cultivating multicultural, interdisciplinary, progressive blue-ribbon panels and colloquia to ‘solve’ the problem).

    Fault NASA as much as you like, but by NOT having a great round table of opposing opinions (which inevitably become politicized and end up almost always in deadlock), it spent money in a focussed, rational, and prudent fashion to “We shall get a man to the moon”, per JFK.

    Single-ideal focus of various governmental departments have bequeathed upon the public such astounding civil structures as the Hoover Dam, the Grand Coolee Dam and hundreds of others, merrily generating “renewable” power from the obvious potential of our country’s and of course the world’s great rivers. Focus, buy-in, ratification, development, delivery.

    Same too to the obvious regarding conversion of available renewable solar and derived energies to something useable by society at large.

    ASK YOURSELF, when faced with the 30+ year old chitter-chatter of “The Problem With Solar Is…” defeatists (or generations of well meaning, but nuthin’ producing researchers and grant-a-holics): what IF the ‘storage’ problem isn’t easily made ‘portable’ (vehicular), or ‘efficient’ (PV versus Stirling cycle, versus combined, versus… wind…). So what? Like in its first stages of massive implementation the power would be WASTED due to the lack of ‘whatever’ is being discussed?

    HARDLY. At the very least, power from conventional power-generation sources, nuclear, coal, gas, diesel, can be ratched down if there is power going for the asking from the PV, wind and other direct-renewable sources. That’s the EASY part. We don’t have to figure out “the storage problem” to any significant degree until it BECOMES a problem.

    More to the point, excess energy can always be used for energy-hungry product manufacturing that in turn has a strikingly solid international trade-value. Picturesque Iceland, for instance has gazigawatts of extra geothermal, which due to the not inconsequetial distance of the island to everything else, can’t realistically be “shipped” to the Continent and sold for a profit.

    No matter. I personally toured the freaking-enormous aluminum smelter … which uses a sizeable amount of that extra electricity to convert (literally) dirt-cheap aluminum ore into mountains of shiney ingots and you’ve-gotta-be-kidding-me large cryogenic reservoirs of liquid oxygen. Extra electricty … into products that have international value … and get MONEY in return for it.

    Same too with the “problem” with channeling electricity into some rapid-charge-cycle (or “fill up” cycle) for vehicular use. Can’t do it today by any “well, that’s obvious” route. Yet, like how Intel DEPENDS on their being way more transistors tomorrow on a chip in order to compete (largely with itself), so too will the “chemistry” and “physics” and all the rest come to solve this problem.

    So …

    Let’s just choose two technologies, and put a HUGE effort behind it. American, larger than life, bold, and anything but benign.


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