There is a truth to Detroit's latest claim that forcing an increase to CAFE standards makes no sense if the public isn't buying the product that they would be forced to produce, and this is evidenced by falling sales of the Toyota Prius (which as if on cue I had my first problem with last week at 97k miles. Turned out it was an ignition coil breakdown - part of the conventional drive system, not the hybrid part!)
The solution to their dilemma however is to ensure demand rather than give them more time. My proposed approach is outlined after the jump.
I have become somewhat dismayed by some here who seem genetically opposed to the thought of raising the gas tax. (The irony of this is that this is a straight out of George W. Bush's mindset. If anything at all is true about this past year it is that demand is the key ingredient in oil prices and it is high oil prices that is killing the economy not high gas prices.) Low gas prices in this country is a basic cause of the sickness that we see in our economy. It is also a basic cause of the continued rise in Carbon emissions. We must force ourselves off of burning fossil fuel in order to do anything about either.
It is a basic rule of economics that the cheaper something is, the more of it gets consumed. As the price of copper has gone up, the less copper we use in our pipes - either thinner walls are used in copper pipe or alternatives such as PVC pipes are used as replacements. Corn syrup is used wherever possible to replace sugar, the price of which is kept high to protect both domestic sugar suppliers and the vast corn farm industry which profits from this product - even at the expense of our health. The fact is that demand for all of these items is highly elastic, just as it is for gasoline. The price goes up, we use less. Moreover, if the price goes up outside of the rate of overall inflation, we will use a lot less.
Now oil being the major component of gas, we saw gas prices reach over $4/gallon in the US this past year. However, oil is not used only for gas, but for many of the product we use every day. As a result, not only did demand fall for gas, but it fell for many, many of the products we use that contain significant petroleum derived components. This, along with the bubble that was created by the reckless fiscal and monetary policies of our government and Federal Reserve in our housing market along with the drain on the economy that the tax cuts and costs of the various wars and homeland security have forced us to bear is what has caused the impetus for the current meltdown, not the banking system itself. True, the complete lack of any kind of regulation in the banking system has made things much, much worse, and in fact has caused what would have been a moderate recession to evolve into what may still become a dismantling of the fabric of our society but that didn't cause the onset of the problem.
So, given the premise that demand impacts price and price impacts demand, the key here is that we need to lower demand for gas so that we wind up using less at a continual and predictable rate of change. In order to do that, we need to remove the ability of outside agencies (OPEC, China, Russia, Hurricanes, terrorists, etc.) to manipulate prices. At the same time we do not necessarily want to raise the price of petroleum itself, since we don't want to stop using all those wonderfully effective products that help to drive the economy (yet!). In fact in the transition to higher efficiency we probably want to be able to offset some portion of the impact of higher gas prices with the lower product costs that lower than otherwise occurring oil price will cause.
Hence, a gas tax, and at a slightly lower rate, a diesel fuel tax.
Yes, I know, this hurts low income people who for some reason can't find a job within 45 miles of their home. This is why there needs to be an income based offset - which allows for some absorbing of that tax hike by those who can better afford it. It also encourages the ranks of the poorer among us to find a better solution over the long haul.
Here is my proposed plan:
- Immediately, institute a change to the federal tax on gas that brings the price based on the previous 4 weeks to $3, ramping up by an additional $1/gal by January 1, 2010.
1b. Implement a diesel tax that brings diesel to the same price per gallon. While this will mean a lower tax on diesel, that is a good thing. Diesel engines are more efficient and while we need to force more shipping onto rail than trucks, if anything, this is the most problematic part of my plan and I recognize that.
- Publish and maintain the resulting price of gas along with the formula that will be used to raise the price of gas linearly to $10 a gallon over the course of the next 6 years. This means essentially $0.02/week per gallon.
- Institute a income based credit to offset the cost of the increase over and above some other projected increase in cost were we to leave the tax alone based on a standard model, say 15,000 miles a year at 30 mpg. The income basing would be such that it would offset 100% of the tax increase on those making 2 x the poverty level and be phased out by 4 x the poverty level. Note that for those who manage to alter their behavior this results in additional money in their hands. I'll also note the contrary to those who think that this creates the need for the lower income individuals to carry the cost until April, this need not be the case. Changes to withholding can be made to include the credit so the only carrying is from paycheck to paycheck, less if someone simply fills their tank the day before this starts.
- The model above would be reduced over time once the CAFE standard reached 30 mpg and keep being reduced to match the CAFE standard each time the standard increased.
- Create a tax credit for purchase of new vehicles whose mileage rating is above the CAFE standard. The formula would set an upper limit, say $5000, and an income limit, say full amount at $50k down to zero at $150k. The way it would work is to give the credit based on how much above the current CAFE standard the car was rated multiplied by the % US content in the car. Assembly would count as content as its fraction of the cost. We could start the full credit mileage at twice the standard, so a car that got 2x CAFE and was 100% US would get $5000, while one that got 50% higher and was 50% US content would get $1250, and so on.
- 100% of the net revenue from the gas tax increase would go to mass transit infrastructure and user subsidy in a 60-40 split (In some future time, we could change the split, but I don't see this being any time soon since we need to build a system on the scale of the Japanese and Europeans if we hope to survive.)
That's it. Actually, not quite. However, since the argument that no one is going to want a car that beats my Prius in mileage would have been made blazingly and permanently false, getting on with raising CAFE seems rather simple. Let me give you a very simple observation. My car gets essentially double CAFE. We import something like 60% of the oil we use for gas. If we all drove cars that got what mine does, and reduced our driving by just 20%, we use 40% of what we use now or NO imported oil. No it isn't that simple, as our production will also keep going down and our population is growing. (Although an aging society should also be a less consuming and driving one.) The point is that importing 10% or 20% of our total consumption means that those who export oil will not and can not drive our decisions. Almost as important, we won't drive theirs.
I welcome feedback on this. I ask only two things. The first is to open your mind. I will simply make fun of you if you recite talking points at me. The second is to provide workable solutions if you have problems with mine. If you think a part of what I've written is wrong, fine. Explain why, and what you would do to make it work.