Obama Proposes Limited Carbon Tax
February 6, 2016
The President has proposed a modest tax on oil, 10 per barrel, at a time when oil is so low that Oil companies are being derated. Conventional wisdom says it’s dead on arrival, but the fact that it’s being proposed suggests that oil companies might not be the unbeatable “Bigbads” they were a few years ago.
Above, Art Laffer was an architect of Ronald Reagan’s tax policy. Bob Inglis is a former republican congressman from South Carolina.
Both of them think a carbon tax might be a pretty good idea.
It’s the last year of President Obama’s presidency. He doesn’t have to stand for reelection. Congress isn’t going to pass any of his proposals anyway. So he may as well dream big.
That’s one way to read this new idea Obama’s putting forward: He’s suggesting that Congress slap a $10-per-barrel tax on oil, phased in over five years, in order to fund $300 billion worth of investments in “clean transportation” over the next decade. That would mean massively increased spending on mass transit, high-speed rail, self-driving cars, freight upgrades, and so on.
None of this is going to pass Congress anytime soon — House Republicans have already vowed to block it — so any discussion here is purely academic. But there are a few points to make about this plan:
1) In theory, there’s not a huge difference between a broad oil tax and a tax on gasoline. An oil tax might sound better — the White House says it will be “paid for by oil companies” — but the costs presumably pass through to consumers anyway. As a rule of thumb, a $10-per-barrel increase in the price of crude oil translates into a roughly 24-cent-per-gallon increase in the price of gasoline.
2) That said, there are a few smaller differences. A gasoline tax mainly affects drivers; a broader oil tax would hit air travel, home heating, and a few other sectors as well. What’s more, a per-barrel oil tax would be a bit more work to implement, since we’ve never done this before. By contrast, the United States already has a federal gasoline tax, so it’d be much simpler to just hike that.
3) If you were going to tax oil or gasoline, right now would be the time to do it. The price of crude oil has been plummeting over the past year, down to around $30 per barrel, a level not seen since 2004. A $10/barrel tax would lift that to $40 per barrel, which is roughly the (still-low) price we saw… last November.
4) That said, any oil tax would exacerbate the woes of US oil companies, who are already reeling from the price crash and laying off workers and idling rigs (their struggles may also be having adverse ripple effects on broader markets). So you’d expect to see a lot of resistance to this move from industry — one big reason this isn’t going anywhere in Congress.
5) The oil tax will get all the headlines, but perhaps the most radical part of Obama’s budget proposal is the outline for a “21st century clean transportation system.” Generally speaking, US transportation policy over the last 50 years has largely focused on funding and building new roads and highways, with a smaller fraction carved out for mass transit. That build, build, build dynamic has led to more driving, more suburban sprawl, more gasoline use, and more CO2 emissions.
The White House wants to break that pattern, diverting a greater share of federal funds to transit and rail instead:
The President’s plan invests nearly $20 billion per year above current spending to reduce traffic and provide new ways for families to get to work and to school.
The plan would expand transit systems in cities, suburbs and rural areas; make high-speed rail a viable alternative to flying in major regional corridors and invest in new rail technologies like maglev; modernize our freight system; and expand the Transportation Investment Generating Economic Recovery (TIGER) program begun in the Recovery Act to support high-impact, innovative local projects.
6) You can also think of this plan as a piece of Obama’s broader climate agenda. The administration has already cracked down on CO2 emissions in the electricity sector through the Clean Power Plan and other EPA programs.
But electricity is only about 38 percent of overall emissions. Transportation makes up another 32 percent — and, if anything, is a harder sector to address, since we don’t have many easy substitutes for gasoline-powered cars. So far, Obama’s climate strategy for transport has mainly focused on CAFE standards to make new cars and trucks more fuel-efficient. But his latest clean transportation plan would aim for even more sweeping changes:
The plan would create a new Climate Smart Fund that provides bonus funding to states that use existing formula funding to cut carbon pollution in the transportation sector – for example by encouraging better land use planning, investing in clean vehicle fueling infrastructure or increasing use of public transportation.
The President’s plan invests just over $2 billion per year to launch a new generation of smart, clean vehicles and aircraft by expanding clean transportation R&D and launching pilot deployments of safe and climate smart autonomous vehicles. It also accelerates the transition to cleaner vehicle fleets in communities around the country, including expanding Diesel Emissions Reduction Act Grant Program funding, and supports the creation of regional fueling infrastructure for low-carbon vehicles.