New Blog Posts at RFF on Administration’s Proposed Fee on Oil

Two researchers from Resources for the Future (RFF) write today on the Obama administration’s just-announced proposal to impose a $10-per-barrel fee on oil.

Their comments, as well as links to the posts on RFF’s blog, are below:

• A Way to Give the Administration’s Oil Tax a Real Chance
  RFF Senior Fellow Alan J. Krupnick, Co-Director of RFF’s Center on Energy and Climate Economics
• Taxing Oil: Good Climate Policy?
  RFF Visiting Fellow Stephen P.A. Brown, professor of economics at the University of Nevada, Las Vegas

A Way to Give the Administration’s Oil Tax a Real Chance
Alan J. Krupnick

The Obama administration has launched another broadside in its attempt to internalize the damages from climate change and address our aging transportation infrastructure by proposing a tax on oil (the details remain unclear) of $10 per barrel. The idea has long been championed by many of us at Resources for the Future, although we want the tax to be broad-based—that is, on oil, natural gas, and coal. Further, with oil prices so low, now is a good time to do it, although here the administration tarries and has a five year ramp up to the full tax.

Predictably, the Republican Congress says this part of the budget package is dead on arrival. As this is no surprise, the administration’s proposal comes off as purely political, somewhat trivializing the urgent need for something like this.

Hopefully there is still time to regroup and give the Republicans something that will be harder to dismiss by taking another page from the economists’ playbook: tax neutrality. The country would gain doubly in efficiency if the tax were paired with reform of corporate taxation, including a reduction in the corporate income tax. And the political costs of rejecting such an approach out of hand could be high enough to at least give a pause to opponents. Of course, there are lots of details here—for instance, the tax is only on oil while corporate tax reforms would be economy-wide. But even so, the president would have an opportunity to advance an idea that would provide real benefits to the country and would be hard, or at least harder, to ignore.

Taxing Oil: Good Climate Policy?
Stephen P.A. Brown

As part of a new climate initiative, the Obama administration is proposing a $10-per-barrel tax on oil companies. The details remain unclear as to whether the tax would fall on all oil consumption in the United States or just domestically produced oil. Funds from the tax would be earmarked to support greener transportation infrastructure.

From the point of view of climate policy, any attempt to tax fossil energy is welcome, but taken by themselves, the proposed tax rate and coverage don’t add up that well as way to reduce greenhouse gas (GHG) emissions.

1. As shown in the table, the proposed tax does not reflect research on the full environmental costs of oil use, but it is close to the US Environmental Protection Agency’s social cost of carbon).
2. The proposal only applies to oil, while coal and natural gas, which are also important sources of GHG emissions, seem to have been completely ignored.

Table. Estimated Environmental Costs of US Oil Use (2015 US$ per barrel)

Sources: From adapted Brown and Huntington (2015) based on inflation estimates, conversion factors, and cited work.  
Notes: n.a. = not applicable;

Investing in Greener Transportation Infrastructure

Given the social costs of the congestion and pollution associated with our typical transportation choices, a step toward a greener transportation system is welcome. In political circles, the need to tie funding sources to spending is seen as necessary, but economists do not typically find that the correct level of spending on green transportation infrastructure needs to be tied to oil taxation. What matters is finding the most efficient level of spending on green transportation infrastructure.

Taxing US Consumption or Production?

It also matters whether the tax is applied to all US oil consumption or just domestic oil production. An oil consumption tax would reduce US oil consumption and enhance US oil security. The differential effect in discouraging domestic oil production would be less because all sources of US oil consumption would be taxed.  In contrast, taxing domestic oil will discourage its production and reduce US oil security. The effect on domestic consumption will be less because imported oil isn't taxed.