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Let's Get Real on Energy Reform

President Bush and Senator Clinton's plans ignore the best way to cut our dependence on oil: A high fuel tax  

by Joel Darmstadter

Link to Article

This article currently appears in Newsday.

"20 in 10"

"50 by 25"

Snappy catchphrases? Yes. Realistic energy policy? Hardly.

The first slogan reflects President George W. Bush's determination, voiced during his State of the Union address, to reduce gasoline consumption 10 years from now to 20 percent below levels that would otherwise prevail.

The second refers to Sen. Hillary Rodham Clinton's plan for halving oil imports by 2025.

Both illustrate that when it comes to energy-policy proposals, we prefer erring on the side of catchy rhetoric and splashy targets, never mind the small print.

But small print matters. Take the Bush gasoline scenario. The largest part of the 20 percent reduction the president envisions would come about through a nearly nine-fold increase in annual ethanol production, with a volume of some 35 billion gallons in 2017. (The improved automotive fuel economy standards in Bush's proposal would contribute only modestly to the gasoline savings).

Most of that ethanol output would undoubtedly have to be in the form of corn-based fuel, since the more desirable long-term biofuel option - ethanol made from plant material or plant wastes whose development Bush pushed last month - remains, for now, extremely costly and technologically problematic.

But even corn-based ethanol flourishes only through a federal 51-cents-per-gallon subsidy, which a decade from now would cost the U.S. Treasury (i.e., you and me) around $17 billion in today's prices. That escaped the president's pronouncement, even as corn growers and processors looked forward to laughing all the way to the bank. Indeed, judged by soundings from some farm-state legislators, the 35-billion-gallon goal might just be their starting point. Senate Agriculture Committee chairman Tom Harkin (D-Iowa) has a 60-billion-gallon target

But there's not only the fiscal impact to worry about. There is already anecdotal evidence - from Mexican tortilla vendors to American hog farmers - that the present ethanol demand already is driving up the price of corn that goes into food and feed.

Clinton's plan to limit the nation's dependence on imported oil avoids several important realities. The import reduction she contemplates flies in the face of forecasts of steadily rising - not diminishing - import dependence. The federal Energy Information Administration projects a nearly 20 percent increase in oil imports over the period considered by Clinton.

Beyond that reality, even with greatly reduced oil imports, a severe disturbance in international oil markets would still produce a price shock here at home. In fact, even if we consumed zero imported oil, chances are we'd be as much in hock as before - simply because, in the integrated world market, the price per barrel is the same whether oil is imported or domestically produced.

What the president and senator's ideas have in common is a conspicuous, if unsurprising, disinclination to face up to the one policy that, demonstratively, could help curb the nation's oil "addiction" (Bush's term in the State of the Union speech a year ago): a sufficiently high fuel tax to provide an incentive to develop alternative energy sources and technologies and to restrain oil consumption at the same time. So potent are the effects of higher fuel costs that sales of gas-guzzling sport utility vehicles and minivans lagged significantly - to Detroit's dismay - during the sharp gasoline price run-up the past couple of years.

On the basis of careful research my colleague Ian Parry, at Resources for the Future, suggests that a $10-per-barrel oil tax can easily be justified on security and environmental grounds. It would take at least that much of a tax to reach Clinton's goal.

But tax-increase proposals habitually encounter a dead-on-arrival rebuff in Congress, even when they are accompanied with an equal degree of relief in other taxes.

An idea championed by Sen. Richard Lugar (R-Ind.) sidesteps the "T" word. He proposes setting a floor price for oil at, say, $40 per barrel. If world oil prices dropped below the floor, government would collect the difference - and could apply it to debt reduction, tax relief or subsidizing new energy technologies.

As things stand now, wildly vacillating oil prices leave innovators unsure whether their efforts to develop alternative, but initially costly and speculative, energy technologies will be rewarded. With world oil prices now hovering around $60, a $40 floor would leave plenty of room for consumer prices to drop. But it also would protect innovators' investment against another oil price plunge.

Ultimately, oil-policy strategies - their benefits and costs - will be settled in the political arena. There, the politicians' claims must be accorded close scrutiny, to avoid the wishful-thinking syndrome.

My advice: Read the small print.


Resources for the Future is home to a diverse community of scholars dedicated to improving environmental policy and natural resource management through social science research. RFF provides objective and independent analysis and encourages scholars to express their individual opinions, which may differ from those of other RFF scholars, officers, and directors.



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