WASHINGTON – Resources for the Future Fellow Marc Hafstead today in a new post looks carefully at the Obama administration’s recently proposed tax of $10 per barrel of oil—an action aimed at reducing carbon emissions from the transportation sector, which accounts for nearly 30 percent of US greenhouse gas emissions. Hafstead’s analysis, however, questions whether the policy would be effective in achieving meaningful emissions reductions.
In The Environmental Merits of Obama's Oil Tax Proposal, Hafstead finds that the policy would only reduce carbon dioxide emissions by 2.8 percent relative to a business-as-usual baseline. Hafstead states clearly: “The transportation sector, which consumes the vast majority of refined oil products, is not very price responsive and a relatively low tax on oil will simply not lead to significant emissions reductions. This is hardly effective climate policy.”
Hafstead analyzed the administration’s tax plan by running provisions through the Goulder-Hafstead E3 model—a large-scale computable general equilibrium model of the US economy.
“While there are good reasons for taxing the emissions related to oil consumption, we need to be more ambitious if we are to make meaningful progress toward addressing climate change,” Hafstead writes. “An economy-wide carbon tax, linked to tax reform . . . remains the most cost-effective method of significantly reducing harmful carbon emissions.”
When the administration announced this budget proposal in early February, Hafstead’s RFF colleague Alan Krupnick was quoted in a Washington Post editorial making the point that the fee needed to be larger and should apply to a broader set of fuels. Hafstead's modeling is consistent with that assertion.
Read Hafstead’s full blog: The Environmental Merits of Obama's Oil Tax Proposal.