Both Max and Lucas have recently written on this blog about the need to price gasoline appropriately. I agree with them…mostly. I mean, how could I disagree with them? I’m the one driving the gray Prius with the license plate “TAX GAS”. But, as I and the others who have advocated for higher gas (and diesel) taxes have recognized all along, it is an imperfect way to price the externalities of driving. And it is likely to get worse.
A good idea, but not the whole solution
For more than a decade, the students in my MBA course on Energy and Environmental Markets have listed the externalities from driving and then discussed how well taxing gasoline prices those externalities. The list usually looks something like this:
- Greenhouse gas emissions
- NOx, particulates, and other local pollution emissions
- Energy security
The students generally get the emissions externalities right away, and the energy security externality pretty quickly. Congestion externalities — my decision to get on the freeway slows down all the other cars on the road — sometimes takes a bit longer. Accident externalities — my decision to drive increases the chances that another car will hit or be hit by me — are almost always the last to be pointed out. Most students are surprised to learn that congestion and accidents are the largest externalities from driving.
Slowing down other cars is often the largest negative externality from driving (limitstogrowth.org)
Then we get to the livelier part of the discussion: is taxing gas an effective way to have drivers internalize the externalities that they create?
Before I discuss the answers, let’s recognize that no public policy perfectly targets the problem it is meant to address. Every tax break is utilized by someone it was not intended to benefit and goes unnoticed by someone whose behavior it would have changed in exactly the hoped-for way. Subsidizing the purchase of an energy efficient refrigerator sometimes causes a household to go from having one refrigerator to two, keeping the old one running in the garage or basement. Fuel economy standards get people to buy more efficient cars, but don’t encourage them to drive any less.
Still, even if perfection is unreachable, we need to understand the policy imperfections and work to improve them.
The discussion of gas taxes and greenhouse gas emissions is always very satisfying, because it turns out that the correlation between burning gasoline and emitting GHGs is nearly perfect. Every gallon results in about 20 pounds of CO2 emissions. So, if you want to put a price on GHGs, taxing gasoline is pretty much the same thing when it comes to emissions from gasoline-powered cars. One smiley face for gas taxes.
Much of the problem comes from a small number of old smokies (Oak Ridge National Laboratory)
But the students also start to see red flags as they apply that logic to the other categories. The high correlation with GHG emissions evaporates when it comes to NOx and other local pollutants. These emissions, which contribute to ozone and other health-damaging pollutants, have a very low correlation with the amount of gasoline the car uses. Old cars are massive polluters compared to new cars, due to great technology improvement in pollution control systems. And even within the same year and model, there is huge variation in the quantity of these emissions, as our MIT colleague Chris Knittel has shown in work with Ryan Sandler. Taxing gasoline is not an effective way to go after the small share of cars that put out most of the local pollution. A frowny face for gas taxes.
Energy security is always a bit hard to explain, but it generally means some combination of greater risk to our economy when we import a lot of oil, and greater security risk when oil sales enrich the autocratic leaders of oil exporting countries. As US oil production rises and world prices fall, it’s less clear that this is a big externality, but it is clearly still highly correlated with the amount of gasoline one uses. Another smiley face, though probably a less important one.
By now the students see where this is going, despite the fact that I have told them of my license plate at the beginning. Congestion is also likely to be poorly correlated with the amount of gasoline a car burns. Some people drive on crowded freeways at rush hour, while others drive on uncongested roads or at off-peak times. I’m not aware of any good studies on the variation in congestion externalities across drivers, though someone at Waze/Google should be able to tell us a lot on the subject. That one almost certainly gets a big frowny face.
Accidents are more complicated because some of this externality is internalized through your insurance rates. But work that Max has done with Michael Anderson points out that insurance does a poor job of internalizing the accident-risk externality, because of low insurance requirements and limited cases of liability. Max and Michael find that a gas tax does a pretty good job of representing the fact that heavier cars are more likely to hurt other people, but it still doesn’t capture the variation in where and when people drive, or much of the variation in how carefully they drive. Hard to know for sure, but gas taxes probably aren’t great.
Perhaps the most interesting part of this debate is not how well taxing gas captures externalities today, but how that will change in the next decade or two. Gas taxes will almost certainly remain an excellent way to price greenhouse gas emissions and, to the extent they are relevant, energy security externalities.
Technology, however, is increasingly giving us much better ways to address the other externalities, though not without their own issues. Onboard computers will be able to inexpensively monitor tailpipe emissions so we can know exactly how much pollution a car has put out in the last year (though tampering with the equipment may still be a problem – see the VW debacle). GPS will be able to report to that computer how many of the miles were driven on roads that Google was coloring yellow or red at the time and, with some sophisticated algorithms, even calculate how many delay minutes you imposed on the drivers around you.
GPS could easily tell your onboard computer when you’ve been driving on congested roads (LA freeways at 7:13am today)
At the cost of a modicum (OK, a whole lot) of privacy, we could price pollution and congestion externalities to an extent that perhaps only an economist could love. The difficult conversations we have been hearing lately about the trade-off between privacy and social responsibility will come to vehicle transportation.
And the possibilities for pricing accident-risk externalities are even more exciting/disturbing. That onboard computer will know how close you came to hitting the other car or tree or pedestrian, as well as every time you accelerated too quickly or braked too hard.
By now, you may be thinking, “wait, when onboard computers are monitoring that much information, they will also be driving the car.” Maybe so. But given the blowback I’ve heard from drivers who seem to think that the right to drive old polluters is also protected by the Second Amendment, I don’t think see everyone giving up their vehicular autonomy any time soon.
And sometime in the next decade we will have to face up to the fact that electric or hydrogen or biofuel powered vehicles have the same congestion and accident effects as the ones powered by hydrocarbons. As they become a larger share of the fleet, gas taxes will become even less effective for these major externalities, though still a fine way to capture GHG emissions.
In 20 years, if vanity license plates aren’t obsolete, I will have to get a new one: MEASURE AND TAX ALL DRIVING EXTERNALITIES. Hmmmm. That may have to go on my LED bumper sticker.
ADDENDUM: As commentors have pointed out, wear and tear on roads is also an externality, because we don’t pay for the damage our vehicles do to the roads. That is clearly correct. There seems to be some disagreement about how much road damage increases with weight (though it is recognized to be more than proportional), and about how much damage occurs due to weather apart from vehicle use.
Severin Borenstein is E.T. Grether Professor of Business Administration and Public Policy at the Haas School of Business. He has published extensively on the oil and gasoline industries, electricity markets and pricing greenhouse gases. His current research projects include the economics of renewable energy, economic policies for reducing greenhouse gases, and alternative models of retail electricity pricing. In 2012-13, he served on the Emissions Market Assessment Committee that advised the California Air Resources Board on the operation of California’s Cap and Trade market for greenhouse gases. Currently, he chairs the California Energy Commission's Petroleum Market Advisory Committee and is a member of the Bay Area Air Quality Management District's Advisory Council.