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Dollars and sense of energy taxes—A Commentary by Michael J. Graetz

The following commentary was posted on Washingtonpost.com on June 7, 2011.

Dollars and sense of energy taxes
By Michael J. Graetz

Americans have been living an energy delusion for 40 years, argues Michael J. Graetz in his book “The End of Energy: The Unmaking of America’s Environment, Security, and Independence,” published by the MIT Press. Graetz says Americans have ignored the consequences of how we get and consume our energy. Before the 1970s, all the oil we needed for our homes, power plants and cars was domestically produced. Since then, as everyone knows, we have had to import most of our oil. In his book, Graetz, a professor of law at Columbia and a professor of law emeritus at Yale Law School, details what he sees as 40 years of policy incompetence that favored finding a silver technological bullet to solve all our energy needs over finding a way to have Americans pay prices that truly reflect the cost of the energy we consume. Here, Graetz discusses the efficacy of energy taxes.

The ritual of rising gasoline prices for Memorial Day weekend skipped this year. But this is no cause for rejoicing. Prices are already about a dollar a gallon higher than they were last year, due to the conflict in Libya and fears of additional potential supply disruptions stemming from uprisings in the Middle East. For more than four decades now, what Americans pay at the pump, along with our economic well-being, has been hostage to the vagaries of the Middle East.

The fundamental difficulties that first brought energy onto the policy agenda remain unabated. The United States has 4 percent of the world’s population, but consumes a quarter of the world’s oil. We now import about 3.5 billion barrels annually – more than half our oil – compared with just over a third in 1973, the year the Arab oil embargo first shocked consumers at the pump. Much comes from Canada and Mexico, but we still depend on OPEC oil to keep our vehicles moving. We import 13 million barrels of oil every day, 5 million from OPEC countries.

We created a heavily subsidized ethanol industry that now supplies about 7 percent of the fuel our automobiles burn. The billions in costs of this pork-barrel program, however, have outpaced its benefits, and these wasteful subsidies should be repealed. Automobile fuel efficiency standards have also reduced somewhat our oil consumption – but again in a wasteful and costly way, while doing nothing to reduce the miles we drive. Economists have estimated that a gasoline tax of just 25 cents a gallon would have saved as much oil as these fuel efficiency standards at one-third their costs to the U.S. economy. And these are our energy policy successes.

Since energy policy came to the fore in the 1970s, Congress has never demanded that Americans pay a price that reflects the true price of the energy they consume. Even now, removing expensive and unnecessary tax subsidies from the oil industry remains controversial. And no one seems to think we should require gasoline prices to include, for example, the costs of keeping oil moving safely from the Persian Gulf into our gas tanks or insist that our electricity prices reflect the costs of coal pollution or of nuclear power safety.

The problem, of course, is that reflecting these kinds of costs in the price of energy would require taxing energy consumption, rather than subsidizing its production. We take it for granted that we will pay in lives and treasure to keep Middle East oil flowing, but we refuse to adopt energy taxes. Recall Jimmy Carter’s failed efforts to increase gasoline taxes by a nickel a gallon a year beginning in 1979 or Bill Clinton’s 1993 energy tax defeat. As our nation’s massive debt reminds us, our government finds it far easier to spend than to tax. And so we instead send a half billion dollars a day to OPEC countries, dollars they can use to buy our assets.

We know that we should tax what we want to reduce — petroleum use and electricity consumption from fossil fuels — and use those revenues to reduce taxes on things we want to increase, such as jobs and wages.

Changing our pattern of energy consumption and how it is produced is a long-term problem that does not yield to a quick fix. Even now, slowly but steadily raising energy taxes as a substitute for payroll taxes would be good policy, but currently any gasoline tax increase would almost certainly be political suicide.

Once the turmoil in the Middle East settles down, oil prices will come back down, at least for a while. Then, rather than rejoicing at our good fortune as we always have before and returning to our complacent ways, we should seize that opportunity to tax gasoline and other fossil fuel consumption.

Today, we are paying the price for 40 years of policy failures. Let’s not allow our children to look back 40 years from now and wonder why they are doing the same.