Saturday, 9 April 2011

A strange proposal for promoting conservation and sustainable generation technologies

I have been contemplating the following proposal for years. Now that the national average gasoline price has reached $3.68, up more than 85 cents from a year ago, it is a good time to put this idea in writing.

The Proposal


Congress should pass a law to increase national taxes on petroleum energy sources, using the following rate schedule: if the market price is higher than the equivalent of a gasoline price of $3.50 per gallon (as it currently is), there is no tax increase at all.  If the market price falls below a gasoline price of $3.50 per gallon in the future, the tax increase raises the per gallon price by the difference between $3.50 and the (lower) market price.  For example, if the market price falls to $3.25, the tax increase would be $0.25 per gallon.  The consumer would pay $3.50 per gallon in that case.

Discussion

The goal of this proposal is to strengthen the incentive for consumers and businesses to invest in energy conservation and sustainable generation technologies. 

When petroleum energy prices are high, investments in conservation and sustainable technologies are more economical.  When petroleum energy prices are low, it is not worthwhile for people to make these investments.  For example, a manufacturer who is contemplating an investment in technology research to make a better hybrid car will have a greater profit if the petroleum energy price remains high.  The manufacturer will lose money on the investment if the petroleum energy price falls.

By providing assurance that the effective market price of petroleum will not fall below a certain point, this proposal takes away one of the greatest risks for consumers or businesses contemplating an investment in conservation or alternative technologies.  For example, our hybrid vehicle manufacturer can count on customers who face an effective gasoline price of $3.50 or higher.  If the manufacturer can produce a good vehicle at a reasonable price premium above the cost of conventional automobiles, this reassurance makes a big difference in the likely market for the vehicle (for example, see this break-even analysis or this online calculator).

This proposal takes advantage of an important principle in consumer psychology, for which the economist Daniel Kahneman won a Nobel prize in 2002.  Consumers seem to care more about avoiding losses than about achieving equivalent gains.  It also seems fair to say that consumers care more about their economic situation today than they do about the future (in economic lingo, consumers frequently behave as if they have a surprisingly high discount rate).

While this proposal changes the risk calculation for environmentally advantageous investments, it does not cost Congress or taxpayers anything this month or next month.  It might never cost anything, if the market price for energy remains high.  For voters and taxpayers who are today paying $3.68 a gallon, this proposal will never increase their energy costs beyond what they are paying today.

These advantages might matter for environmental advocacy on behalf of a beneficial public policy.  Higher energy prices are more economically sound (.pdf) than other forms of environmental regulation in energy markets. Yet environmentalists want to avoid the grief they get for seeming too cheerful about energy price increases that harm consumers.  With this proposal, environmentalists need not advocate any harm to consumers, but merely that conservation and alternative technologies share a part of the good news if petroleum energy prices fall back down again.

Have others proposed this policy previously?

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