Big Oil Wants Congress to Gouge Consumers

Earlier this week, the carbon tax advocacy group Climate Leadership Council (CLC) announced its List of Founding Members. “Founding Corporate Members” include three oil majors: BP, Shell, and ExxonMobil.

Carbon tax advocates claim people over-consume fossil fuels because market prices do not reflect the “external” (“social”) costs associated with their use. Although the power to tax involves the power to destroy, and many in the climate movement want to bankrupt fossil energy companies (hence the agitation to “keep it in the ground”), carbon taxers claim they merely want to reduce consumption to “efficient” levels—the quantities households and businesses would purchase if they had to pay for the “full” (private + social) costs of fossil energy use.   

In its manifesto, “The Conservative Case for Carbon Dividends,” the CLC argues for a tax that starts at $40 per ton of carbon dioxide (CO2) and increases over time. Although CLC does not use the term “social cost of carbon” (SCC), the proposed $40 starting point is roughly the Obama administration’s mid-range SCC estimate for 2015-2020.

The social cost of carbon is usually defined as the present value of cumulative future damages caused by an incremental ton of CO2 emitted in a given year. As I explain elsewhere, SCC estimation is a garbage-in-garbage-out exercise. By combining non-validated climate parameters, made-up damage functions, and accounting gimmickry, SCC estimators can get pretty much any result they desire. What they typically desire is to make fossil fuels look unaffordable no matter how cheap and climate policies look like a bargain at any price. Nonetheless, let’s assume for the sake of argument that the SCC for 2017 is actually $40 per ton.

What then is the carbon tax we should pay at the gas pump? Both the federal and state governments already tax gasoline. Gas taxes are not called carbon taxes but their economic effect is the same—impose a price penalty on consumption. Moreover, via simple arithmetic, any carbon tax can be converted into an equivalent gas tax and vice versa.

Here’s how to do it. Combusting one gallon of gasoline emits 8.78 kilograms (kg) of CO2, according to the U.S. Environmental Protection Agency. One metric ton = 1,000 kg. Thus, one gallon emits 0.00878 metric tons of CO2. At $40 per ton, the carbon tax for gasoline is 35¢/gallon.  

Turns out, motorists in 49 states already pay combined federal and state gas taxes higher than 35¢/gallon. In fact, 20 states have combined motor fuel taxes of 49.5¢/gallon or more, exceeding an implicit $40/ton carbon tax by 41 percent to 122 percent. Only in Alaska do motorists pay gas taxes that are lower than a $40/ton carbon tax, and even there they pay about 88 percent of the implicit carbon penalty.    

So do American motorists “need” a carbon tax to be “efficient” consumers of gasoline? No. The vast majority already pay fuel taxes at or above the SCC-based carbon tax.

CLC members might say the foregoing analysis is not relevant because the purpose of gas taxes is to finance transportation infrastructure while the purpose carbon taxes is to reduce emissions. Such criticism is irrelevant. Whether the tax on motor fuel is called a carbon tax or a gasoline tax, it imposes the same penalty on consumption. Regardless of nomenclature, any 35¢/gallon gas tax “internalizes” any climate change “externality” calculated to equal $40/ton of CO2.

For years, assorted leftwing politicians and organizations accused refiners of engaging in market manipulation to “gouge” consumers, especially when gasoline prices spike. However, investigations by the Federal Trade Commission and other government watchdogs failed to find evidence of such skullduggery. Producers’ inability to keep oil prices above $60/barrel during past three years also suggests detractors exaggerate the industry’s “market power.”

What is unclear is how much influence Big Oil has on Capitol Hill. ExxonMobil, Shell, and BP are now urging Congress to make us pay more for gasoline. Substantially more. By my calculation, under the CLC plan, the typical family of four would initially pay an extra $623 per year for motor fuel.*

No problem, the CLC assures us, because whatever carbon tax revenues the government collects will be returned to U.S. households in equal shares called “carbon dividends.” Those who adjust their “behavior” to lower their “carbon footprints”—for example, by shelling out to buy an electric vehicle—will come out ahead.

That is highly dubious. Carbon dividends are not unlike targeted tax credits for purchases of “climate friendly” equipment, appliances, and vehicles. Many beneficiaries are free riders—households and businesses that would have made the purchases anyway. For them, the policy is a source of windfall profits. For example, the U.S. Energy Information Administration found that much, most, or even all of the tax credits proposed in the Clinton administration’s Climate Change Technology Initiative would go to free riders.

Conversely, the CLC policy would impose windfall losses on those whose circumstances make purchase of low-carbon vehicles, etc. unaffordable or impractical. As my colleague Myron Ebell told the Huffington Post:

“One of the things that is particularly objectionable about the [CLC] carbon tax dividend is it rewards people in highly urban areas who have very non-energy-intensive lives and jobs,” Ebell, who leads climate policy at the Washington, D.C.-based conservative Competitive Enterprise Institute, told HuffPost by phone. “So say you’re somebody who commutes to work on the Washington Metro, as I do. I would get a check equal to somebody who has to drive a long way to work every day, who required a four-wheel-drive vehicle because he lives in an area with lots of snow and may have a job that includes heavy hauling, like a plumbing business.”

Since Washington’s big spenders have no interest in new taxes that don’t “enhance” federal revenue, it is hard to imagine Congress would enact a $40/ton carbon tax just to give the revenues back to households. The Congressional Budget Office estimates a carbon tax that starts at $20 and increases by 5 percent annually would raise $1.2 trillion in first decade. The CLC proposal might raise double the booty. If you believe Congress would never divert hundreds of billions of new revenue to federal spending programs, then I have a bridge to sell you.

A carbon tax is hardly a new idea. Why do the oil majors believe their time has come? Niskanen Center climate policy direct Joseph Majkut sees today’s low gas prices as a factor. The HuffPo reports:

“From a political point of view, on any big moves toward carbon pricing―which will have visible price effects for consumers, drivers and industries that use energy―the low-price future that we apparently have in front of us might ease the pain of standing up a carbon price,” Majkut said. “It’s easier to do at $2 a gallon than it is at $4.”

What that means is that carbon taxes increase the consumer risks of energy-price volatility while reducing (confiscating) the benefits. When gas prices passed $3 and even $4 a gallon, there was no legal mechanism adjusting gas taxes downward to alleviate the windfall losses consumers incurred at the pump. Similarly, the CLC plan provides no mechanism to suspend or reduce the carbon tax if oil and gas prices shoot back up. Consumers will be stuck with a new tax that grows over time, no matter how high oil prices get.

Apparently, Big Oil hopes taxpayers will forget the historic volatility of oil markets and look just at “low price future that we apparently have in front of us.” Typical, inside-the-Beltway, swamp-creature behavior.

Ebell proposes an elegant counter-measure: a bill called the “Put Your Money Where Your Mouth Is Act.” As he explained to the HuffPo:

We should introduce a bill to allow any company that wants to put a carbon tax on itself to do so and send the money to the U.S. Treasury every year. Consumers would then have the opportunity to go to an Exxon station and pay more for their gasoline because that would be great, because those consumers who agree there should be a tax would be able to put it on themselves.

* In 2016, the daily average motor gasoline consumption in the United States was 391.73 million gallons (EIA). Total U.S. population in 2015 was 321.4 million (Google). Hence, each man, woman, and child consumes about 1.2 gallons of gasoline per day. 1.2 x 365 x $0.35 x 4 = $623.