Why the government should drink your milkshake: the case for restructuring the federal gas tax.

• Author: Abelkop, Adam D.K.

1. INTRODUCTION II. BACKGROUND A. The "Twin Crises 1. Climate Change 2. Oil Dependence 3. Kicking the Addiction a. Fuel Efficiency and Driving Patterns b. Biofuels c. The Electric Grid and Renewable Energy B. The Petroleum and Gasoline Market 1. Crude Commerce 2. Oil and Gasoline Pricing III. ANALYSis A. The Need for a Price Signal B. Internalizing Externalities C. A Tax on Gasoline Consumption D. Where to Tax in the Chain of Commerce 1. Upstream: The Oil Producer 2. Downstream: The Gasoline Producer a. Crude Coming b. Gasoline Going IV. RECOMMENDATION A. Phase-In a Price Floor and Variable Tax on Gasoline B. Phase-In Increases in the Current Gasoline Tax C. Revenue Distribution and Tax Offsets V. CONCLUSION I. INTRODUCTION

   American drivers pay close attention to changes in the price of gasoline. Gasoline prices across the United States rose above $4 per gallon in August 2008, but by November 2008, the price of gasoline in many states had fallen to $2 per gallon. (1) The price of gasoline is tied to the price of its primary source, crude oil, and the price of crude oil is fluctuating rapidly. The International Energy Agency reports, "rarely has the outlook for oil prices been more uncertain than now.... [P]ronounced short-term swings in prices are likely to remain the norm and temporary price spikes or collapses cannot be ruled out. Prices are likely to remain highly volatile...." (2)

   Although consumers may welcome the current decline in oil and gasoline prices, uncertainty in the petroleum market discourages energy investments in the transportation sector, the electrical grid, and even in the renewable energy industry. (3) Investors rely upon long-term predictability to make decisions, but this confidence is undermined by price volatility. Underinvestment in these sectors is a significant barrier to a comprehensive solution to global climate change and the United States' over-reliance on petroleum. (4) Efficiency improvements realized by an improved electrical grid and the development of renewable energy technologies serve the dual purposes of diminishing the undesirable consequences of climate change and the United States' dependence on oil. (5) Nobel Prize winner and former vice president Al Gore fervently insists that "the United States should undertake a massive strategic effort to solve the climate crisis and the fossil fuel dependency crisis simultaneously" because they are "inextricably linked." (6) The causes and effects of climate change and dependence on oil are so diverse that no single course of action can possibly offer a sufficient solution. (7) Indeed, "[w]e will need to attack the problem from both ends: by reducing demand and by increasing supply (from renewables) simultaneously." (8)

   Recognizing the need for government involvement in the energy market, clean energy advocates support a diversity of policies, including, for example, feed-in tariffs, net metering, renewable portfolio standards, a cap-and-trade scheme for carbon emissions, and subsidies for clean energy technologies. (9) In particular, many scholars, policymakers, and industry insiders have suggested harnessing the power of taxes to influence how businesses and individuals make their energy investment and consumption decisions. (10) For instance, Rex Tillerson, the chief executive officer of Exxon Mobil, advocates a direct tax on carbon emissions. (11) Others, including President Obama, have suggested reintroducing a windfall profits tax on oil companies' excessive revenues. (12) Alternatively, an expanding group of scholars proposes the enactment of a variable tax, including a federally-mandated "price floor," on oil or gasoline. 13 This Note explores this last option as one component of America's strategy to address climate change and oil dependence.

   Specifically, this Note presents the normative arguments detailing why and how the federal government should administer a variable tax and price floor on gasoline derived from petroleum. Part ILA provides background information on the petroleum and renewable energy markets as well as the twin problems of climate change and the sustainability of the United States' current energy infrastructure. Part ILB expounds the underlying causes of the volatility in the prices of oil and gasoline and demonstrates that a stable, high gasoline price can facilitate a smooth transition to sources of energy that are cleaner and more efficient than traditional fossil fuels. Part III illustrates the necessity of government intervention in the energy sector by means of increased taxes designed to internalize the externalities of petroleum and gasoline. Finally, Part IV explains how the federal government should restructure the tax on gasoline to be a variable tax with a price floor and how such a tax would function as part of the solution to the looming climate and energy crises.

2. BACKGROUND

   1. The "Twin Crises"

      1. Climate Change

         Climate change is human-induced, caused by emissions of greenhouse gases (GHGs), primarily carbon dioxide (COA14 Although the burning of coal is the largest fossil fuel source of GHG emissions, (15) oil burned primarily through the transportation sector also contributes materially to climate change. The Energy Information Administration indicates that among end-use sectors, the transport sector is responsible for roughly one-third of all carbon dioxide emissions and "has led all U.S. end-use sectors in emissions of carbon dioxide since 1999." (16) Energy experts, therefore, reason that "the increasing levels of emissions from transport suggest that stronger mitigation efforts may be necessary for this sector." (17)

         Because of its potentially dire consequences, climate change must be taken seriously. (18) Projections as to the extent of warming and its consequences vary in degree and reliability. (19) A consensus of scientific authorities, however, indicates that positive feedbacks (20) and climatic oscillation as a result of atmospheric warming may be sudden and severe, (21) triggering a number of undesirable events such as acute biodiversity loss, (22) sea-level rise, (23) enhanced droughts and floods, (24) disruption of the Atlantic Current, (25) the spread of insect-borne and other diseases, (26) and international conflicts over adversely affected agricultural, land, and water resources. (27) Taken together, these factors could ultimately culminate in the extinction of an alarming number of species and stress the global economy to its breaking point. (28) Many of these projections may seem unduly alarmist; however, uncertainty as to the extent of the consequences of global climate change is a reason to err on the side of caution. (29)

      2. Oil Dependence

         The United States burns more oil than any other nation and imports roughly 60% of the oil it consumes. (30) The Energy Information Administration (EIA) estimates that domestic consumption of petroleum will average 19.7 million barrels per day (bbl/d) in 2009.31 Given America's mammoth level of consumption-popularly referenced as its "addiction to oil" (32)--and dependence on foreign sources of petroleum, the United States is particularly vulnerable to an oil supply shock. (33) An oil supply shock occurs when a perceived or actual decline in the supply of crude causes a rapid increase in the market price and subsequent harm to the economy as a whole. (34) Such a shock could come unexpectedly and arise under a variety of circumstances. (35)

         There is a high risk that violent conflict or political instability will disrupt oil supplies in the near future. (36) An attack on a pipeline or refinery in Nigeria, Iraq, or Saudi Arabia or a possible conflict between the United States and Iran could severely disrupt the flow of oil to the marketplace. (37) Even though Canada and Mexico are among the United States' primary sources of oil, (38) the United States would not be shielded from the effects of a supply disruption of this nature because the "price of oil is determined in the world market and depends mainly on the balance between world demand and supply." (39) This is reason for concern given that 85% of the world's proven reserves are in nations to which the Government Accountability Office assigns medium-to-high investment risk. (40)

         Of course, the severity of supply shocks will vary in degree. An attack on a pipeline, for example, would not be as significant as an obstruction to shipping traffic through the Strait of Hormuz, which would threaten the flow of 55% of the world's oil reserves. (41) Oil is a fungible commodity, and the ability of the international economy to absorb limited supply shocks has increased since the 1973 oil embargo. [42] The gravity of a supply shock is dependent on how suddenly it occurs, whether it will obstruct the flow of oil in the long-term, and the overall state of the economy:

         It is not clear how the economy would react to a sudden as opposed to a gradual increase in the price of oil or how it would overcome a long-term reduction in the oil supply. A jump in the cost of oil would strike at the margin of an economy that is facing substantially elevated oil cost already. (43) Extreme weather events, for example, are isolated; but even small losses of supply have regional consequences. The series of hurricanes that struck the Gulf of Mexico in the fall of 2008 significantly upset the southeastern oil distribution system, causing gasoline shortages throughout that region. (44) This relatively small shock, however, did not greatly affect the price of oil or alter long-term investment decisions in the energy market in the way that the onset of a fresh conflict in the Middle East could. (45)

         Structural problems throughout the petroleum sector also have the potential to instigate an economic crisis. (46) Eighty percent of the world's oil infrastructure is "corroded-literally rusting through "47 Some economists forecast that inadequate investment in production and refining infrastructure will...