Deadweight Loss from the New California Gas Tax
Starting in January, Californians will pay an added 10 cents or so per gallon of gasoline due to a new law that goes into effect next month. UC Berkeley economist Severin Borenstein writes:
Under California’s cap-and-trade program to reduce greenhouse gas emissions, after Jan. 1, wholesale gasoline distributors (mostly refiners) are going to be responsible for the emissions from their fuel. They will have to buy, and eventually turn over to the California Air Resources Board, one emissions allowance for every metric ton of greenhouse gases you emit when you burn the gasoline or diesel they sold you.
The calculation looks like this: When you buy one gallon of California gasoline, the seller will have to cover about 18 pounds of emissions. At the current price of allowances — about $12 per metric ton — that works out to about 10 cents per gallon of gas. So, in early January, the state’s cap-and-trade program will increase our gas prices by about a dime.
This is not literally a tax but it is a tax in all but name: we will pay more to generate revenue for the government.
Borenstein’s article is titled “Learning to love paying 10 cents more per gallon” and is in the Los Angeles Times. Before you dump on him for that title, though, be aware, as I have pointed out a number of times before, that authors of op/eds rarely get to choose their titles. I doubt Borenstein would have used this title. He can’t be so naive as to think that people will learn to love higher prices for gasoline.
He does, though, argue for them. His case is interesting. It’s twofold.
First, it’s about the uses the government will make of the revenue. He writes:
That money goes to the state when it sells emissions allowances to oil refiners and other fuel wholesalers — about $1.7 billion a year at current prices. The plan is to spend it on clean energy and sustainability programs, including building the proposed north-south bullet train, subsidies for buying low-emissions vehicles and help for low-income households to afford energy.
His second reason is signaling. Immediately after the paragraph above, he writes:
But just as important, by establishing a price for emissions, California sends a signal to the rest of the country and the world that we recognize the risk of climate change and are willing to take actions to address it.
For Borenstein, this signal has independent value.
Back to its uses, though. Borenstein doesn’t state that he likes the idea of spending the money on a north-south bullet train, but his starting the next sentence with “But just as important” suggests that he does. From everything I can tell, virtually all of the expenditure on that train will be deadweight loss. So rather than the usual, often small, triangle of deadweight loss that we draw for our students, the deadweight loss from this expenditure will be almost the whole rectangle. Can Borenstein really justify that expenditure?
Dec 15 2014 at 5:09pm
A straight duty at point of sale would be better but its taxing an externality. Whats the issue? Government has to raise money and petrol tax is no more distortionary than other taxes.
Dec 15 2014 at 5:13pm
It strikes me as evil to think broadcasting your values by forcing others to pay greater taxes. Because the cap and trade program itself won’t have a signficant impact on global warming, the big value from this program is sending the signal that Califorians care. Global Warming will not be reduced, because increased taxes will cause residents of Calif. to simply reduce their demand, leading to a decrease in price. Others will buy more oil at this new price. The legislature is just shifting who eventually buys the oil, not whether the oil will be consumed.
The only way this program actually could work to solve global warming (assumiing it is as large a problem as many believe) is if it invested in renewable (or cleaner) energy R&D that is marketable absent subsdies. But of course there is already a huge incentive to invest in that kind of energy. So, do we really think a state will spend that money better?
David R. Henderson
Dec 15 2014 at 5:15pm
Whats [sic] the issue?
Seriously, mucgoo? You actually read my post? It doesn’t look as if you did.
Dec 15 2014 at 6:02pm
I agree with your assessment, but would added that the price of carbon based on the values provided is only $11 per ton. Just in the past week average gas prices have dropped $0.12 per gallon for US nationwide gas prices and $0.76 per gallon over the past year (Gas Buddies Trends).
The signalling that I see is that legislation makers are willing to put a very low price on Carbon, so Californians can feel good about their conservation. The resulting spending of the collected carbon tax will emit over half of the emission reduced (really less increased) by the tax. So next year as Californians feel all warm and green they almost certainly will be emitting measurably more Carbon emission than prior to the Carbon tax. The more accurate signal is not that California cares about global warming but rather they would like to been seen as caring about global warming.
You will know the legislators are serious about emissions when they not only apply the Tax to private entities, but also apply the tax to governments and enure the payments are made to the alleged society of the future that is said to be harmed.
I would not put it past Californians to understand, based on their milder pacific climate, that if imposed nationwide Carbon Tax will hurt other states much more than California.
Dec 15 2014 at 6:18pm
Wouldn’t it be more palatable to voters if they just divided up the carbon revenue and cut a check to each taxpayer instead of spending it on a ludicrous train plan?
This is the same train whose only first leg is massively over budget and schedule right?
Dec 15 2014 at 6:32pm
I’m for the carbon tax. I just wish it were being used to replace the income tax. Or the money was just rebated. I hate to see a good tax get tainted by entangling it with the choices that bureaucrats want to make for “replacement” technologies. Tax the externality and let the free market come up with alternatives.
Dec 15 2014 at 6:36pm
Regarding California GHG emissions (Source):
Dec 15 2014 at 7:35pm
This really is an important feature. A significant part of the world uses California’s choice of policies as a negative indicator.
Dec 15 2014 at 9:06pm
Any Pigou tax is a signal to market participates that the taxed transaction is harmful and creates incentives to avid it. A lot of new ideas, good and bad are first tried out in California.
Mark V Anderson
Dec 15 2014 at 9:09pm
Exactly! A tax on pollution is a very good idea. We should make despoilers of the environment pay, even though it’s all of us. The bullet train is one of CA’s dumber ideas (which is saying something), but the tax itself is a good thing.
Dec 15 2014 at 10:12pm
A straight tax like 10 cents per gallon gasoline is perhaps as regressive a tax as one can devise inasmuch as it hits the poorest hardest by increasing the costs they bear to travel to and from their work.
Perhaps some added tax on avgas and jet fuel at fixed base operations might be less regressive, don’t you think? I’m sure Vice President Gore would welcome a tax on fuel for his aircraft, given its ostensible purpose.
In fact, I’m amazed the he doesn’t demand one so as to relieve the burden on the economically challenged residents of California.
Perhaps the governor is planning on exempting those individuals or subsidizing them? That would make the tax a way to spread wealth – one of his party’s stated objectives.
Dec 15 2014 at 11:03pm
The bullet train is also an “independently valuable” signal
Dec 16 2014 at 5:05am
There’s some missing Economics 101 here!
“…the seller will have to cover… about 10 cents per gallon of gas. So … our gas prices [will increase] by about a dime”
Even wikipedia covers this.
David R. Henderson
Dec 16 2014 at 9:23am
I’m not sure whom you’re quoting. In any case, when the supply curve is horizontal, an increase in incremental cost of the seller by 10 cents will be paid entirely by the buyer. So you’re right that there’s some missing Econ 101 here. But filling in the missing Econ 101 leads to Borenstein’s conclusion. Why? Because in a global market, or even in a national market, the supply curve of gasoline to any given state is close to horizontal. The reason is that the supplier have, as alternatives to sell to, all other 49 states.
Dec 17 2014 at 4:47pm
This would be considered a Pigouvian tax because the producers are having to pay this extra fee to account for the pollution that occurs during the production of gasoline. The Pigouvian is meant to stop the over production of gas so that the social cost of producing gasoline will be reduced. Since gas is very inelastic in the short run for most consumers, we have to bear the burden of paying this tax.
Dec 20 2014 at 1:42pm
Considering that revenues from all taxes get filtered through the grabby hands and idiotic ideas of politicians, one could make a serious argument that there are no “good taxes.”
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