Deadweight Loss from the New California Gas Tax
By David Henderson
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?