My state senator, who is also majority leader of the California Senate, is Bill Monning. We’ve generally gotten along well, having been on a panel on the Iraq war at our daughters’ school in the spring of 2003 and having both spoken at an antiwar rally last decade. We were on the same side on both issues.
The local publication Monterey County Weekly had a cover story on him the week before. I wrote the following letter to the Weekly, which was published:
Like Bill Monning, I would have been touched by, and proud of, my father if he had given a $20 bill to a poor Mexican immigrant. That speaks well of his father and of Bill Monning.
It’s tragic, therefore, that the lesson he learned from his father’s private act of voluntary charity was to use government to make forcible transfers and to interfere in other ways in people’s lives. He deserves strong kudos for his legislation allowing terminally ill adults to request medication to bring about a peaceful, and less painful, death. But he deserves condemnation for using his political power to raise the gas tax and to dictate to restaurants what they can and can’t advertise on their children’s menus.
I’m glad that he withdrew his 2012 bill to ban food trucks within 1,500 feet of a school. That would have hurt a number of relatively low-income Mexicans.
READER COMMENTS
Thaomas
Nov 26 2018 at 8:59am
Without Knowing more about the consequences of NOT raising the gasoline tax, I certainly would not condemn it. Two possible consequences I can think of — less road repair and more CO2 emission into the atmosphere — are not good things.
Jon Murphy
Nov 26 2018 at 9:12am
How effective is the gas tax at both of those things? Is it the best option for combatting CO2 and road repair?
Dylan
Nov 26 2018 at 10:14am
Best is somewhat subjective of course, but it certainly seems to be one of the better and practical ways to do both of these things while staying (just barely) in the realm of the politically possible. Since road damage is mostly a function of vehicle weight, and vehicle weight is pretty well correlated with fuel economy, a gas tax seems like a not bad surrogate for road usage fees.
As for CO2, it obviously isn’t nearly as good of a solution as a straight carbon tax, but considering vehicle emissions make up about 20% of CO2 emissions in the U.S., it isn’t a bad start either, since infrastructure is already in place and it is easy to administer.
If you believe that carbon is seriously underpriced currently based on the externalities, then an increased gas tax gets us a little closer to the true price of carbon, while having little danger in going over.
Jon Murphy
Nov 26 2018 at 8:31pm
Dylan-
You’re right. “Best” is subjective. Forgive me for not being clear.
I was asking (to your point about carbon taxes) if gas taxes are actually the most effective solution out there. Thaomas’ original comment to me implied that he’d oppose keeping the gas tax at the status quo. Would the costs of increasing the gas tax outweigh the benefits of increasing the gas tax?
Dylan
Nov 27 2018 at 6:36am
Jon – no need to apologize, I understood the suggestion. My comment was made in the spirit of not letting the perfect be the enemy of the good.
Your question is something that is mostly empirical, and depends on a lot of factors that I’m not an expert in. However, if you accept as most economists who study climate change seem to do (although probably not most of the ones on this site), that the price of carbon is too low, then raising the gas tax isn’t the optimal way to fix that issue…but is a lot better option than something like CAFE or Cash for Clunkers. Would you disagree?
Jon Murphy
Nov 27 2018 at 7:57am
Going off the assumption that the price of carbon is too low, then a carbon tax is probably the best solution.
Dylan
Nov 27 2018 at 10:40am
Sure, a carbon tax would be the best option, but if that’s not politically viable for some reason, the question is, is an increase in the gas tax better than the status quo? Thaomas made two arguments.
Road repair
CO2
My understanding is that gas taxes previously had only paid for about 50% of road work, with the rest coming out of the general fund. So, this looks like an improvement to me. A better option from a user fee perspective would probably be based on miles driven, but I’m not a big fan of the privacy aspects of that, and given that electric cars are still a pretty insignificant percentage of overall vehicles, a gas tax shouldn’t be too far off on usage fees for awhile still.
And on the carbon side of things, yes a carbon tax would likely be the best solution. But if we compare it to the kinds of solutions that actually do get through politically, like CAFE standards, a gas tax seems like a net improvement.
Jon Murphy
Nov 27 2018 at 12:04pm
If the carbon tax is not viable for political reasons, we’d need to consider why. The gas tax may not be viable for the same reasons.
But, the viability of the carbon tax is ultimately irrelevant to the question of whether raising the gas tax would be the best solution. Let’s say the gas tax would reduce CO2 damages by $1b, but to raise it would cost $3 billion. In this particular case, the costs ($3b) would outweigh the benefits ($1b), regardless of the other viable solutions.
As an aside, this line of reasoning is why I argue that, in fact. carbon is currently over-priced. All the analysis currently done is done as if there are no or minimal transaction costs and various other carbon fees in place. But that’s neither here nor there for this present conversation.
Dylan
Nov 27 2018 at 5:27pm
Jon – Appreciate your response. I’m afraid I’m not following your logic, and from reading other comments of yours on the site I know you’re a smart guy, so I’d really like to. Can you give a little more detail?
As to your point on viability. We know that so far a carbon tax has not been viable in the U.S. because all attempts to impose one have failed. While the gas tax increase passed in California last year, and gas taxes have been with us for a long time, so by definition they must have been politically viable.
What I’m having trouble following is your transaction cost argument. Are you suggesting that raising the tax would increase transaction costs substantially over the current costs of administering the tax? I have to admit, I assume it would be a fairly nominal increase if any at all, but maybe you’re considering costs that I’m not thinking of?
Estimates I’ve seen suggest including all externalities in the price of gas would raise the price somewhere between a couple of dollars a gallon to over $10 a gallon, which if those are anywhere close to accurate suggests we’re in no danger of overshooting when we’re talking about taxes in terms of cents and not dollars.
Jon Murphy
Nov 28 2018 at 9:50am
I’ll happily respond. But, before I do: how familiar are you with Ronald Coase’s “Problem of Social Cost”?
Dylan
Nov 28 2018 at 1:13pm
I think I’m fairly familiar with the concepts, but I have not read the original article. In general I’ve found the idea very thought provoking, but somewhat lacking in practicality for many of the cases of externalities that are commonly discussed. There’s not just the transaction costs issue, and perfect information, and free rider problems, but also temporal differences where the party bearing the cost of the externality might not even be alive at the time when there is a theoretical chance to bargain.
I find Coasian solutions particularly impractical when it comes to problems where there are very large numbers of parties involved both in terms of those bearing the potential costs as well as those reaping the near term benefits. In those cases I thought some form of taxation by a central authority was preferred precisely because the transaction costs were lower than other potential solutions?
Jon Murphy
Nov 29 2018 at 10:05am
Dylan-
Fantastic. It looks like you understand at least basically where I am going with this already.
The purpose of Coase’s article is he shows that, in a situation where a Pigouvian tax (like a carbon tax) is generally supposed to be beneficial, it is ultimately unnecessary as people can simply bargain their way to the optimal solution (what is commonly called the Coase Theorem). But that’s not his key insight, far from it. The majority of the paper is dealing with issues of transaction costs and how they prevent such bargaining from taking place. If transaction costs are sufficiently high, he shows, government intervention may be applicable.
But the story does not end there. We need to look at the transaction costs themselves. If the transaction costs are higher than the benefits of reducing the externality, then the externality is already the optimal outcome. Government intervention would, therefore, move the market away from optimality. Consider the following example: you are sitting at home and someone drives down the road blasting music of a type you do not like. There is an externality on you. Why do you not negotiate, or lobby, to have the noise reduced? Probably because the effort of going to the driver (and forcing him to stop!) and reaching some agreement is too high. Of course, if there are many drivers doing this, then the benefit of the externality increases, which might make certain actions such as lobbying more practical, but that’s part of my point.
Now, let’s assume that the transaction costs are sufficiently low compared to the benefits so that some optimizing action can take place. Let’s further assume, for the sake of argument, that it is decided that government action through some tax is preferable. Now, our task gets trickier. When determining the optimal tax, we need to consider what, if any, Coasian bargains have already taken place. We also need to figure in the costs of imposing and monitoring the tariff, as well as the costs of using the government to impose such a tariff (what I call the “political costs”). In the normal analysis, all of these factors tend to be ignored. Most estimates of carbon taxes assume they are costless to implement and ignore taxes and other issues already in play.
Going back to the music example, let’s assume that, though the normal analysis (as described in the paragraph above), the town agrees that a fee of $100 per noise complaint is the optimal tax. But, let’s further assume that there are already certain actions in place: the town charges an auto registration fee, it does not allow idling in residential neighborhoods, etc etc. Once these factors are calculated in, the optimal tax may be closer to zero, or even negative if the current costs are too high! (Remember, the optimal level of pollution is not zero).
To bring this to the realm of carbon taxes, there are already a number of Pigouvian taxes and Coasian bargains already in place: parking fees, auto registration fees, public transportation subsidies, emission inspections, etc. When normal analysis on carbon taxes are done, these factors are usually assumed to not exist. Thus, the analysis of the carbon tax is likely too high. Indeed, the optimal carbon tax might be negative!
Dylan
Nov 30 2018 at 7:17am
Jon – Thanks for taking the time to spell this out, I think I’ve got a better idea now of where you’re coming from, and it is an interesting way to frame the issues, but I still feel like I’m missing a logical step somewhere. Presumably, the fees you mention are in place for a reason, and that reason is something besides carbon mitigation?
As I see it, you can divide the costs of car use into 3 buckets. A) There are the direct costs, things like fuel and maintenance that you pay for directly. B) Indirect costs, like the wear and tear on the roads and demand for new roads that are caused by using your car, these are paid for indirectly through fuel taxes and vehicle registration fees, but are also heavily subsidized out of general tax revenue. C) Then there are the pure externalities like increased pollution of various types. We pay for these through various mandated equipment that raises the price of vehicles, and through periodic emissions checking that verifies that the equipment mandated is still in place and functional. But note, that CO2 is not one of the pollutants that is covered under this scheme, so any damage that is done by CO2 will be paid for by society, but not the driver.
So if we add up all the costs of driving we’ve got A+B+C, where currently the driver pays all of A, maybe 50-75% of B, and some smallish fraction of C. I agree that the fees you mention will discourage driving at the margin, compared to not having them at all, and that discouragement of driving reduces overall carbon emissions. However, that is only against the world in which those fees didn’t exist, and the cost of driving was even further below the true market rate than it is today. It’s hard to think of those things properly as a “price on carbon” in the same way that I don’t get Showtime in my cable package if I just pay for HBO. Am I misunderstanding your analysis? The one thing I can think of is that the current fee structure is almost certainly not the most efficient way to handle things like NOx emissions, and to the extent that we are overpaying for that, we reduce the demand for driving at the margins, and that acts as something of an indirect carbon tax. Intuitively, I have trouble believing this is so substantial that we would need a negative carbon tax to compensate…but my intuition is not all that reliable, so maybe I’m wrong there.
Jon Murphy
Nov 30 2018 at 8:42am
Excellent point! You do not misunderstand me at all. Rather, I’d argue that even though those fees are used for other things, they still act as if they are a carbon tax by reducing the output of carbon. True, those fees may not go into any kind of damage mitigation or compensation, and that might be the margin we wish to change (eg, increase the gas tax and have some funds go toward mitigation efforts), but we still ultimately need to take into account all current taxes and efforts that exist that reduce carbon output when determining an optimal tax.
Dylan
Nov 30 2018 at 3:04pm
Phew…seems like we probably agree more than we disagree, and I’m glad I wasn’t misunderstanding any fundamental point. But one last question if you don’t mind. When economists and others who look at climate change through an economic lens try to estimate the damage from CO2 induced warming, don’t they normally take the level of emissions today and then make some reasonable estimates for growth based on no change in incentives…and then try to put a dollar value on the damage that following the status quo will get you? In other words, when we’re talking about a price on carbon, aren’t all those “current taxes and efforts that exist that reduce carbon output” already priced in? If we took those out, and started with a world that didn’t have those taxes and fees and other things, we’d have an even higher baseline, and the price of carbon would be higher, right?
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