The price we pay at the pump is inaccurate

A couple weeks ago, I wrote about what might happen if gas were to spike to $10 per gallon. The comments and tweets were enlightening. Nobody wants this to happen, and the consequences could be drastic to our still-fragile economy. Today, I wanted to focus on a different angle: the hidden price we pay for burning fossil fuels (aka, oil).

The national average gas price sits at $3.67 per gallon. Most of that consumer cost goes to a massive supply chains of drillers, explorers, refiners, transporters, commodities exchanges, and storefronts. It supports their bottom line. This process of getting oil from the ground into a refined fuel source is an elegant dance. Without every component working in harmony, we wouldn’t be able to fill up our cars.

Where our current fuel taxes go

In America, our price per gallon includes about 50 cents for state and federal taxes. Of that 50 cents, about 18-20 cents per gallon is directly funneled to the federal government as an excise tax. Essentially, an excise tax is an adjustment and penalty for greater contribution of damage. For instance, if you drive more, shouldn’t you have to pay more to maintain the roads? Most people understand the need for this tax; without it, we wouldn’t have this infrastructure.

Like all things political, the funds get redirected to all sorts of “special” programs. About 60% of federal funds go directly to road and bridge building. The other 40% seems to be sent to local municipalities for the purposes of pet projects, which may include (but is not limited to) roads.

There are museums that are being built with that money, bike paths, trails, repairing lighthouses. Those are some of the kind of things that that money is being spent on, as opposed to our infrastructure.
–Former Transportation Secretary, Mary Peters (Link)

What’s happening here is that federal funds are being redirected back to districts after Congress gets their hold on the excise tax. Instead of spending on the federal level with federal funds, earmarks eat away at the excise tax. Ironically, senators and congressman already see a benefit via state gas taxes. The federal redirection of funds is just an added bonus. An estimated 30 cents per gallon is fed back to the state (e.g., Iowa) for the purposes of:

State highways maintained by the Iowa DOT are financed with funds that are principally derived from vehicle fuel taxes and registration fees collected and allocated by the state and federal governments.
–Iowa DOT (Link)

Both state and federal taxes for fuel directly charge corporations and individuals for their use. I bet you and I could both use the extra 50 cents per gallon that we’re paying in taxes, but it would not properly contribute to the maintenance and security of our infrastructure. Albeit, we could probably do without the earmarks for special interest projects in local municipalities.

Our tax code is missing an essential element: Carbon

Unfortunately, the current tax regime doesn’t account for other, indirect negative externalities that are involved with burning fossil fuels. Many developed nations attempt to account for these indirect damages.

Norway is a major oil producing country, but the average Norwegian has to shell out $9.97 for a gallon of gas, more than twice the U.S. average. Norway doesn’t subsidize fuel at the pump; instead, it uses oil profits to fund free college education and infrastructure development. (Link)

In Norway, steep gas prices are primarily due to two taxes: road and CO2 taxes. After that, the revenue generated goes to support free education in Norway — creating a highly-educated populace that can intelligently vote and participate in democracy. These are some of the positive parts in expensive taxes.

But there also more nefarious company practices that could be accounted for by taxes. For instance, while BP’s Deepwater Horizon spill in the Gulf of Mexico has cost the company around $13 billion, the environmental devastation and future wildlife concerns are still unknown. A carbon tax could account for this damage, too. The threat of terrorism and instability in global markets forces companies to explore and drill in safer zones that are further from developed areas. But safety has a cost, as transporting, leaks, spills, and CO2 emissions in the pumping process is already tremendously expensive.

America subsidizes heavy oil use, at the detriment of long-term stability considering major environmental impacts (i.e., climate change). This policy stands in direct contrast to many European countries that prioritize the environment and recognize the painful consequences that are soon to occur if we don’t change course. Further gas taxes alone would likely reduce consumption and begin to correct our course towards a more environmentally friendly economy.

What should we do now

The leading argument against additional taxation (primarily carbon taxes) is because the economy could suffer. By placing a uniform tax on the fossil fuel use that’s contributing to climate change, a difficult consequence may occur: business may slow. Critics point out that the economic ramifications for increasing the excise tax and introducing a CO2 emissions tax are dangerous – they affect average Americans and vulnerable small businesses.

…higher prices would consume a greater share of income for low-income households than for higher-income households, because low-income households generally spend a larger percentage of their income on emission-intensive goods. Similarly, workers and investors in emission-intensive industries, who would see the largest decrease in demand for their products, would be likely to bear relatively large burdens as the economy adjusted to the tax. (Link)

Most of the evidence suggests that if we ignore the signs and continue our current fossil-fuel driven life, we’re in trouble, but the solution is murky. Our current paradigm is to burn and travel as fast and frequent as possible to deliver goods with efficiency and at a low-cost to consumers. Tweaking this simple equation may provide long-term benefit to our environment and future as humans, while hurting individuals in the short-term. More importantly, lower-income populations would be at particular risk to these changes.

We’re at a fork in the road as a country and world:

• Should we do anything about climate change?
• Should we admit that our consumerism contributes to spiking CO2 rates?
• What happens if we don’t act now?

Unlike apocalyptic predictions from moneyed interests, a carbon tax likely wouldn’t decimate the US economy. In fact, the Congressional Budget Office (CBO), which acts as a non-partisan group for Congresses budgets, says this:

For example, in 2011, CBO estimated that a cap-and-trade program that would have set a price of $20 in 2012 to emit a ton of CO₂ (and increased that price by 5.6 percent each year thereafter) would raise a total of nearly $1.2 trillion during its first decade. In addition, total U.S. emissions of CO₂ would be about 8 percent lower over that period than they would be without the policy, CBO estimated. (Link)

Production costs would increase and possibly affect the total output; moreover, the prices paid at the supermarket would likely increase. All forms of consumption would decrease, and as the CBO statistics suggest, an 8 percent decrease in emissions would be witnessed.

Like much of Europe, where you are likely paying double what you pay in America for gas, fossil fuel use is reduced. The cost is burdensome — in a good way. We need to begin exploring alternative energies and production paradigms that don’t tax our environment as much. In the mean time, we need to start taxing fuel at higher rates and redirect some funds to lower-income families as a fuel credit (essentially, becoming an upper-middle, high income, business tax).

Below is a video from Apple. They’ve recently been featured by Greenpeace for their all alternative energy power sources for data centers. While companies can and will adjust — innovating for the future — we should make this shift economically advantageous, while punishing the polluters.

The future is just too fragile without significant changes.