What A Gas Tax Can’t Do, Ctd

Apr 26 2011 @ 9:59am

A reader writes:

I was involved in producing a recent white paper that comes at this point from a slightly different angle that might help to flesh out the argument around a gas tax a little bit. Manzi and Drum rightly focus on consumption and efficiency, but those are only half of the equation when it comes to gas taxes. For a lot of advocates, gas taxes and carbon prices are also important for generating technology substitutes, i.e. super-efficient vehicles, or electric vehicles, or some other wholly new technology, in addition to inducing behavior change and effecting demand.

The problem is that just as price changes have to be severe to manifest any impacts on gas consumption, price changes on their own also tend not to do much to inspire the development of radical new tech solutions, unless prices are through the roof. This is mainly due to the high levels of risk and uncertainty that come with new tech: private firms would generally rather seek out low-risk, low-cost alternatives (i.e. more efficient internal processes or capital goods) than to invest time and effort into developing high-risk, initially-high cost alternatives (i.e. hydrogen fuel cells). It takes a real, permanent shock to get any real effects, and suffice to say the American political system is unlikely to ever pass a gas tax high enough to drive these kinds of changes.

Europe is a great example: they have high gas prices, but they don't drive electric cars much more than we do. They drive diesels, and they drive a bit less, but they're still dealing in petrol. So as much as I hate to say it, anyone who is advocating for a gas tax has to deal with the double-whammy of low elasticity of demand AND low upside for induced innovation.

This is not to say we shouldn't have a gas tax, as we should, if for no other reason than to price the associated externalities (environmental and national security alike). It just means it's somewhat limited as a solution to fuel emissions and fossil dependence.