President Obama’s $10 Per Barrel Oil Tax [Gaille Energy Blog Issue 23]

President Obama’s $10 Per Barrel Oil Tax [Gaille Energy Blog Issue 23]

  • Posted by scottgaille
  • On April 26, 2016
  • "carbon tax" "oil tax"

Earlier this month, I debated the merits of President Obama’s proposed $10 per barrel oil tax at the 2016 Energy Forward Conference (sponsored by the University of Chicago’s Booth School of Business) with, among others, Ron Minsk, Former Special Assistant to President Obama for Energy and Environment. The new $10 per barrel tax would be paid “by oil companies” on both imports and domestic consumption (but not exported oil). Everyone on the Chicago Energy Policy panel agreed that oil companies would simply pass along the cost of the tax to consumers, effectively making the proposal a gasoline tax in disguise.

Minsk viewed the $10 per barrel oil tax as a half-measure. He called instead for a sweeping carbon tax on all fossil fuels. Another panelist pointed out that current gasoline taxes (18.4 cents per gallon at the federal level plus various amounts levied by each state – Texas adds another 20 cents per gallon) already constitute steep carbon taxes. Electric cars, for example, are effectively incentivized because they avoid gasoline taxes.

But the current taxes are not enough to achieve Obama’s pledges in the U.N. climate agreement. The President’s 2025 target needs a new $45 per ton carbon tax, which the Wall Street Journal today reported would result in a 15% increase in the cost of American electricity and 8% higher gasoline prices. The climate agreement’s later targets require a carbon tax of ~$425 per ton, which equates to about ~$3.75 per gallon at the pump.

Advocates of carbon taxes are quick to cite the 2008 British Columbia Carbon Tax as a success case. It seeks revenue neutrality – that is, every dollar raised from the carbon tax goes to decrease other taxes (e.g., income taxes). The BC carbon tax increased gasoline prices by ~25 cents per gallon, which reduced per capita BC consumption by about 17% (when compared with the rest of Canada). While proponents claimed a win for the environment, they missed another telling statistic. United States border crossings by British Columbia vehicles surged 136% during the same period. What if Canadians were just buying their gas in America?

Even if the United States cuts its carbon emissions, will the rest of the world? Two decades ago China was only responsible for 13% of global carbon dioxide. Today, China’s plants and factories account for almost a third of all carbon emissions. Why? Because two billion more Chinese have access to electricity, the vast majority of which is generated by inexpensive coal. Gary Sernovitz elaborates on this dilemma in The Green and the Black:

“‘Living standards in 1800, even in England, were likely no higher than for our ancestors of the African savannah.’ But starting with the Industrial Revolution fueled by coal and continuing for two centuries of supplementing coal with oil and gas, humanity has built the world we know. And many people like the modern world: suburban homes are nice . . . flying to places on vacation is nice . . . eating oranges in Chicago is nice. . . . And more and more people on earth want that sort of life.”

The importance of cheap energy is highlighted by the signs along every highway, showing fuel prices down to the penny. Grocery stores do not similarly broadcast their prices for milk and eggs. Energy hungry people, be they Canadians or Chinese, will seek the lowest prices.

Artificially increasing the price of fossil fuels is not a viable solution. Somewhere voters will not stand for it, which results in the inevitable bypass. Canadians buy their gas in America, and manufacturers move to China. The only practical solution is decreasing the price(s) of alternative(s). United States carbon emissions from coal-generated electricity declined steeply due to plentiful natural gas (which, by the way, emits about half as much carbon as coal). All that cheap gas came from technological innovation, principally hydraulic fracturing. Perhaps the best antidote to carbon (in the near-term) is opening up the shale fields of China and Europe. Paradoxically, the Climate Change Conference met in France – the very nation that banned hydraulic fracturing altogether.

The long-term answer is private investment in renewables. I can choose “green” electricity for my house. I can buy an electric vehicle, too. Investors can purchase stocks and bonds in renewable companies. Environmental entrepreneurs can build a better battery or solar panel. This is exactly what has been happening. Solar and wind power are 70% and 90% cheaper, respectively, as result of such innovation. It’s the same reason other doomsday predictions never came to pass. The planet keeps getting saved by capitalism. This time will be no different.

Chicago Booth Gaille

About the Gaille Energy Blog. The Gaille Energy Blog discusses issues in the field of energy law, with weekly posts at Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of two books on energy law (Shale Energy Development and International Energy Development).


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