Why It's Imperative That We Raise Energy Taxes

The argument is really fairly simple. Fossil fuel supplies are limited. World oil production will soon peak—if it has not already—beginning an inexorable decline in output and increase in cost. The same goes for natural gas, though its transition from plenitude to shortage may be even more abrupt.

The best way to extend the availability of oil and gas is to reduce demand, and the best way to reduce demand, I’m afraid, is to make fossil fuels more expensive—significantly more expensive.

Energy can become more expensive in two ways. The first is through the free-market laws of supply and demand, which affect the commodity price. That’s what we’ve witnessed the past few years as petroleum and natural gas prices have doubled, and that’s what experts predict will keep happening as reserves dwindle. When prices rise this way, the businesses and governments that control those resources reap the profits. In the case of petroleum, much of this future wealth will accumulate in the Middle East (Saudi Arabia and Iran together account for a third of world oil reserves), and a chunk of that money can be expected to continue funding the sort of terrorism we witnessed on 9/11.

The other way energy prices can rise is through taxation. Because a large tax on fossil fuels would decrease consumption, the rate of commodity price increase would slow down. The price of crude oil might even drop, slowing the flow of money into the politically unstable Middle East. We would have replaced the

natural price increases from supply and demand with artificial increases—but the effect on energy conservation would be the same. Consumers would demand more efficient cars—and manufacturers would supply them. Developers would build zero-energy houses. We would create walkable communities again.

Here’s what we need: a Btu-based tax on extracted fossil fuels. I propose something on the order of $5 per gallon of gasoline ($1.30/l), normalized on a Btu basis to other fossil fuels, including natural gas, propane, and coal. This tax should be implemented gradually (perhaps 50 cents per year for ten years) to ease the transition and allow industry (such as car manufacturers) to plan for it with new products. In this case, wealth is transferred not to foreign governments and a few huge corporations, but rather to our government to do with as we—through our legislators—deem appropriate. It could be a

floating tax that would rise or fall as the commodity prices for these fuels fluctuate—to keep energy costs consistent and predictable.

Since higher energy prices cause hardship, a significant part of this tax should pay for low-income programs—for example, helping low-income Americans replace their inefficient cars and appliances and insulate their homes. A portion of this tax should fund a mammoth, nationwide effort to ramp up research on energy conservation and renewables, while funding weatherization, public transit, and other programs needed to bring about energy independence. (See

EBN

Vol. 13, No. 3 for information on the Apollo Alliance, which seeks to do just that.)

If one accepts that fossil fuel production will soon reach a peak and that prices are bound to increase as availability is constrained, the choice is whether someone else—governments in the Middle East, for example—decides how the hundreds of billions of dollars to be collected get spent, or we—tax-paying and voting Americans—decide for ourselves.

In an earlier editorial, I referred to this as a Freedom Tax (see

EBN

Vol. 12, No. 4). That moniker still works for me. Instituting a $5/gallon Freedom Tax on energy would be a hard sell for a Congress whose members receive millions of dollars in campaign contributions from fossil fuel interests, but it is increasingly clear that such a tax would be good for our nation.

– Alex Wilson