How Oil Conservation Hurts Governments
Posted by Prof. Goose on December 4, 2005 - 1:25pm
In thinking through the role of government responses to Peak Oil, and I've come to a realization that wasn't obvious to me: Governments suffer financially when conservation occurs, because tax revenues drop. This gives most governments a disincentive to push conservation.
Direct tax losses are the biggest effect. Direct taxes include royalties on oil leases, and federal, state, and local taxes on oil products. If people or businesses buy more efficient vehicles, they get more miles per gallon, and hence pay less tax per mile. There is an inverse 1:1 ratio between conservation success and taxes: if consumption falls by 10%, taxes also fall by 10%. Governments can, of course, raise tax rates to offset the decline in revenue--but if the oil price is high enough to spur conservation, it's probably politically impossible to raise fuel taxes.
Indirect Tax Losses
Indirect tax effects are probably smaller than direct effects, but they are significant. Conservation is likely to result in less economic output than profligate energy use would offer, and governments will not get any taxes on the forgone economic activity. Effects might include lower employment and incomes, leading to less personal income tax and fewer sale taxes, as well as fewer corporate profits leading to lower corporate taxes.
Other effects occur as well. Stuart has done an interesting set of analyses between miles driven and gross domestic product (GDP). There's a very clear correlation: as GDP grows, businesses and individuals drive more. Likewise, when they drive more, GDP grows. So, conservation (by driving less) reduces GDP and economic growth, and that cuts tax revenue from several sources: income taxes, corporate taxes, sales taxes and fuel taxes.
Efficient is better--but it still costs the government
Clearly, we want to keep increasing energy efficiency, so we get more output per BTU. But economic systems are complex, and efficiency comes at a cost. If people or businesses buy more efficient vehicles, they get more miles per gallon, and hence pay less in direct taxes per mile.
Indirect tax effects are more complex. Improved efficiency generally requires increased capital spending, and higher interest bills. Conservation efforts may have a positive ROI, but often at a tradeoff against higher widget production. With a fixed amount of capital available, increasing spending on energy efficiency means forgoing investments designed grow output like bigger plant and equipment, more sales staff, or greater advertising expenditures. So output is efficient, but smaller, yielding less for the tax man. We may believe that smaller and more efficient is better--but it costs the government money.
Losers and winners
These effects occur worldwide. Ironically, the losses hit hardest on progressive governments that raised taxes to spur conservation. The higher the taxes on fuel, the more the government suffers when people and businesses conserve. The only exception is those governments who now subsidize fuel price--in Iran, for example, regular sells for 34¢ a gallon, and the government pays any costs above that. When people conserve, subsidy costs drop.
What will governments do? 3 choices:
Accepting a lower tax take is difficult and probably unlikely, especially if there is a budget deficit.
Increasing fuel taxes is a logical step: it directly offsets the revenue-reducing effects of conservation, and it spurs further conservation. However, it is politically very difficult to enact new fuel taxes at a time when prices are already a source of public concern. I believe this is unlikely.
Develop new taxes, either vehicle-related or unrelated, is my guess for the most likely course of action. A pilot test for higher mileage taxes is running in the UK. London reduces traffic congestion by imposing car taxes on motorists who drive into the central city at peak times. The daily charge for driving in the "central zone" has now been raised to ₤8 (US$13.71), and the zone will probably be expanding in size. It's a fairly intrusive system, with video cameras and plate recognition software used to impose fines on those who don't pay.
Governments are starting to figure out the taxation issues. The BBC reports from the UK:
"Charging people according to where, when and how far they drive is a big idea whose time has come. Last month, the British Transport Secretary, Alastair Darling, suggested something altogether more ambitious [than the London congestion charge]: a national [road pricing] system covering the whole country. Drivers would be charged a varying rate per mile, depending on what kind of road they took. Cars would be fitted with a "black box" to record their movements, probably linked to global positioning satellites (GPS). Mr. Darling described it as "a radically different approach", something that no other country in the world had done. ... All the same, there are strong pressures on governments to push ahead with road pricing. For one thing, some experts say, revenues from fuel taxes have begun to decline as cars become more efficient."http://news.bbc.co.uk/2/hi/uk_news/4641089.stm
And from New Zealand Herald 21 November 2005:
"The Ministry [of Transport] has highlighted to new Transport Minister David Parker a need to charge more for actual road use, rather than relying on blunter forms of raising revenue such as petrol tax and ratepayer contributions. It warns in a briefing paper for the new minister that better fuel efficiency from technological improvements to New Zealand's vehicle fleet is starting to outstrip the growth in kilometres travelled. "This will lead to a reduction in the level of fuel excise duty collected and is therefore likely to threaten the long-term viability of petrol excise as a primary method of paying for land transport activities," the briefing paper says.... Motorists pay 62.9c in tax for each litre sold - 47.665c in petrol tax and 15.3c in goods and services tax - accounting for 46 per cent of the 136.9c price of 91-octane. Although petrol tax will rise with inflation in annual adjustments starting in April, the ministry's briefing paper says this will only delay an erosion in revenue..."
http://www.nzherald.co.nz/section/9/story.cfm?c_id=9&objectid=10356223
Implications of the government's potential tax choices
New mileage taxes should be effective, because they provide an incentive to drive less miles while sating the tax appetite. This will cut fuel consumption, and reduce traffic congestion. It may have a tendency to spur people to keep their old inefficient vehicles, but drive them less. This cuts long-term road development needs.
Higher fuel taxes may have a slightly different effect: drivers win by burning less fuel, whether they reduce mileage or not. It could spur people to buy more fuel efficient vehicles, but drive them further. This may not reduce the needs for new roads.
Non-transport taxes are the worst choice for conservation, but make the most money for government. An additional tax, not related to mileage or fuel consumption, would fill government coffers, but provide no incentives to conserve. In this case, governments win by maximizing fuel tax revenue (prices stay lower, so no incentive to conserve) and they gain new taxes as well. Non-transport taxes may be easier to impose, because they can be less controversial.
What happens next? Watch as the plot develops.
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(Although here in Finland much of the road wear comes from studded winter tires, which are allowed for six months a year, and only allowed for light vehicles.)
Our whole distribution system has moved away from the railroads. The Wal-Mart model is built on cheap energy. Their cavernous stores are out in the boonies, their distribution centers are far from the stores, the ports are far from the distribution centers. Trucks are used as "rolling warehouses." It's going to get ugly if energy prices keep rising, or if there are actual shortages.
Of course, this only addresses damage to existing roads. Capacity is another matter. We multilane roads because of all the traffic, not because of the damage to the roads.
BTW, one of the most common complaints I hear is bicyclists do not pay for anything. In 2004, Florida DOT said it cost $205,508 per mile of bike lanes. This ain't cheap.
http://www.dot.state.fl.us/planning/policy/pdfs/TransCost.pdf
These charges also help in two ways:
- Diesel powered engines that are not in vehicles (generators, pumps, etc.) do not have to pay the charges, thus reducing the cost of operating these machines.
- It is a nice fair way to charge bio-diesel users for the damage that their vehicles still do to the roads.
Rick, nice to see some TOD input from NZ! Are there any Peak Oil Awareness groups here in NZ? I'm in Hawkes Bay.My prediction: we'll cut spending a little, and raise taxes a little, but mostly we'll just increase the deficit. As usual.
How's that one for a great example of insightful forward thinking! What an incentive to go out and buy a hybrid!
If your state DOTs are anything like mine, at least a third of all road project expenditures is 100% pure grade A pork. That's where more attention should be focused, not where to squeeze the motorist next.
Yes, as a general rule, conservation will decrease governmnent tax revenues. But that's quite easy to solve: the government can just raise the tax rates accordingly. Presto - more tax revenues magically appear.
One thing I am vehemently opposed to is some sort of black box that will automatically record how many miles you've travelled and then tax you accordingly. While such a system would make tax proportional to road use, it would only take minor modifications to morph it into a system that could tell a repressive government where and when you travelled. Does anyone want to be in position where he/she might have to explain to the police why you traveled 23.7 miles at 9:30 PM on January 17 to such and such coordinates?
A good rule to follow is that if a new power can be abused, it will be abused.
Plus such a system would be a perfect instrument for implementing enforced gasoline rationing. It would be quite easy to configure the system so that the black box allows you to drive only X miles per week and then automatically disables your car. Or if the State determines that you have been a naughty boy, it could keep your car disabled for a certain period as a form of punishment.
When my paranoid side gets the best of me (which seems to be happening more and more these days), I sometimes wonder whether this optional LO-JAC (sp?) system that is available on some GM cars is really a Trojan horse for the government to get its foot in the door to eventually make it mandatory for all new cars to have such a black box.
There is something to be said for keeping one old car with a points-and-condenser ignititon system: i) it won't be knocked out by an electomagnetic pulse in the event of a nuclear war, and ii) it can't be disabled remotely by a third party in the way that an electronic ignition can. In addition to my daily drivers, I just happen to have such a car: a 1968 Beetle. A great car for the Sixties, and perhaps a great car for the post peak oil Road Warrior scenario (after a few serious performance modifications, of course).
Device Stops Speeders From Inside Car
Note, though, that the UK is already proposing your worst-case GPS-based system, because they want to charge more for congested roads or peak hours, and less for lightly-travelled roads. To do this, they need to know exactly where you are, and when. The idea is to do two things: raise money, and change drivers' behaviour. It's an intrusive and high-tech way to make all roads into toll roads, with some charging higher rates than others.
Regardless of the implementation method, effective road taxes should reduce driving. And we will need to do that.
of course this plan requires that the price of fuel remain stable... something that would be more easily achieved through convservation... or maybe not.
An example: In New Zealand, our gasoline taxes are $.63 per litre. So I conserve, and save $1.30 by not buying a litre of gasoline. I take the $1.30 and buy a candy bar, which has sales tax included in the price. The government gets merely $.16 in taxes on my purchase, for a net tax loss of $.47 (about 75%) because I bought a lower-taxed candy bar instead of a higher-taxed litre of gasoline.
This general principles holds in every country, and under almost every circumstance. The only way tax revenues stay the same is if money conserved is used to buy goods that are taxed equally to or higher than gasoline. So far as I know, the only goods that are taxed that highly are tobacco and alcohol.
I agree that the money not spent on fuel does get put to other, probably better uses. But the tax revenues do evaporate.
We can hire more people to look at data all day, even if its all ran by the mainframe we still have to mail out the tax bills.
Or, No more cheating on the spouse, the gov't will know i used the family car do so. Or drive by shootings should also go down.
I do not see this black box thing happening in the USA we would have a political fallout for years. But the UK already has the cameras everywhere.
Though the USA is installing Traffic Signal cameras, and Police have had cameras in their cars for years now.
Laughs, I wrote a short about all the cameras once. I'll have to get it out and send it in again.
That means that your cell phone triangulates your position in order for the system to work.
It has to be that way as a matter of physics.
EZ-Pass boxes can be used to nail speeders, not just at the tollbooths but anywhere there's a scanner that can pick up their signal. (Tip: construction work zones often have them.) There have been people who lost their jobs because their EZ-Passes showed they were not where they were supposed to be. And yes, EZ-Pass tracking has been used in divorce cases to prove infidelity.
Conservation produces net lower expenditures on gasoline. Lower expenditures on gasoline means less money taken from the public in gasoline taxes. The money that the public saves by not buying gasoline gets spent elsewhere on some good or service that carries a lower tax than gasoline. Therefore governments receive less tax revenue. That all makes sense.
But what about the concurrent decline in costs? Externalities not figured into the revenue/cost scheme of gasoline taxes would go down along with tax revenues. For example, the cost of providing health care to inner-city children suffering from asthma and other automobile pollution-related diseases would go down. The cost of repairing automobile pollution-damaged ecosystems and farmland (from acid deposition, road dust, etc.) would go down. And the cost of treating and disposing of/recycling all the toxic waste produced by automobiles (street runoff into city sewers/storm drains, old motor oil, old tires, etc.) would go down. Might a drop in costs from damaging externalities of the automobile industry offset at least some of the drop in tax revenues? Or do the externalities add up to just too small a number to matter?
Good comment. We don't spend nearly enough effort in understanding externalities. You're quite right that externalities would drop if consumption drops, and we should do everything we can to make that happen.
The dollar amount can be calculated, but it's going to be a pretty approximate number. Reducing gasoline consumption by 1 gallon will cut C02 emissions by about 20 pounds(!). Clearly, that's worth something in the fight against climate change. How much? Make an assumption, and multiply.
Yes, but ... The tax drops are clear, easy to see, and painful: it's like the government suddenly gets a cut in their paycheck. The costs of externalities are diffuse, and harder to see the linkages, even though they are real. Importantly, the government won't pay many of these costs--individuals will. The key thing about externalities is that they are inherently unjust: the innocent pay disproportionately more than the guilty.
Externalities would be a big number, but they are hard to add up. And some of these "costs" are never paid in dollar terms: we just live with them. And because externalities are so diffuse, most economists just ignore them.
But I think the whole premise here is wrong. The purpose of government is not to raise taxes, it's to take care of those issues where collective effort solves problems individuals cannot alone. And the more direct consequence of the way we create governments (in democratic societies) is that political decisions are made for the most part to try to please the most people, given present attitudes and opinions. Pleasing people does tend to increase the size of governments, but it's not inevitable, and there are certainly lots of examples of, at the least, significant reductions in taxation, and not just in the US.
I.e. taxes and tax revenues can go up and down depending on all sorts of needs and circumstances, and there's little need to be so worried over motivation of this sort.
The real reason governments may not be pushing conservation as vigorously as they can (and high gas taxes are themselves a pretty significant effort there) comes from the specific special interests our leaders have to please even to be in the positions they hold. If nothing else, pleasing people the way politicians have to to get elected leaves them with little enthusiasm for bold steps of any sort. Pushing conservation isn't going to be high on the list.
Ideally, yes, but governments tend toward self-preservation and expansion even when preservation and expansion are bad for the governed, because governments are organizations of individuals whose livelihoods rely on preservation (and sometimes expansion) of the government. Lowered tax revenues as a result of achievement of a desireable goal would not impede an ideal government, but every government on Earth is, at least to some degree, in the thrall of self-interested individuals who very much want to stay in power and stay in a job. Less tax revenue means a less powerful government that can pay fewer people to do fewer things.
I agree. But that leaves us in the very uncomfortable position of having two major reasons for governments to do the wrong thing (tax losses and special interests), and no politically appealing reasons to push the policies we will desperately need. And that should worry all of us.
I'd suggest reading up on modern political economics, for example Public Choice Theory, to better understand what motivates governments.
Political economics is not remotely my field. But there is a huge need here. If you can come up with a set of (realistic) incentives or motivators that will push government to make sound energy policies, it would be a big contribution.
We need all the help we can get.
Besides, I think your whole argument may be off, given Jevon's paradox: the more efficiently we learn to use a resource, the more we use it, so government revenues will increase, not decline, with improved conservation measures!
One thing not mentioned above is that governmental units that are net exporters of energy (e.g. Alaska) often subsidize their operations through severance or production taxes. The burden of these taxes falls on "foreign" consumers rather than their own citizens.
A most startling example: Alaska gives money from oil production taxes back to each & every citizen through its "permanent fund" (that was why so few Alaskans voiced concerns about environmental impacts of oil production, pipelines, tankers, etc.) Alaska spends roughly $12,000 plus per capita-year in its state budget. Guess how much of that comes from direct taxes levied on Alaskans?? Maybe one third or less.
In US states with high per-capita energy production, severance taxes shift a major portion of state budget expense to out-of-state energy consumers. Politicians in these states who favor conservation or increased energy efficiency may be regarded as traitors by those whose state tax bills increase when consumption declines.
We presently have about ten states that are net energy exporters. Take a look at the leadership/control of various US congressional energy & commerce committees, versus which states are net exporters of energy. This tells a big story.
Much of the early production-oriented subsidy of US energy industry was aided by a strong coalition of politicians from energy producing/exporting states, whose congressional delegations tended to wind up in control of key congressional committees.
This has, IMO, been a major reason for our past and current production-oriented energy policies, and a major barrier to efficiency & conservation.
The 40 or so energy-importing states in the US need to recognize their common interest, and act accordingly.
Les Lambert
Excellent points. Some of the University of Texas campuses have working oil wells as part of the decor, and to remind them where the revenues come from. Information on state energy trends is available at:
http://www.naseo.org/committees/energyproduction/oil/Supply_Graphs.htm
You've added a new level to this issue which I had not considered, and that is helpful.
All states, and the federal government, benefit from taxes on the sale of oil products. What you've pointed out is that there is a small subset of states, with very powerful legislators, who double-dip: they benefit from taxes and revenues on the production, as well as on the sale of oil products.
To reiterate your point: that means that these legislators/states will be doubly opposed to any efforts to conserve. Now I'm even more worried.
Government is the only third party outside of the economic relationship between the oil seller and oil consumer. If government is enlightened and altruistic (don't even say it, OK?), it is in a position to enact forward-looking public policy initiatives to spur efficiency, conservation, and alternatives. The free market tends to do a very bad job of that until it's pretty late in the game.
I can't say that I have confidence in governments--there is an abject lack of government leadership on energy isues worldwide. Nonetheless, I still think they are our best hope for setting policies that spur behavior in a way that the markets might not. But if governments remain venal and self-serving on energy issues, they will compound an already difficult situation.
Wish I could claim that was an original insight. But it is an idea that Walter Youngquist advanced in his book "GeoDestinies". Having studied by-state per-capita energy production data, I can say that Youngquist is certainly right.
And it's not just oil, it applies to coal & NG as well.
Talk about PORK! What Alaska is passing along to the rest of us in severance taxes makes their "bridges to nowhere" look trivial, as pork goes. And most Americans are so blissfully unaware of how they are supporting Alaskans and residents of nine other states that it seldom occurs to anyone that an effort to balance this (by becoming more efficient and conserving, to keep those energy dollars at home) should be considered.
Internationally, the ultimate example is what I call the "oil-supported failed state". For example, Saudi Arabia has 30% unemployment. Iraq, before we invaded, had 50% unemployment. Both places are or were distinguished by the these facts:
As long as the leaders control the means of oil production, and collect the revenues, there is no incentive to keep taxpayers happy lest they withdraw their support. There is no neeed to worry about policies to encourage full employment, such as good public education, to promote productivity leading to greater tax collection, prosperity, etc. All that is necessary is to maintain one's grip on power, and to pump more oil. Without oil, these places would more closely resemble, for example, Yemen.
And US energy policy has for many years helped to support these failed states.
Stateside, energy severance tax revenues can also be a substitute for good governance, and for worrying about re-election. Don't expect the politicians in these states to relinquish their grip on the revenues streams provided by oil, NG and coal easily.
Les