carbon tax, fuel tax, transportation
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“The Case for Restoring the Fuel Tax” by Robert Repetto

Submitted by EFC Team on November 23rd, 2015

The author, Robert Repetto, is an economist and Senior Fellow at the UN Foundation. The views are not meant to represent the position of the Energy Future Coalition.

Putting a price on carbon emissions would be the most cost-effective way to combat global warming, as even Big Oil now acknowledges. Unfortunately, however, only incremental progress toward enacting such a policy is possible in the United States, given the Republican Party’s intransigent opposition and control of Congress. Nonetheless, a good start has been made. The Administration’s Clean Power Plan strongly encourages states individually and jointly to establish systems to trade emission permits. Most will do so because that will greatly reduce the costs of compliance with the Plan’s regulatory requirements. Trading will establish market prices for emission permits – in effect, carbon prices. But these prices will be limited to the electricity sector, responsible for just over a quarter of U.S. emissions. What about the rest of our carbon dioxide emissions?

The next target must be the transportation sector, which is responsible for another third of carbon emissions.

Restoring the federal tax on gas and diesel fuels to their previous inflation-adjusted level is the most feasible and effective way to put a price on carbon emissions in the transportation sector. Though not politically easy to do, it is much more likely than enactment of a carbon tax, which carries so much ideological baggage. Economists, policy advocates and activists should shift their focus from an economy-wide carbon tax, which is unattainable in the foreseeable future, to restoration of the federal fuel tax to at least its former level in real (inflation-adjusted) terms. That campaign would have much greater chances of success and would be a big step in the right direction.

Most important, through the Highway Trust Fund, the fuel tax finances road and bridge construction and improvement projects in every state and district that are dear to every Congressional heart. The fuel tax is essentially a user fee on highway and road users. It charges travelers in proportion to their wear and tear on the highways, whether because they drive lots of miles or because they drive heavier, less fuel-efficient cars and trucks. The revenues are apportioned to states in the same ratio as their tax collections and fuel use. Unlike a carbon tax, it’s by no means novel. It’s been on the books since 1956, and just restoring the gas tax to its 1993 level in inflation-adjusted terms would justify an increase of 10 cents per gallon (from 18.4 cents today). Many states with Republican regimes have their own state-level fuel taxes, mostly linked to inflation or to other price indices. Now, when gas prices at the pump are extraordinarily low, hiking the tax rate would provoke a minimum of consumer dissatisfaction.

Letting the real tax rate erode because of inflation is undermining the efforts made to reduce vehicle emissions by means of stricter fuel efficiency standards. Since the depths of the recession and over the longer term as well, vehicle miles traveled have been increasing and are now at an all-time high. Ridership on buses and rail, also funded from the Highway Trust Fund, has been stagnant.

Moreover, the fleet average vehicle weight has been rising because almost all the increase in vehicle sales in recent years has been of SUVs and pickup trucks. Taken together, these adverse trends have led to smaller gains in fuel efficiency and larger emissions in the transport sector. Very low gas prices are also slowing the pace of technological change, weakening the attraction of hybrids, electric vehicles and other new technologies.

The erosion of the fuel tax has also created a growing deficit in the Federal Highway Trust Fund. As recently as 2000, it provided 92 percent of Fund revenues; now that is down to 44 percent.

The growing gap has been filled by a series of short-term measures and accounting gimmicks that for the most part have shifted funds from one government account to another without generating any significant new resources. The latest gimmick extends the spending program but leaves a significant funding gap.

This shortage of funds has resulted in deteriorating driving conditions. Congestion is worsening. Congestion now costs $160 billion per year, almost 1 percent of GDP, just through delays and extra fuel use. Congestion wastes more than 3 billion gallons of gasoline per year, responsible for 8 million tons of additional carbon emitted. In major metropolitan areas, the average costs per driver are more than $1,400 per year, because of 63 extra hours of driving delays and 27 extra gallons of fuel consumption. In Washington, DC, the most congested area, these costs reach $1,800, 82 hours sitting in traffic, and 35 gallons of fuel wasted. Approximately half of all congestion is attributed to inadequate road capacity. Most of the rest comes from traffic accidents, which cause even more delay under congested road conditions.

Our transportation infrastructure is in poor and deteriorating condition. More than 60,000 bridges are structurally unsound. More than 150,000 miles of federal highways and major roads, almost 45 percent of the total, are in less than good condition. Pavements are deteriorating; highway safety features need improvement. The backlog of unmet investment needs is growing. Investment in public transportation, also partially funded by federal fuel taxes, has also lagged. The Highway Trust Fund needs a significant, stable, predictable source of increased long-term revenues.

For these reasons, there is a strong economic and political case for raising the fuel tax, at least to its previous level, and indexing it to inflation. Restoring the gas tax just to its 1993 purchasing power with an increase of 10 cents per gallon would bring in about $13 billion of new revenues annually, enough to cover the funding deficit and sustain enough investment to prevent our roads, highways, and bridges from deteriorating further.

That increase would be equivalent to a carbon tax of $37 per ton on the transportation sector, roughly in line with economists’ estimates of an appropriate carbon tax rate and, coincidentally, approximately equal to the estimated damage to the economy from an additional ton of carbon emissions. It would be much easier for consumers and politicians to swallow a 10-cent-per-gallon increase in gas prices, now that the nationwide average price is down around $2.15 per gallon, than a $37-per-ton economy-wide carbon tax.


Image Credit: Daniel X. O’Neil on Flickr


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