Energy In the US Is Already Pigovian Taxed

A comment I posted on "The growing fallout of the shale revolution" on Newmark's Door in response to another comment:

All energy sources in the US are Pigovian [or Pigouvian] taxed.

Petroleum based energy and other carbon based energy are already heavily taxed on a federal and state level in the US. For example, taxes are added to the price of gasoline at the pump, and gas stations, distributors, wholesalers, refiners, drillers, explorers. etc. also pay various taxes, which increase the price of energy in the US. The consumer pays all these taxes in the final price.

The fact the theses taxes are not called Pigovian or that these funds are not set aside to reduce externalities is inconsequential in their economic effect.

If one priced an externality at $X and then added that to the base cost of energy, one would find that the already existing taxes diminish the need for an additional tax to raise the relative price of energy to account for externalities.

Plus, not all externalizes externalities are negative. Imagine the number of ambulances and emergency equipment that would be needed if after every run, batteries had to be recharged for several hours or overnight. The negative effect from needing multiple batteries, extra vehicles or other energy sources would outweigh the gain from switching away from gasoline.

Shale gas burns substantially cleaner than many other carbon forms of energy. That is a positive externality from shale. Raising the price and lowering the usage of shale gas, lessens that positive benefit of shale gas. One cannot just add the negative costs to a tax without subtracting out the positive benefits.

Like all things in life, there are trade offs.

Even with oil, there are positive externalities. It has the second highest energy density of our available energy sources, surpassed only by nuclear energy. That means, less volume, less weight, less resource production needed for energy equivalence, which all create positive externalities and which are almost never counted in the measure of carbon energy externalities.

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Jevons Effect In Action: US Homes Use Same Per Capita Energy As In 1971

From "Are American homes more energy efficient? Not exactly." by David A. Fahrenthold, Washington Post Staff Writer, Thursday, September 30, 2010:

The amount of energy that the average American requires at home has changed little since the early 1970s -- despite advances in technology that have made many home appliances far more energy efficient.

Dishwashers use 45 percent less energy than they did two decades ago, according to industry data. Refrigerators use 51 percent less.

But on a per-capita basis, Americans still require about 70 million British thermal units a year to heat, cool and power their homes, just as they did in 1971. (One BTU is the energy required to heat one pound of water one degree Fahrenheit.)

Read the complete article here.

Using the same or more energy as energy efficiency increases instead of less is known as the Jevons Effect or Jevons Paradox. An economist William Jevons noticed in 1865 that as coal technologically improved the efficiency of coal, more coal was used instead of less. Sometimes, the Jevons Effect is called the Rebound Effect.

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The Origins Of Oil Reserves

Excellent New York Times article, "Tracing Oil Reserves to Their Tiny Origins" by William J. Broad on the geological origins of oil reserves:

Today, a principal tenet of geology is that a vast majority of the world’s oil arose not from lumbering beasts on land but tiny organisms at sea. It holds that blizzards of microscopic life fell into the sunless depths over the ages, producing thick sediments that the planet’s inner heat eventually cooked into oil. It is estimated that 95 percent or more of global oil traces its genesis to the sea.

Read the complete article here.

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Energy Density, Innovation, Gas Tax, Supply Chains And Economic Shifts

A comment I posted to "Innovation, and the Gas Tax" on The Bellows by Ryan Avent:

In response to high gasoline prices in Europe, Europe did not innovate. Europeans reduced their miles driven (actually the number of hours gasoline engines run) and reduced the weight and size of their vehicles, including the number and weight of passengers and cargo the vehicles can carry, which then require less fuel.

If they had been able to innovate, such as to produce a much more fuel efficient gasoline engine, they would own larger cars and drive greater distances. Most mileage improvements have come from changes to the vehicle body and not the engine, such as air drag reduction and lighter materials

There is a fundamental natural problem. For practical energy sources, gasoline has the second highest energy density only surpassed by nuclear power.

Alternatives to gasoline as an energy source have not materialized because other energy sources are like the energy differences between fire and sunlight.

Innovators have not been able to find a practical alternative dense energy source. Many of the popular media alternatives, such as hydrogen, pose great dangers. Hydrogen interacts with its container, weakens it, and is highly explosive. Batteries contain and are manufactured with highly toxic heavy metal and rare materials, many of which are in short and limited supply. Batteries move more serious and harmful environmental issues from the car to the manufacturing and disposal facilities. Large batteries can also be explosive.

It is not clear that reducing passenger miles will help reduce carbon. If I will not drive to the Home Depot 10 miles away, hardware stores will have to move closer to where I live and within my acceptable driving distance. Supply trucks will drive the additional distance that I forego to bring the goods to the stores and more often because there will be more, smaller stores, with less inventory storage space, closer to more people. There maybe total carbon savings depending on relative fuel efficiencies or there may not be.

Additionally, 45 percent of a barrel of oil becomes gasoline. If gasoline use declines, the question is how much can oil barrel production switch to non-gasoline products. About 25 percent of a barrel of oil is use to make plastics and other products. One has to look at the price change that will occur in the other products. The price may go up or down. My guess is the prices will go up, because if they were currently more profitable than gasoline, production would have shifted to produce more of the other products than gasoline to maximize earnings. That means with less gasoline usage, the price of the other products from oil will rise to recover costs formerly recovered by gasoline's higher profitability.

Changing byproduct costs, such as plastics, lubricants, etc. that are widely used in the US economy will cause dramatic production and price shifts. These economy wide production shifts may or may not increase carbon production.

Most analysis about price changes (taxes) to gasoline look at the carbon reduction from the reduction to total miles driven. Driving shorter distances and using less gasoline will cause economic shifts to oil barrel production and the retail product supply chain in the US. The economy wide effects to the supply chain of reducing passenger miles will offset in part or in total the benefits of reduced passenger miles. Most European countries that place taxes on gasoline for cars recognize the need for increased trucking and do not place the same burden of taxation on trucks and other delivery vehicles.