2014 Symposium: Are you willing to pay $5 or more per gallon for gas if it helps the environment?

Raleigh: The impact of people’s actions on the environment has been at the center of public debate for a long time. Many researchers, scientists and concerned citizens have pointed out that if people do not change their ways, the future of our planet can indeed be dire. One of the biggest factors which negatively affect our environment is the increased volume of transport on our roads. According to IHS Automotive report from 2014, United States has about 253 million cars and trucks on the road with the average age of a car about 11.4 years. What do all these cars do to our environment?

According to Environmental Protection Agency, more than half of air pollution in the USA is attributable to vehicles. In short, cars emit carbon dioxide, hydrocarbons, nitrogen oxides, sulfur oxides, and particular matters (solids such as metal and soot). These emissions damage the environment in numerous ways: greenhouse gases contribute to global warming; nitrogen and sulfur oxides cause acid rains; solids seep into soil and waterways, thus affecting food supplies and animal life, and so on. What can be done to change the situation?

One interesting proposition is to increase the price of gas. What does it give us? There are several possible scenarios. The first one is that people would be driving less and would increasingly use public transportation, thus reducing emission levels overall. However, gas is what economists call “price-inelastic” commodity and people generally continue paying even higher gas prices and drive at the same levels. Moreover, public transportation system in most American cities is underdeveloped and people do not have much choice but drive their cars.

Much more feasible scenario is that increased gas prices would stimulate the development of alternative energy cars such as the ones running on natural gas and, more importantly, plug-in hybrid electric vehicles. This, in its turn, will encourage the development of alternative energy sources such as solar, wind, and geothermal to support the increased energy needs. As such, higher oil prices might indeed help the environment by fueling the growth of green energy and reducing dangerous emissions. If that is the case, then high price of gas is a small price to pay for the future of our planet.

Asheville: Classical economic theory holds that as the price of a good rises, the demand for that good ought to go down. If the price of gas goes up, people will consume less of it. The reduction in carbon emissions will help the atmosphere, and the cleaner air will mean fewer children suffering with asthma. In an ideal world, $5 per gallon gas would have these effects. Supply and demand, though, are mediated by elasticity-the degree to which changes in price or supply alter the other. Some goods, like big-screen TV’s, are highly elastic. If they are cheap, people will buy many of them. If they are expensive, fewer people will buy them. Gasoline, on the other hand is relatively inelastic. There are a few reasons for this.

Most people are currently driving the most car they can afford. Particularly among the working poor, a new, fuel efficient car is a pipe dream. Someone who makes minimum wage is likely struggling to make payments on a heavily used car. They would love a Prius, but cannot afford one. The simple supply and demand analysis ignores the sunk costs of an existing vehicle.

On the other hand, the most flagrant abusers of gasoline are also the ones most able afford it. Drivers of luxury SUV’s are more able to absorb the increasing price of gasoline, and so are unlikely to modify their driving behavior. They will adjust their discretionary spending in other ways to adjust for the price.

There are also limits to the degree to which people can just ‘drive less.’ A 2008 CBO study found that a $.50 increase in gas prices only translated to a .7% reduction in freeway trips. The area of the study was one in which rail transportation was a realistic option.

In short, a $5 per gallon price tag will not help the environment. It will inconvenience the wealthy, and threaten the livelihood of the very poor. Another approach to discouraging car traffic must be found.

Cartwright: Yes, but I don’t think most Americans would be willing to do that. I find it ironic that the environmentalists are often the ones driving the SUV and the gas guzzlers and they’re the first to bemoan high gas prices. I’ve spoken at length in the past as to the benefits of higher gas prices. As gas prices increase, you have fewer people on the roads or people begin to drive less. Higher gas prices change consumers’ behavior. If you chart the price of gasoline and gasoline consumption, you’ll find that as prices rise consumption does, in fact, decline. When gas prices spiked back in 2008, gasoline consumption declined by about 3%. Prices fell in 2009 and 2010 then rose again in 2011. When prices rose in 2011, consumption fell by about 3% again. This doesn’t seem much, but it does illustrate that as prices rise, consumers drive less. When the gas prices rose to over $4 per gallon, public transportation ridership increased. It doesn’t seem much in percentage terms, but it equates to about two or three hundred thousand barrels per day. How much would consumption decrease if we did get to $5 per gallon? My contention is that the higher gas prices go the sharper the drop in consumption.

So, as prices rise, consumers either drive less or take public transportation or perhaps car pool, though that hasn’t quite caught on with most people. As we drive less, we pollute less thus helping the environment. As we drive less the roads are less congested and there are less accidents, which may result in lower car insurance premiums for a lot of people. We can keep going about the benefits, but I won’t digress.

Like I said, I don’t have a problem paying higher gas prices, but a lot of people won’t like that. There are those who don’t want higher gas prices because they feel it’s making the oil people richer. There are those who feel that it’s just an additional tax on people. To some extent they’re right, but you only pay that tax if you drive. My grandmother doesn’t drive so the gasoline prices don’t directly impact her, and let me put emphasis on directly. This does beckon the question whether the $5 per gallon gas is a result of supply cuts or increased federal, state, and local taxes. The federal gas tax has been 18.4 cents since the early 1990s. I think it was raised to 18.4 cents in 1993 to be exact, so for two decades it hasn’t changed and it isn’t indexed to inflation. I don’t think we’re going to raise the gas tax so much as to get the average gallon of gas to $5, so it would likely be the result of lower supply. But let’s not forget that there are hidden taxes in the price of gas—taxes, fees, and other costs paid by the refiners and producers of oil along the way before it reaches the gas pump. A lot of these extra costs that drive up the price of oil are the result of environmental regulation.

The money raised from the federal gas tax is supposed to go to road and bridge maintenance and construction. Doubling the federal gas tax isn’t going to be too noticeable to most people, but I wouldn’t support that until two conditions were satisfied: 1) there must be a guarantee that the money raised by the entire gas tax would go for federal roads and bridges (states should take care of their own roads) and not get used as part of the general fund in Washington, and 2) there must be audits and safeguards in the program to prevent fraud, wasteful spending, kickbacks, and roads and bridges to nowhere.

Ultimately, none of this is going to happen.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s