Recipe for Success: Higher Gas Prices

I read a brief article today in Foreign Policy Magazine (January/February 2008) that echoes what I’ve been thinking and talking about for a long time.  Politicians need to stop insisting that we have a right to cheap gasoline and instead push for higher gas prices.  High gas prices would not only stimulate public and private technology investment, it would have a transforming effect on our failing education system similar to the effects of the Manhatten Project in the ’40s and the Space Race in the ’60s.

By Kenneth Rogoff

The world believes that the only thing Americans care about is cheap oil. Prove them wrong.

Future historians will almost certainly regard the failure of the United States to lead in global environmental policy as an even greater mistake than the invasion of Iraq. The first thing the next American president should do upon taking office is to insist that the U.S. Congress pass a huge increase in gas taxes. To be more precise, the United States should implement steep carbon taxes that hit coal, heating oil, and natural gas. The tax should be enough to raise the price of gasoline by at least $2 a gallon. But unlike Europe’s consumer-oriented gasoline tax, it should hit everyone in the economy, including manufacturers.

No other specific policy action will be half as effective in changing America’s engagement with the world. No other presidential directive would so clearly disown the United States’ record of lamentable and self-centered head-in-the-sand energy policies. There is no way the United States can hope to persuade China and India to adopt more environmentally friendly growth strategies without first acknowledging its own responsibility—and then doing something about it. At the same time, a carbon tax might finally convince the rest of the world that the United States does not aim to invade countries to preserve cheap oil.

Such a tax would raise massive revenues that will help reduce current and prospective U.S. deficits. The revenues would help ease the pressure that excessive American borrowing is putting on international capital markets, pressure that is now contributing to a dangerous collapse of the dollar. Of course, some of the new tax revenue should be earmarked for scaling back other taxes and for providing subsidies to low-income citizens to offset the burden of the carbon tax. It also demonstrates the right way to provide the private sector with incentives to conserve fuel and develop alternative energy sources. It is far better than the complex and inequitable carbon trading schemes that Europeans are trying to implement.

Yes, oil-exporting countries will protest that a U.S. carbon tax is aimed squarely at them, and indeed, they will see a drop in demand for their product. Venezuela and Russia will have to figure out how to get by with lower oil revenues. But many poor developing countries will see huge cuts in their oil import bills as world petroleum prices fall. The effective transfer of wealth would be far larger than anything that private or public philanthropy could provide.

There is no doubt that there are many other symbolic gestures a new president can make, but a carbon tax would cut to the heart of what’s wrong with America’s place in the world today—politically, economically, and socially. Let’s not kid ourselves: Taxing gas and other carbon emissions will be wildly unpopular among American voters, at least at first. Many will say it is a political nonstarter. But that is precisely why children everywhere will be so grateful that a courageous American president will have finally put the United States back on its proper fiscal—and moral—track.

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