The word from behind summit doors is that some form of energy tax will likely be the largest source of new revenue in a budget agreement. This is as it should be, for energy is too cheap in the United States relative to its unpriced costs, especially of pollution. Taxes are a far more cost effective means than regulation to signal the need for greater energy efficiency and cleaner fuels.
Therefore, the budget crisis could yield substantial environmental benefits. But as always with taxes, the fine print matters. Of the major proposals now on the table -- a gasoline tax, an oil tax, a carbon tax and some type of broad-based energy tax -- some would provide benefits beyond their revenues, others may be destructive.
Gasoline Tax: In real terms, the price of gasoline is at its lowest point since 1918. Our combined federal and state tax of about 25 cents per gallon compares to taxes of $1-to-$3 per gallon in Europe and Japan. Clearly, there is room for a large increase. If the tax is slowly phased in, with a commitment to a sizable long-term increase, its economic impact would be cushioned while it induces Detroit to develop the very high mileage automobiles now being tested by European and Japanese producers. Over time, higher gasoline prices would spur the development of mass transit alternatives and by doing so ease gridlock, lessen urban air pollution, and ameliorate the fierce local battles being waged over new highways. And, because oil and automobiles top the national import bill, a gasoline tax would have a particularly salutary effect on the trade deficit.
Opponents argue that the tax is narrowly based (though 88 percent of American households own a car) and regressive (though the Congressional Budget Office finds that by some measures its impact would be nearly proportional across all income classes). Among the options on the table, the gasoline tax is the only one whose likely macroeconomic impacts are well understood. It is also the only one of these taxes that is widely familiar. Politically, it suffers for that reason.
Oil Tax: This tax shares many of the advantages of its more narrowly based cousin. Like the gas tax it would lessen American dependence -- now more than 50 percent -- on imported oil. Changes in the international oil market since 1973 have made the threat of another politically motivated oil embargo very small. But high and growing import dependence creates a modest constraint on U.S. foreign policy, which an oil tax would lessen as it would the much more serious threat of economic shock from a sudden OPEC price increase.
Because a third of petroleum use is outside the transportation sector, the benefits of the more focused gasoline tax on automobile technology and transportation options would be muted. And, unlike a tax on gasoline, for which coal can not be substituted, an oil tax would enhance the value of coal, eliciting opposition from those concerned about global warming and acid rain.
Carbon Tax: A carbon tax directly addresses emissions of carbon dioxide, the major greenhouse gas. The fossil fuels differ strikingly in their carbon content. Coal produces twice as much carbon per unit of energy as does natural gas; oil lies in between. Thus wherever choices among fuels are possible, a carbon tax would discourage the use of coal and synfuels (including so-called "clean coal") and lead to greater use of natural gas, nuclear power, wind, solar and to efficiency improvements. It would also reduce emissions of sulfur and nitrogen oxides, because by this measure, too, coal is the dirtiest fossil fuel, and natural gas the cleanest. If large enough to reduce overall energy demand, a carbon tax would lessen dependence on imported oil and boost transportation efficiency, though less powerfully than a gas tax.
A carbon tax would be fiercely opposed by the coal industry and those states dependent on it. On the other hand, it is a broadly based tax that would slow global warming while meeting the administration's "no regrets" test (steps must be justified for non-greenhouse reasons) for greenhouse policy.
Broad-based Energy Tax: Two variants are being discussed: a tax based on heat content -- the so-called Btu tax -- and an ad valorem tax that is simply a percentage of energy price. By increasing the price, any such tax leads to some conservation. But depending on its size, and the arcane details of its design, such a tax could have economically surprising and environmentally perverse effects. For example, across the country electricity prices differ by more than 100 percent. Under an ad valorem tax, Chicagoans, New Yorkers and others who pay at the highest prices would be hit with the largest tax bite. Californians would be penalized because of the state's development of wind, solar and other new higher-cost technologies. In fact, all of the many regional inequities in energy costs would not only be frozen in place but enlarged -- a bizarre political result. And the dirtiest but cheapest fuel, coal, would be favored over all the others. A Btu tax has similar quirks. The worst thing about both of these taxes is that neither is well understood. A budget agreement that rests heavily on either one would be an economic leap into the unknown and risk an early unraveling.
All five of these taxes can raise the needed revenues. Equity, effects on competitiveness and ease of administration must also be factored in. But if the choice among them is made with the possible environmental payoff in mind, politicians may discover that the bad tasting tax medicine they fear so deeply slides down much more easily with the voters.
The writer is vice president of the World Resources Institute.