I have in mind a fairly detailed set of policy ideas that fit into the package I’d label “ideal climate policy response.” I also have in mind changes I’d accept to this package that would correspond to “second-best”, “third-best”, “fourth-best” policies, and so on down the line. And at this point, we’re well down the line. But you have to start somewhere.

To me, the straightforward, revenue-neutral carbon tax seems like something no reasonable person would oppose, but of course plenty of people do oppose it, so my judgment of what is likely to be politically workable and what isn’t is clearly somewhat suspect. Even so, I venture — who could oppose this:

A petroleum tax of $5 per barrel on every barrel of petroleum produced in America or imported, which would be put into place next year and increased by (my preference) $5 per barrel every year.

Point 1: Everyone seems to hate imported oil, and by now we should have a pretty good sense of the risks of domestically produced oil, as well. This stuff is bad news for everyone, so why not tax it until we don’t need to use it anymore?

Point 2: $5 per barrel is a change most Americans wouldn’t notice. Since the beginning of June, the market price of crude has moved up and down by $5 a barrel multiple times. If consumers haven’t been troubled by these market movements, they shouldn’t be troubled by the tax increase.

Point 3: Adding $5 per barrel per year to the tax wouldn’t be that big a deal. A decade from now, the tax would be $50 per barrel. But oil prices now are about $50 higher per barrel than they were a decade ago. The difference would be that rather than having that increase go to oil producers, it could go to the Treasury to be redistributed, to reduce other taxes, to fund alternative transportation infrastructure, or to reduce the deficit.

Point 4: The revenue would be pretty substantial. Assuming fairly inelastic demand, the tax would generate nearly $37 billion in its first year (Americans consume roughly 20 million barrels of oil a day). With no demand response, the revenue generated would be ten times that in ten years, or equal to about a third of the projected deficit for that year. In all likelihood, there would be a substantial demand response by that time, which would reduce the revenue take. But that would be great! We’d be using less oil.

That initial $37 billion, by the way, would make up about half the DOT budget. It would very nearly pay for California’s high-speed rail network — the whole thing, with one year’s revenue.

Point 5: Many wonderful things would result from the tax, including reduced emissions (of CO2 and other pollutants), reduced risk of spills, reduced imports and trade deficit, increased investment in efficient automobiles, increased use of transit, increased private investment in transit-oriented development, increased biking and walking, and so on.

Point 6: It’s simple. Have you obtained a barrel of oil out of the ground or from a foreign source? Then you owe $5 in federal tax!

Point 7: No one would have to utter the words “gas tax”.

The downside would be…well reduced profit for oil companies, private and state-owned. A small bite out of household budgets, but on the order of what’s likely to happen from market moves anyway (and which can easily be offset through partial use of revenues to reduce tax burdens).

Sometimes I lie in bed awake, wondering why things like this don’t pass through Congress at light-speed. I mean, I understand the forces that oppose it. I just don’t get why common sense isn’t enough to overcome that opposition.


  1. Ted says:

    I’ll preface this by saying I’d ideally prefer the revenue-neutral carbon tax, but since you asked why/how people would oppose this:

    1. Everyone hates imported oil. The counter then is that we should only tax imports. But why should we punish Canada and Mexico, who are our friends (and also rank #1-2 in exports to the US)? So now you’re only taxing Saudi Arabia, Russia, etc., but there are diplomatic issues with that. Plus, the revenue you’re raising is a mere pittance compared to taxing every barrel no matter the source.

    2-6, I agree, though if this becomes revenue-neutral (i.e. offset by other tax cuts) then we’re not really addressing the problem of making our lives less dependent on oil–which should really be the goal of all this, right?

    7. Just because no one would have to utter the words “gas tax” doesn’t mean they won’t–and that they can’t convince a large segment of the public that it’ll somehow cripple our economy.

    So like I said: great policy, but I don’t think common sense has won many political arguments lately.

  2. Doug says:

    You have my vote, for all that that’s worth.

  3. mike shupp says:

    Messieurs and Mesdames Angry Bear, Cowen, De Long, Dresner, Klein, Kling, McArdle, Mendel, Thoma, Udall, Yglesius, etc.

    I understand you get lots of email from Concerned Souls With Solutions to the world’s problems, so I’m addressing a bunch of you, with the faint hope that one or several of you will read this through and think it worthy of address on your blogs. The idea seems to be new; I hope it provokes some debate and even some thought. Forgive my intrusion upon your time; I take this approach because it promises to bear more fruit than being the 178th post in a 300 post comment string….



    At present two distinct viewpoints on the topic of global warming are commonly presented in the United States. One group (“believers”) argues that global warming is occuring and will eventually, likely before the end of this century, cause hardship and economic distress around the world. Proponents of this view feel that human actions have contributed to this warming, that alternative human actions such as taxes on carbon emission can help reduce the degree of warming, and that major industrialized nations should begin immediately to address the problem. The second group (“deniers”) does not accept that global warming is an immediate concern, doubts the predicted magnitude of the problem, and is strongly opposed to taxation or other government coercion aimed at allieviating an imaginary crisis.

    Using order of magnitude numbers, believers would accept spending $25B per year to avert possible worldwide economic and environmental costs of $1000B per year. If they are correct and global warming is averted or reduced, the cost will have been justified. If they are wrong and data eventually shows global warming was not a threat, the cost will still have been bearable and it might have secured some desirable environmental effects.

    Deniers would spend nothing. If they are correct, we would save $25B per year for spending on more desirable goals. If they are wrong, $1000B per year in the distant future is a bearable cost when spread across the world’s population, especially since $25B per year in the hands of individuals would certainly haved increased the wealth of the world more than wasteful government schemes.

    Deniers will accept global warming as a problem only if it occurs despite anti-GW programs; believers will realize their error only if deniers control the spending and global warming fails to appear. Neither alternative will seem crystal clear until say the last quarter of this century, so there is little possibility for compromise. The debate has been politicised.

    Inevitably, deniers will be the victors in these arguments. Spending nothing will always trump spending something, and the costs for being wrong will be long deferred. On the other hand, such a policy is morally obnoxious. It is pleasant to think that the warmer climates of 2075 will permit Canadian farmers to enjoy the yields of present day Kansas and Oklahoman farmers. It is not so pleasant to imagine what rice farmers in say coastal Bengladesh and Indonesia will face as rising seas inundate their crop lands. And since the rice farmers are not in the position of shaping the global climate agenda, it seems unfair to punish them for decisions made by American politicians. (“No man is an island,” “the Good Samaritan”, “Christian behavior” — you all know the drill.)

    There’s a problem with incentives here. Let me suggest something new.


    This could amount to $365B per year — more than the USA currently pays for Social Security, about half the amount it currently spends on Defense programs. Economists might want to tinker. Climate scientists might want to tinker. But in general, we should pledge our lives, our fortunes, our sacred honor to something like this idea. We should make it a Constitutional amendment if necessary to show our intent. We should encourage our European and Japanese and Chinese friends to make similar pledges. And in the end we should deliver on our promise, just as a “Leader of the Free World” might be expected to do.

    Consider. To GW believers, this is the order of magnitude cost we can expect to bear for doing nothing about global warming. It’s large enough to point to as the cost for neglecting our global responsibilities. They should find such a pledge quite reasonable. GW deniers expect to spend nothing on global warming; they should whoop with glee and sign as soon as the paper is spread before them. And for the next 60-100 years, GW believers will back up their arguments by reminding GW deniers of the cost of failure; GW deniers will look at that approaching wall of spending and ask themselves how certain they are it will never be reached.

    Over time, I suggest this will change our climate policy.


    Needless to state, each of you is absolutely my favorite economist/political scientist on the internet, and I read your blog religiously, six or seven times a day, in search of Holy Insight, and of course you can present these ideas as your own. I’m not after personal glory but to bust open a logjam in the current, sterile argument.

    mike shupp

  4. Louis says:

    I too am surprised that the Democrats aren’t more interested in taxing oil. I might even propose limiting the tax to imported oil, which would help the American oil producers in the short-term, raise revenue for public transit so we can reduce our use of oil in the future, and encourage people between now and then to buy more fuel efficient cars.

    I understand why a trade war in general is a bad idea, but I think going after the oil producers is worthwhile even if the oil-producing countries retaliate. Alaska is a small sacrifice to make for the good of the planet.

  5. Adrian says:

    First you say that the tax would be revenue-neutral. Then you start talking about what the government could do with all the extra revenue the tax would raise.

    Can’t have both.

  6. Wick says:

    I always lean towards Gas tax over Oil tax. We have many, many industries that would lose competitiveness to overseas markets with such a tax. Plus, what is the elasticity of oil at $5?

    Gas, however, is mostly used by consumers who choose driving over other forms of transportation. Plus, we learned in 2008 that $4 is the tipping point.

  7. Gabriel says:

    Taxing imported oil may violate WTO, NAFTA, etc. agreements, and could be argued is protectionist, anti free trade policy.

  8. Michael S says:

    There may not be much price elasticity @$5/barrel, but the price goes up by $5/year.

    He’s arguing we should tax all oil, not just imported oil.

  9. jim says:

    There is a rumour going around that something similar to this is being considered as the funding mechanism for the Surface Transportation Reauthorization bill, which has been stalled in Oberstar’s committee for lack of one. The rumour is that there will be a tax imposed on all barrels of oil at a sufficient level to both fund the STAA and abolish the federal gas tax.

    Possible opponents: (1) any user of untaxed fuel — airlines come to mind. (2) Homeowners in the Northeast (and their reps), many of whom heat their houses with home heating oil. (3) Oil companies (and their reps).

  10. Robert says:

    I’d add another reason to your list. “Oil”, unlike “Carbon” is something you can easily grasp. I have no doubt that one hitch in any “Carbon Tax” is that most people don’t readily associate carbon with a specific product (outside the coal belt, at least), and this kind of amorphous tax gets a lot of people nervous.
    Couple this proposal with A)ever-stricter regulation of coal=fired plant emissions, and B)well-regulated but aggressive expansion of nuclear energy (hey, something has to power all those electric cars and streetcars), and you have a practical way to change our energy consumption and improve the environment. (Plus wind, and solar, of course.)

  11. staypuftman says:

    Don’t forget, you will massively spur on domestic oil production with this move.