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A Modest Proposal to Improve the National Energy Policy

and Substantially Reduce Energy Waste and the Terrorist Threat

J. Donald Tillman
11 April 2005

One of the major problems facing the United States today is the large level of oil consumption, mostly in the form of gasoline for automobiles.  It has become a major cause of air pollution, it uses up a limited resource, and it requires that we import a large fraction of the oil we use.  Imported oil increases the trade deficit, increases our energy dependance on foreign countries, and provides substantial revenue to countries with tyranical governments and often supporting terrorist activities.

Trains, subways, and light rail systems are underdeveloped, nonexistant or rarely used in most U.S. cities.  And alternative energy sources are either unavailable, too expensive, or horribly inconvenient.

So it's not the best situation.

What won't work

Many suggestions have been proposed; some have been implemented.  The better ones have been ineffective, and the others actually make the problem worse.  Some examples:

There are more examples; this is a highly abbreviated list.

Towards a solution

A solution must recognize the problem for what it is, address the problem at fundamental scientific and economic levels, must not be based on weird abstractions, must be workable and be fair.

First we need to recognize the simple truth that we, as a nation, use a lot of gasoline because gasoline is really inexpensive.

Right now gasoline is around $2.20 a gallon in California where I live, and about $2.00 in the rest of the country [footnote].  Compare that to the price of milk, beer, cola, coffee, tea, vodka, orange guice, bottled water or just about anything else.  Gasoline is mighty inexpensive by any measure.

Sure, the prices of those items are not directly comparable because the bulk delivery of gasoline is very different than the processing, packaging, inspection and transportation of milk, beer, and so forth.  Granted.  But the overall point still stands; if I can easily get 25 miles of fine quality transportation out of a gallon of gasoline that costs $2.00, there is going to be very little incentive to use an alternative fuel that costs more, takes up more space, is more difficult to carry, and limits my travel options.

The current price of gasoline at the pump leaves no financial incentive to develop a car engine that runs on alternative fuels.  Imagine a wildly creative engineering breakthrough resulting in a new engine that runs only Evian brand bottled water, only to discover at the end that it's just not cost effective?

The effects of market forces

The fundamentals of free market economics tell us that the if the price of gasoline is sufficiently low, then drivers will care less about gas consumption, and we'll see fuel efficiency traded off for other features or whims, we'll see less use of public transportation, and longer commutes.

As the price of gasoline goes up, drivers become more concerned about convserving fuel, alternative forms of transportation are more attractve, and vehicles that are inefficient (SUV's etc.) will disappear.

If you see a lot of SUV's and Hummers on the road, it's a very good indication that gasoline prices are too low.  There would simply be no demand for such vehicles if gasoline was more expensive.

The price of gasoline in other countries

I think it is important to compare the price of gasoline in the US with the price in other countries.  Here is some recent data:

This table is from A glance at global gas prices, Paul Bannister, Bankrate.com

And it includes the following note:

Global gas prices as of June 1, 2004, were supplied by Associates for International Research, Inc., a firm that tracks the cost of living around the globe. Where applicable, metric measurements were converted to U.S. gallons.

LocationCost per gallon
(US dollars)
London $7.03
Middlesbrough, England$5.49
Hong Kong $5.62
Frankfurt, Germany $5.30
Stavanger, Norway $5.23
Copenhagen, Denmark $5.18
Oslo, Norway $5.08
Rome $4.88
Lisbon, Portugal $4.81
Geneva $4.72
Seoul, Korea $4.67
Vienna, Austria $4.51
Istanbul, Turkey $4.48
Zagreb, Croatia $4.45
Tokyo $3.88
Sydney, Australia $2.57
Vancouver, Canada $2.44
Calgary, Canada $2.07
Taipei, Taiwan $2.43
Tblisi, Georgia $2.39
Mexico City $2.31
Vientiane, Laos $1.66
Bangkok, Thailand $1.56
Shanghai, China $1.47
Moscow $1.43
Baku, Azerbaijan $1.15
Caracas, Venezuela $0.14
Baghdad, Iraq $0.05

This isn't perfect data; I don't have any reference material to back it up, the Calgary number may be incorrect, it's not clear what causes a city to be included in or excluded from this table, we don't know if there are other economic factors that ought to be considered, it would be good to have data for additional years to look for consistancy and trends, and so forth.  The reasoning behind these numbers would also be fascinating to research.

But nonetheless, it is pretty clear that gasoline is comparatively very inexpensive in the US.

The proposal

I propose a change to the US federal tax structure where the price of gasoline at the pump would be raised significantly by imposing a tax, and at the same time, federal income taxes would be reduced in such a way that the combined operation is roughly revenue neutral and that the Average Joe effectively sees no net change.  The pump price of gasoline would rise to somewhere around $6.00 per gallon, triple the current price.

Since gasoline consumption is roughly independent of income level, the income tax reduction would very likely be in the form of a credit, perhaps similar to the current Child Tax Credit.  Alternatively, it may be workable as an exemption, much like the exemptions for dependents.

The advantages of this proposal are numerous:

An example

To help describe the proposal, let's try a hypothetical example.  Let's say that gasoline currently costs $2.00 per gallon, that the average car gets 25 miles per gallon, and that the Average Joe drives 10,000 miles per year.  Just to serve as an example.  [footnote]

In that situation, this Average Joe would spend $800.00 per year on gasoline today.  If he replaces his car with a hybrid vehicle that gets 50 MPG, he would see a savings of $400.00 per year.  Alternatively he could enjoy similar savings by cutting his driving by 50%.

But if the price of gasoline at the pump was raised to $6.00 per gallon through gasoline taxes, a year's driving of 10,000 miles at 25 mpg would cost $2400.00. At the same time there would be an accompanying tax credit of $1600.00, so the Average Joe driving the average car would see no net difference.

Now, if this fellow switches to a hybrid car with a fuel efficiency of 50 mpg, then that same 10,000 miles will cost $1200.00, and with the accompanying tax credit of $1600.00, he will now be saving $1200.00 by driving the fuel efficient vehicle, compared to the $400.00 savings under the current system.  And likewise if he keeps his old car and finds a way to cut his driving by 50%.

This proposal effectively triples the financial incentive to use less fuel, and triples the penalty for wasting fuel.

And here's a wild possiblity; anyone who just gets rid of their car basically pockets a $1600.00 reward from the tax credit.


Are there downsides to this proposal?  Are there situations where folks will come out on the short end?  Sure.  Those who don't pay taxes will obviously not reap the benefits of the lowered taxes.

Also, those who drive for a living.  The plan as stated will force a hardship on independant taxi drivers, truck drivers, delivery services, traveling salesmen, and others in similar businesses.  Some of them will gravitate toward more efficient vehicles or alternate fuels.  The cost of most of those services would increase, reflecting better their actual cost.  Some of the business will move to rail transport, beefing up the rail industry, which would be a good thing.

(Since so much of the nation's economy is based on trucking, it may be worth considering a specific tax break on gasoline purchased for a trucking business, perhaps temporarily.  This area certainly deserves some research.)

Would raising the price of gasoline have a bad effect on the economy in the short term?  As with most anything, there will be good effects and there will be bad effects.  Some industries will be negatively affected for sure.  But others will thrive.

A gradual transistion

You wouldn't want to jump into this suddenly.  It would need to be phased in over, maybe, a 6 year period to allow drivers time to understand the system and adapt.  And time for the mass transit infrastructure to respond to the new demand.

Subsidizing gasoline

Subsidizing gasoline encourages and promotes its use and forgives its waste.  We really want the opposite of that.

Does the US subsidize gasoline?  A paper published by the International Center for Technology Assessment titled "The Real Price of Gasoline" claims that gasoline use is subsidized a tremendous amount, and that Americans pay between $4.60 and $14.14 per gallon in external costs not reflected in the price at the pump.  The report is biased to an insane degree in that any program that could remotely benefit anything having to do with oil is included in the tally and blown up way out of proportion.  I think the report is more useful as a starting point for a discussion of what sort of programs should be considered subsidies and what should not.

So while the extent is debatable, the federal government does subsidize the use of gasoline to some degree.  And we have to understand that if one wants to conserve the use of gasoline, a subsidy is not how you do it.  And it would be benificial to remove some of the gasoline subsidies immediately.

A gasoline anti-subsidy, which my tax proposal pretty much is, is required to move toward a better energy policy.


Import tariffs are usually levied by a country on for the purposes of protecting industries, employment, to counter the practice of dumping, or to retaliate against trade barriers imposed by other countries.

To complement my basic proposal, I think we need to impose tariffs on oil and other products imported from countries that cause us harm, as a disincentive for providing them with revenue that will be used for terrorist purposes, and as a financial incentive for them to change their ways.

Robert Locke's article "Rational Trade Vs. Free-Trade Extremism Part I: Security" says it far better than I can.

A set of oil tariffs could easily shift oil imports from dangerous countries to friendlier countries and to domestic sources.   I realize this is a diplomatically sensitive issue, but tariffs are much less draconian than outright bans, and they can offer the potential of redemption.


This proposal is all about having the price of a fuel reflect its true cost.  I think this plan is practical, sensible, realistic and has the best chance of directing the country toward a significantly improved energy policy.


Reuters, 8 June 2005 Gasoline: One of the best bargains around

The gasoline prices quoted in the explanation and example were correct when this article was started, roughly February 2005.  As the article is being finished gasoline prices have suddenly started fluctuating wildly.  I figure they will settle down again soon, so I have not updated the prices in this article.  Yet.

Later note:
Now it's October 2005.  I paid about $3.15 per gallon of gas this week, up about 45% from when I started writing this article.  One of the reasons that gas prices are so high, besides the general insanity in the mideast, is that the demand is high due of all the oil China is using.  China's use of oil has been rising very rapidly in recent years, in parallel with China's growing consumer products industries.  Some huge fraction of the items you buy in WalMart or Target are made in China, and very inexpensive.

So it appears that we're paying significantly more for gas now, but getting the money back by being able to purchase inexpensive products made in China.  So, just like with my proposal, the costs roughly cancel for the Average Joe.  (Unless of course the Average Joe makes consumer products for living.)

Copyright 2005, J. Donald Tillman
Email: don -at- till.com
Web page: http://www.till.com