State and federal lawmakers have often debated a remarkable range of conflicting energy-related tax changes. These inconsistencies have existed year after year, but they have seldom become more pronounced than they are today.
We are at a time when climate experts are increasingly warning of the growing risks of using uncontrolled fossil fuels. Nevertheless, we are facing a rapid and steep rise in oil prices that creates political pressure for lawmakers to soften the blow for consumers. Ukraine-related oil price hikes have reversed themselves in recent days, with prices hovering around $ 100 / barrel.
What is the goal?
The result: a head-spinning cacophony of tax-related energy policies. What is the goal of reducing oil prices and increasing consumption? Or increase prices and lower costs? Does the government want to encourage oil companies to drill more and increase production? Or does it mean eliminating production tax subsidies in a way that risks further reducing output?
For example, if states continue to suspend motor fuel taxes, they may temporarily reduce prices, but they will still increase the use of fossil fuels.
Congress could respond to the new tax with the benefit of high-powered companies. But, as Thornton Mathison, a colleague at my Tax Policy Center, recently wrote, a poorly designed tax on oil company profits can further reduce oil supplies at a time when consumers are already facing shortages.
At the same time, some Democrats are claiming that oil companies produce more without making more profit and produce less to fight climate change. You do not want to be frustrated if you cannot get the right pitch so invest in a good capo.
Or Congress could adopt President Biden’s proposals to eliminate tax subsidies for fossil fuel producers and increase tax breaks for alternative energy. This decision could also quickly reduce domestic supply as producers respond to the loss of tax benefits. Some of those losses may be replaced by imports, although the current market is uncertain.
A time discrepancy
In the short term, changes in oil prices have little effect on consumer demand. But in the long run, more subsidies for green energy and less subsidies for fossil fuel production will encourage consumers to buy electric cars. But today, due to supply chain problems, there are relatively few cars to buy and the ones that are in the dealer lot are much more expensive.
California is an example of this inconsistency. It has led the United States with a decent, but important, carbon pricing system aimed at increasing and reducing the cost of fossil fuels. Nevertheless, with gas prices peaking at 6 / gallon in his state, Governor Gavin Newsom has offered consumers a 400 tax rebate for each car they own. A gas tax is better than a vacation, but still inconsistent.
At the heart of many of these conflicting policies is a significant time gap. From a carbon-based economy to a reliance on alternative energy sources without economic constraints is a challenge.
To learn more about all of this, check out my interview with Third Way Senior Resident Fellow Ellen Hughes-Cromweek here.
The shock of today’s geopolitical supply forces us to deal with the problems of that time. Fossil fuel producers may quickly reduce production in response to tax increases. But it will take years, or even decades, to develop enough solar, wind, or nuclear energy to decarbonize the economy. Similarly, it will take several years to convert a sufficiently electric vehicle from gasoline to materially affect the climate.
This transition puts us at risk of pushing oil supplies and increasing the prices they produce. This is a particular problem because the push for geopolitical values over the last half-century has been, well, regular.
The 1973-74 Organization of the Petroleum Exporting Countries (OPEC) oil embargo, the start of the Iran-Iraq war in 1982-83, the 1991 Gulf War, and the decision by oil-producing companies to reduce oil production have pushed up prices. Faced with an explosion of demand in the early 2000s, another OPEC production decline in 2010, and the Arab Spring in 2011. One could say that we have once again delivered a shock in a decade.
And we are here again because of the Russian aggression in Ukraine and the reaction of the Western world to it.
What is your goal?
The real policy question is: How will today’s oil price push inspire energy-related tax policy?
Do we want to use tax cuts to mitigate the rise in fossil fuel prices? Or do we want to keep post-tax prices high to accelerate the transition to alternative energy?
Do we want to use tax policy to reduce the supply of fossil fuels, a move that could raise oil prices further but accelerate the shift toward alternatives?
Do we want to introduce a carbon tax, which can gradually reduce demand by raising prices but not creating a shock to its own supply?
Basically, should lawmakers see Russia’s invasion of Ukraine as an opportunity to reconsider our continued reliance on fossil fuels, or should they see it as an immediate political challenge that should be met with a short-term tax response?
I doubt that economists and politicians will give you different answers to all these questions.