Talking Energy Innovation at the Daily Dish

By Yael Borofsky and Jesse Jenkins

Updated 8/9/10. See below...

Seemingly inspired by the death of cap and trade, over at the Daily Dish Andrew Sullivan has tied together two interesting threads of conversation -- "Waiting on Innovation" and "Why Not?" -- that deal with the issues of energy innovation and energy taxes.

Highlighted in "Why Not?" the Economist's Ryan Avent is on to something when he suggests a $5 per barrel petroleum tax since it could generate about $40 billion in revenue annually. But to suggest, as Avent does, that the tax should rise by $5 each year with the objective of forcing consumers to drive less or purchase more fuel-efficient cars is a strategy that risks falling into the same political trap that ultimately ensnared cap and trade.

The simple fact is that the American public is extremely loath to accept greatly increased energy prices. As indicated in a number of polls, the tolerance point seems to level off at about $100-$175 per year or as little as $8-$15 per month. Gas taxes or carbon prices intended to alter behavior only work by causing financial pain to force the demand response. But the point at which the public feels the pain (or thinks it will) in a way that might actually alter their behavior is precisely when such policies become political nightmares, as we just saw with the Senate cap and trade debate.

In the case of a gas tax, Avent writes that "Americans wouldn't notice" a $5 tax on a barrel of oil and he's right -- the price hike would amount to about 12 cents per gallon. That's low, even for sofa change. But at this level, the tax would have little to no impact whatsoever on consumer behavior and driving habits.

Avent proposes that the tax increase by $5 annually but in reality, it wouldn't take long for the opposition to figure out that ten years down the line the tax would grow to $50 dollars a barrel - about a 65 percent increase over current gas prices or a hike of a little more than a $1 per gallon. At this point consumers would certainly pay attention and it wouldn't be hard to muster the political resistance to kill the policy entirely.

In fact, the Achilles heel of any attempt to increase energy prices to a point necessary to alter consumer behavior is that this is exactly the type of policy that will face serious political opposition, and probably demise, every time.

But this doesn't render Avent's idea worthless.

Instead of raising energy prices, the point of the gas tax should be to raise revenues. In fact, a $5 gas tax could raise about $40 billion annually, as Avent notes, without consumers feeling much financial pain at all.

These revenues could then be dedicated to the kind of public-private partnership that has successfully catalyzed private sector entrepreneurialism and innovation and delivered transformational technology investments throughout America's history.

There is little historic evidence that marginal price signal changes can spur significant innovation -- after all $5 gas taxes throughout the EU haven't given Europeans affordable electric cars or bio-fuel alternatives.

In contrast, the catalytic hand of the public sector lies behind so many of America's corporate success stories, from Hewlett Packard and Boeing to Intel, Microsoft, and Apple, as well as Merck and Dow Chemical.

This is not to downplay the individual genius of so many entrepreneurs, but without the public sector acting as both initial funder and demanding customer, so many brilliant ideas would never have taken root -- or would never have been possible in the first place.

So, is $40 billion enough? Well it's on par with what we spend on biomedical innovation and defense. So yeah, at 12 cents per gallon, why not?

[Update 1: Andrew Sullivan brings this post into the conversation over at The Daily Dish.]

[Update 2: A tip of the hat to journalist John Fleck, who notes via Twitter that on-highway diesel prices swung up by 6 cents this week.

As the following EIA graphic (click to enlarge) illustrates (and as any U.S. driver knows well), price swings of this magnitude are in fact routine, and they elicit barely a momentary grumble as one rolls past the gas station.
 

In contrast, when the 'oil shock' of 2008 sent prices soaring up more than $1.50 per gallon in just a few months (cresting at nearly $5.00 per gallon), voters across the country rose up, demanded action from their elected officials, and sent energy prices to the forefront of the heated presidential campaign.

Which is all to say: implementing the equivalent of a 6 or 12 cent per gallon fee on all oil (raising $20-40 billion per year for clean energy investment) would easily be 'within the noise' of normal price fluctuations at the pump and should be treated accordingly by consumers and voters.

Trying to increase energy prices by the equivalent of, say, $1.00 or more per gallon (the kind of price signal needed to start budging consumer behavior) and you should brace for some real wrath at the polls...]