We are on the doorstep of environmental and energy crises. In 2003, the fourth hottest year since 1880, 35,000 Europeans died in a heat wave. We watch as glaciers recede and ice shelves break off into the sea. We import over 60% of our oil. Energy has been the primary motivator for two wars resulting in thousands of American armed forces deaths and tens of thousands civilian deaths in the Middle East. Hurricane Katrina exposed our energy supply/demand vulnerability - petroleum and natural gas prices skyrocketed causing economic upheaval after this one storm. In 2006, the U.S. trade deficit set a record for the fifth straight year. This is not sustainable and leaves the U.S. vulnerable to a sell-off in U.S. stocks and bonds that would stall the economy. Finally, fossil fuel combustion has caused mercury in fish, acid rain, and the increasing incidence of asthma.
What to do?
The sooner we address an escalating problem, the easier it is to fix. Because of the:
* enormous benefit from small amounts of fossil fuels;
* problems resulting from the combustion of fossil fuels (see the four "biggies" above);
* finite supply of fossil fuels.....
non-renewable sources of energy should cost more. An economist would say the market is not internalizing (accounting for) all the costs of fossil fuel trade. We need a market-based solution to set the stage for our ingenuity, drive and marketplace to solve these problems. We need a solution similar in function and scope to our patent and antitrust laws - change the "rules" for the long-term benefit of all.
Congress should cut federal income taxes and raise taxes on non-renewable energy to replace the revenue. This tax shift should be phased-in over 10 years. For individuals and families, the shift should be as close to cost-neutral as possible. Those that pay no income tax or receive a credit would be reimbursed for additional energy taxes in other ways such as a larger credit and/or subsidized transportation. Tax shifting lowers taxes on beneficial activities (like work) and raises taxes on activities whose costs are not be accounted for (like burning fossil fuels), with the net effect on the average consumer being a financial wash.
Higher non-renewable energy prices will reduce our energy use and stimulate the U.S. alternative energy industry. If decreased U.S. energy consumption resulted in reduced prices, an automatic "ratchet" mechanism should further shift taxes from income to energy to maintain these incentives.
* * * *
This shift in taxes will reduce the four big problems listed above and stimulate the U.S. renewable energy industry.
Some will argue that this change will be difficult, and it may be. But we can be proactive now, or have disruptions thrust upon us later. When gasoline rises to $4 or $5 per gallon, what will we wish we had done when it was $2.50 per gallon? The longer it takes to reduce our use of non-renewable energy, the harder the change will be and the greater the consequences.
Phased-in, intentional increases in energy prices would make many alternative energy projects economically viable. The renewable energy industry would grow rapidly and create an export boom. This industry has been hindered by cheap energy, growing by only ½ of 1% between 1985 and 2005 (Energy Information Administration Monthly Energy Review - page 7). A revitalized alternative energy industry will create technical jobs and a mighty economic engine providing life-enhancing products for people all over the world.
How much of a tax shift? High enough to reduce energy consumption and stimulate the alternative energy industry, but low enough to keep inflation in check. [5/5/07 update - $0.10 per year for 10 years - see today's post, How much of a tax shift?] Increasing non-renewable energy prices will likely cause some inflation until renewable energy provides a larger percentage of our needs. The question is would you rather have:
- a spike in fossil fuel prices similar to the disruption Hurricane
Katrina caused (with the associated accelerated inflation
when prices don't drop)?
OR
- a phased-in non-renewable energy price increase (with the
associated limited inflation and a reduction in income taxes)?
The energy tax should be based on the energy content of the non-renewable fuel - a BTU tax. [6/5/07 update - not a carbon tax for these reasons - What about nuclear power? and Environmental taxes]
So, the next time you see an SUV or drive past a McMansion, think how nice it would be to be able to say, "OK, they're paying part of my income taxes."
