Economist's Dream, Pragmatist's Nightmare

Martin Feldstein has a guest editorial in the WSJ today that has required careful thought.

The Harvard Professor, whim I admire greatly, proposes a system of Tradeable Gasoline Rights (TGRs) that function much like a cap-and-trade system for pollution. The US decides how many gallons of gas will be legally burned (this is the part I don't like) and every American gets his or her right to burn that amount, pari passu.

Now, if you want to drive a battleship like [I won't name names but he picked me up at the airport in it], the government won't stop you or tax you or influence the manufacturer you choose to buy from (this is the part I do like).

But if you're gonna buy more than your allotment of gas, you are going to have to buy credits from a guy who, say, drives an MR2 and works from home. The bike commuting crowd (which I used to belong to) can sell their credits to buy Power Bars and the latest Shimano componentry. Credits are traded at Gas Stations at a standard cash value, but I might give my friend 625 gallons of credits to defray expenses for his generous airport transportation.

Feldstein is not trying to increase government regulation here, but to ward off the crowd who want to add gas taxes to encourage conservation. Compared to that, the TGR plan rocks.

If the price of a TGR turned out to be 50 cents, an individual who buys an extra 20 gallons of gasoline would use up $10 worth of TGRs. If he avoids the purchase -- by driving less, driving at speeds that use less gas, or driving a more fuel-efficient car -- he could sell the 20 TGRs for $10.

The 50 cent price of the TGR would have the same incentive effect as a 50 cent gasoline tax. But while a gasoline tax lowers everyone's real income, the TGR system creates winners as well as losers. Someone who receives 800 TGRs for a year but only needs 500 would pocket $150 by selling his unwanted TGRs. But even such individuals would still face the right incentive: Every extra gallon consumed would reduce their net cash by 50 cents.

Advocates of a gasoline tax argue that it would produce extra revenue that could be used to reduce the budget deficit or to finance equally large cuts in personal taxes. My own guess is that the increased revenue from a higher gasoline tax would be more likely to finance additional government spending, just as it does in Europe.

And it is also preferable to gub'mint fiddling with fuel economy standards.

Requiring higher mileage standards on new cars would do very little to reduce total gasoline consumption in the near term because each year's new cars are only about 10% of the total cars on the road. Unlike the system of TGRs that raises the effective cost per gallon, the new car standard would do nothing to change the behavior of owners of existing cars. But the TGR system would cause owners to economize on gasoline by driving fewer miles, driving at speeds that use less gasoline, using tires that improve miles per gallon, and servicing their engines to maintain fuel efficiency. And of course the higher effective cost of gasoline would also cause new car buyers to prefer more fuel-efficient vehicles.

In the end, however, even with private help, can you imagine our Government handling this? In addition to the out and out graft, who doesn't think they'd eventually be parceled out by race or some socially-engineered quantity.

Sorry Perfess'r, swing and a miss!

Economics and Markets Posted by jk at June 5, 2006 7:02 PM