Fuel Tax - Better Than A Bailout

(12/10/2008) - The recent hearings and debate surrounding the proposed bailout of GM, Ford, and Chrysler (the “Big Three”) has been surreal.  On the one hand, lots of conservatives are coming back to their free-market talking points after a few months of conveniently forgetting them when it came to providing loans to the banking industry.  On the other, many liberals/progressives are suggesting that the government use the bailout money to force the Big Three to change their ways and produce more energy efficient vehicles as if gas was still selling for $4 a gallon.  There are plenty of good reasons to promote fuel efficient transportation, but this isn't the best way.

Hybridcars.com summed up this idea back in November: “The potential Detroit bailout is a once-in-a-lifetime crisis turned opportunity. A grand bargain is in the works: the federal government provides billions of dollars to the automakers, and in exchange, the automakers must retool to produce high-mpg gasoline cars, gas-electric vehicles, clean diesel cars, plug-in hybrids, and all-electric cars.”

This isn’t the best way to help American automakers or reduce fuel consumption and greenhouse gas emissions.  Despite how much one might dislike gas-guzzlers, or how much they contribute to CO2 emissions, they are only a small part of the reason GM, Ford, and Chrysler are in so much trouble. 

Detroit car companies have been losing money for several years now – before oil prices really began to rise in the summer of 2007.  The Big Three’s real problems started because their pension plans from 20 and 30 years ago were structured with the assumption that they would maintain a large share of the car market.  Matt Yglesias sums it up: “In exchange for getting to pay their workers less in the short-run, they agreed to a benefits structure that was guaranteed to destroy the firms in the long-run unless they could perennially maintain a huge market share. But it’s also a problem that’s largely in the past thanks to an agreement reached last year to offload and ultimately shrink the size of these costs.”

Except before they could finish digging themselves out of this hole, oil prices spiked – from about $66 to nearly $140 a barrel.  Now, you might be thinking, “If they had more fuel efficient vehicles, they would have been prepared.”  There is a little truth to this.  If GM had a Prius-equivalent car, they might not have lost as much money.  But over the last year, Detroit car sales have plummeted because car sales in general have plummeted, not because they didn’t have a fuel-efficient car to sell. 

We now know that the U.S. recession began way back in December, 2007. Since then, car sales have been bad for everyone – not just Detroit – because people have less money (or are feeling less secure about money) and are cutting back on large purchases.  The Green Motorist reports that between November 2007 and November 2008, U.S. car sales fell by 36.9%.  Isuzu posted the highest drop – 73.8%.  Nissan sales fell 42.2%, Crysler by 47%, and GM by 41.3%.  Toyota sales declined 33.9%, Ford by 32.6%, and Honda by 31.6%.  The cars that are being sold are not necessarily fuel efficient.  Sales of the Toyota Sequoia rose 52% from October to November of this year.  GM’s light trucks sold better than the rest of the company’s cars.

I agree with most commentators that the Big Three made a dumb decision when they decided to forgo ANY development of a hybrid car for so long.  But this doesn’t mean mandating requiring them to make all of their cars hybrids or plug-in electrics is a good idea.  These technologies are more expensive, and until gas prices rise again to at least $3.50 or $4.00 a gallon, it won’t be worth it from the buyer’s standpoint.

Fuel Tax - Better than Mandates

A couple days ago, the price of oil sunk to $43 a barrel.  In Rhode Island, a gallon of unleaded is now selling for about $1.77.  Unless we are standing on the brink of peak oil (in which case it’s a whole new ballgame), it will probably take a few years before gas prices approach $4.00 a gallon again.  The primary reason for this is that demand is lower during a recession.  Another thing that tends to happen is that spikes in oil prices spur further exploration and production, which leads to an oversupply. New production projects launched between 2005 (when they broke $50/barrel for the first time) to 2008 will soon be coming online.  This process isn’t guaranteed to happen (at some point there won’t be enough new oil to find), but it is a possibility.  The idea that oil will stay under $60 a barrel for the next 2-4 years or even longer is a definite possibility.

Now, lets suppose we require Detroit to begin producing hybrid-only cars.  What’s to keep Toyota, Honda, or any other foreign car manufacturer from selling big, gas-guzzlers instead?  Increasing CAFE standards further might do the trick, but there is a quicker and more efficient way to do the same thing: increase the gasoline tax.

Plenty of people have already written on the advantages of a higher gasoline tax, so I see no need to delve into the particulars advantages this offers.  If you don't find these explanations satisfying, let me know why and I'll do a post on it.

There are other reasons to loan the Big Three money besides bribing them to build hybrids.  Robert Reich’s “hybrid” bailout is headed in the right direction for the form such a bailout should take.  But using the loan money as a way to coerce GM, Chrysler, and Ford into developing more fuel-efficient vehicles isn’t the best way to implement environmental or transportation policy.  It’s a political cop-out.