The National Interest
Thanksgiving 2001

Achieving Oil Security: A Practical Proposal

by Martin Feldstein

 

. . . If American drivers had to pay what I would call the "full cost" to the nation of driving, there would be a strong incentive to change driving habits and to seek new technologies that deliver lower fuel costs. By the "full cost" I mean not just the cost of producing gasoline and distributing it through gasoline stations, but also the implicit cost to our nation imposed by the national security effects of an increased dependence on imported oil, the adverse environmental effects of air pollution, and the increased risks of automobile accidents that result from a greater number of drivers on the road.

Although the Europeans might use this notion of "full cost" to justify the very high taxes that they levy on gasoline, an acceptable solution in the United States must not involve a new large tax on gasoline. Bringing U.S. gasoline prices up to European levels by an additional gasoline tax of two dollars a gallon would impose a tax of about $2,000 a year on the average American household. The government would have new tax revenue of more than $250 billion a year, equivalent to one-fourth of the total current income tax revenue and more than double the annual tax cuts in the recent Bush tax package. While that money could in principle be returned by lower income taxes or a specific tax rebate, most Americans would doubt that the funds would in fact be returned. Such a tax-based policy is clearly a political non-starter.

Fortunately, we can achieve the favorable incentive effects of a higher gasoline tax without actually imposing any tax at all by the use of tradeable Oil Conservation Vouchers (OCVs). Here is how the tradeable Oil Conservation Vouchers would work. . . .