In An Uncertain Energy Environment, The Best Policy To Encourage Innovation Is To Increase The Federal Gasoline Tax – Clear Long Term Prices For Oil Based Products Will Tell Innovators What They Are Up Against

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By Paolo von Schirach

October 1, 2012

WASHINGTON – New generation electric vehicles (EVs) are not living up to their promise. The GM Volt is not selling, high end electric car maker Tesla Motors is struggling, while Coda Automotive, another EV start up, is also doing poorly, despite its sophisticated backers. Are electric vehicles simply a bad idea? Or is it that the technology still needs to grow and mature a lot more in order to find market acceptance?

Energy uncertainty

At a different end of the energy spectrum, are more stringent CAFE standards the best tool to optimize the efficiency of traditional gasoline burning internal combustion engines?

And finally, should there be a major effort to make and sell heavy trucks that burn liquefied natural gas (LNG) instead of diesel, on account of the extremely low price of domestic natural gas, as opposed to (mostly imported) oil derived fuels?

Impossible to know the correct answer to these critical questions. The picture regarding energy supplies and new technologies keeps changing. And this is problematic because enormous investments affecting entire industries and the behavior of hundreds of millions of consumers in the USA and worldwide are and will be affected.

Conventional wisdom proved to be wrong

Unfortunately, the energy outlook does not provide any clear leads. Until not too long ago, the emerging conventional wisdom was that major oil consumers would have to quickly find new energy supplies. It was predicted that oil would become more scarce and more expensive, while its environmental impact was worse than previously assumed. The future had to be in renewables and that was supposed to include nuclear energy, notwithstanding fears about accidents and the still unresolved issue of waste disposal. Biofuels, solar and wind would be the new clean energy frontiers. America would lead the world in green technologies. This was the picture in 2009.

More oil and shale gas

But now, just a few years later, it all looks different. New technologies have increased oil reserves and supplies worldwide, and in the US in particular. While oil prices are still high, we are not going to run out of crude any time soon. In the US the outlook is much better: more domestic supplies, (think North Dakota, now the second most important oil producing state), and increased imports from Canada indicate quasi oil self-sufficiency within a decade.

Beyond that, the US shale gas revolution has had and will have enormous ripple effects. Because of the shale gas revolution, natural gas will displace coal as the major power supply for electricity. But shale gas has also displaced renewables. Natural gas is abundant and cheap. It does not need subsidies.

Looking forward, in light of its low cost, should natural gas be adopted as transportation fuel, starting with heavy vehicles? Probably yes; yet more easily said than done, as this shift would entail huge up front costs for manufacturers that would need to retool plants and fleet operators that would need to buy new trucks. Not to mention the need to construct a national network of natural gas refueling stations.

Electric cars?

Finally, electric cars have a long way to go. It was assumed that high gasoline prices, combined with fears about the negative impact of fossil fuels emissions, (climate change), would be enough to make a case for clean vehicles that can be refueled at a minimum cost. But, while this may indeed be the future, we are not there yet. EVs are too expensive. Batteries are heavy and still too costly. Finally, the range is limited, and we have no national network of recharging stations.

Increase the federal gasoline tax

So, given rapid changes in our energy supply outlook and no sure indications about clear technology winners, the best approach would be to increase the US federal gasoline tax. By world standards US gasoline prices are still very low. It is possible to gradually increase gasoline taxes and it is possible to do so in a revenue neutral way, by lowering taxes elsewhere.

The signal to the market place would be: “We favor energy conservation and/or viable alternatives to oil, much of it imported. If you make conventional cars, focus on truly energy efficient models. If you work on EVs, higher gasoline prices will give you a benchmark of what you need to do to be competitive. Likewise, if you want to introduce trucks that burn natural gas, a clear understanding of where diesel prices are and are going to be will give you a sense of what you need to do to provide a cost effective LNG based alternative”.

Tax better than subsidies

Eventually the world will have to find alternatives to carbon based fuels. Still, instead of betting on evolving technologies whose long term viability is still unproven, US public policy should provide incentives to innovators by telling them what the price of carbon based fuel is and is going to be.

This way innovators and entrepreneurs will have an understanding of what they are up against, if they want to introduce competitive products. Providing ad hoc incentives and subsidies to this or that technology or fuel, depending on political pressures and favors, is not a better strategy.

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