About a year ago, my old microeconomics professor at Berkeley, Severin Bornstein, came to NY to give a speech to alumni about energy policy. It was timely for me, because just that week, The New Yorker had published an article attempting to explain the difference in energy consumption (including everything: heating oil, electricity, gasoline, etc.) among European households and American households. The numbers are astonishing: European per capita energy consumption in 2006 was 146M BTUs/year. The major Western European nations are the UK (162M), France (181M), Spain (161M), Italy (139M) and Germany (178M). What is the US number? 335M. Roughly double the Western European average. The reason the Western European numbers are so compelling is because the standard of living is so similar. How is it possible that people in Europe are able to live lives full of the same conveniences (nice houses, cars, lots of household electronics, etc.) that we enjoy with half the energy consumption?
The answer can be explained partly by urbanization. There just aren't as many dense areas in the US per capita as there are in Europe. Indeed, if you break down the US numbers, by far the most energy-efficient city in the country is New York, followed by San Francisco and Chicago. Those are the three of the most urbanized cities in America (note that two of the three are not in warm weather climates, either, although climate is obviously a factor). Population density primarily reduces energy consumption in two ways: less driving reduces gas consumption and smaller dwellings reduce heating and cooling usage.
But aside from quality of life, climate and population density, there is a fourth factor that goes largely unnoticed. I asked Prof. Bornstein how energy consumption can be so dramatically lower in Western Europe vs. the US, even after controlling for factors like climate and urbanization. He answered without hesitation: by and large, European countries tax energy more and payrolls less. He exasperatedly lamented, "For some reason, in this country, we tax the things we want people to do (like work) and don't tax things we don't want people to do (like consume fossil fuels)."
It has been over a year, and that sentence has stuck with me ever since. Why do we have such a perverted set of incentives in place? Conversely, what could be simpler to fix? The Obama administration should propose a revenue-neutral reduction in the payroll tax and creation of a national carbon tax. Aside from the usual special interests, like oil and coal companies, and ultra-commuters driving 50+ miles to work each day, who would oppose this? Think of the economic, environmental, strategic and political benefits:
- Lower payroll taxes help businesses, both large and small, and incent companies to hire, thereby reducing unemployment. Unemployment (along with government debt) is probably the single biggest threat to our country's economic health. It would be hard for Republicans to oppose such a plainly pro-business bill such as this one.
- The entire package would be revenue-neutral, satisfying the deficit hawks (of course, a change in consumer behavior that reduces fossil fuel consumption as a result of a carbon tax may lead to larger deficits in the long-run; this would have to be accounted for in the calculation of the effective tax rates in the bill).
- A carbon tax would incent lower fossil fuel consumption and provide a subsidy to renewable energy. A cleaner environment would certainly be popular with the Democrats and would put the country in good stead with the international climate control community, which can't hurt. And fostering the growth of a national renewable energy industry (not to mention the production of more energy-efficient cars, homes and electronics) is the icing on the cake. Again, who would be opposed, outside of a narrow set of special interests?
- It just so happens that most of the major oil exporters in the world are not friendly to the notions of democracy and freedom in general, and the US in particular. Why not reduce our reliance on these countries' petroleum reserves and increase our national security at the same time? The Congressional hawks would be happy to see that happen.
- Even the protectionists have something to cheer here: we would effectively be subsidizing a domestically-produced commodity (American labor) and taxing a foreign-produced commodity (oil).
- Politically, the timing could not be better for President Obama: after so much hand-wringing about the stimulus plan and health care that has cut into his popular support and made him an easy target for conservatives, he needs a "triangulation" strategy. What could be better than a pro-business bill that would provide an immediate boost to job creation with no increase in the national deficit? Aside from the oil- and coal-producing states, this bill would garner some Republican votes, further isolate the right-wingers, appeal to independent voters, and give Obama some air cover to push for his more liberal initiatives.
