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Is It Time for a Price-Stabilizing Gas Tax?

Spiking petroleum prices from Iran’s closure of the Strait of Hormuz have infuriated politicians across the US and across the political spectrum.  There is nothing state or local politicians can do about the cost of crude oil, so discussions in many states – including California – have turned to a gas tax holiday.

Supporters argue that it makes sense for California to offset the war’s impact on pump prices by temporarily reducing the levy that the state imposes, which at $0.61 per gallon is the highest in the country.  Surprisingly – or not – those politicians do not generally say how they would make up the lost gas tax revenue.

But there’s a straightforward gas tax adjustment mechanism that could lower the political temperature on gas prices, reduce the financial strain on drivers, and be a more fiscally responsible policy when oil prices spike. California could modify its gasoline excise tax to automatically adjust downward when the price of crude spikes, but also automatically adjust upward when the price of crude drops.

Posted 3 Comments on California’s Proposed SAF Tax Credit Really Will Raise Gas and Diesel Prices While Delivering Small Carbon Reductions Uncategorized

California’s Proposed SAF Tax Credit Really Will Raise Gas and Diesel Prices While Delivering Small Carbon Reductions

In late February, my co-authors and I blogged about a new tax credit for sustainable aviation fuel (SAF) that California Governor Gavin Newsom has proposed as a trailer bill to the 2026-27 state budget. It would allow refineries and other companies that pay diesel taxes in California to reduce their tax bill if they also produce sustainable aviation fuel.

We argued that the proposed tax credit would reduce road funding, raise gasoline and diesel prices, and deliver small and expensive carbon emissions reductions. The Sustainable Aviation Advisory Council posted a response to our article entitled “Six Faulty Assumptions and Facts about California’s Proposed SAF Credit”.

Here, I explain that the council’s points are incorrect. I quote each of their six claims about our assumptions and follow each one with my response.

Posted 24 Comments on The Climate Policy Paradox: Why Voters Reject the Tools that Economists Advocate Most Uncategorized

The Climate Policy Paradox: Why Voters Reject the Tools that Economists Advocate Most

Economists overwhelmingly favor carbon taxes and cap-and-trade over environmental regulatory standards, but voters disagree. Our new research shows that simple economic misunderstandings help explain why.

Here’s a puzzle that has frustrated economists for decades: putting a price on pollution, through a pollution tax or cap-and-trade, provides the most efficient way to cut emissions. Ninety percent of leading economists in a U Chicago poll endorsed a version of this view. Yet government enthusiasm for carbon pricing can be weak, especially when energy prices are high and salient. Most recently, as the Iran conflict roils energy markets, the EU boosted its supply of carbon allowances, weakening the centerpiece of European climate policy to provide relief on energy bills.

More broadly, rather than typically relying on pollution pricing, governments overwhelmingly instead use regulatory standards that tell power plants, cars, and factories how much they can pollute. Standards dominate most major U.S. environmental laws, many components of China’s War on Pollution, and vehicle emissions rules worldwide. Since the choice affects trillions of dollars that governments are spending to address the energy transition and pollution, understanding why standards persist is a critical question for environmental policy. The question is not new–this blog has discussed policy instrument choice for years (here, here, here, and here).

Our new paper offers an important piece of the puzzle: voters don’t think the way economic experts do. They may prefer standards because they misunderstand policies’ total costs and the allocation of these costs between power plants and customers.