Burning Question for Jay Corrigan, Associate Professor of Economics

by Jay Corrigan, Associate Professor of Economics

The temperature's rising. The icecaps are melting. The Obama administration is calling for an 80 percent reduction in carbon dioxide emissions. Will my next car run on batteries?

Probably not, but I don't really know. And, more importantly, neither does anybody else.

What economists and scientists do know is that the world is getting warmer and that man-made greenhouse-gas emissions play a key role. Environmental economists overwhelmingly agree that the best way to address this problem is to raise the price of fossil fuels, either directly with a tax or indirectly by imposing an economy-wide cap on CO2 emissions.

That's because the price we currently pay for a gallon of gas reflects the costs of extracting oil and refining it into gasoline, as well as taxes that help pay for highway construction. What it does not reflect is the environmental damage caused by burning it, or the additional traffic congestion and automobile accidents caused by driving.

In order to incorporate these environmental and social costs, the U.S. government would have to increase the gasoline tax by just over $1 per gallon, according to a 2005 study. Facing higher gasoline prices in the short run, we might choose to drive less, to make greater use of public transit, or (un-American as it sounds) to start walking.

It's no secret, of course, that rising fuel prices cause people to buy less gasoline. The price of gas went up by a dollar between the summer of 2007 and the summer of 2008. This led Americans to reduce gasoline consumption by 5 percent, the largest percentage decrease since the 1980 oil crisis.

But the relationship between gasoline prices and consumption is far more powerful in the long run. Facing permanently higher prices, we may choose to drive smaller cars or to live closer to where we work. We might even embrace one or more alternative technologies for powering our cars. These include widely available technologies like biofuels or gas-electric hybrids, but also more exotic alternatives like all-electric plug-in models or hydrogen fuel-cell vehicles.

No one knows which, if any, of these alternatives will win out because while all will come down in price, it's impossible to say which will ultimately be most cost-effective.

My best guess is that we'll continue to burn fossil fuels for the foreseeable future, but that we'll do it much more efficiently. For example, Europeans can currently buy a family-friendly Volkswagen Passat that goes 46 miles on a gallon of diesel. Future models could be even more fuel efficient if horsepower were reduced or if manufacturers made greater use of expensive but readily available aluminum and composite parts. Cars like this would require no changes in driving habits and could take advantage of our existing fuel pipelines and gas stations.

I'm less optimistic about the much-hyped 2010 Chevy Volt. Like the Toyota Prius, the Volt will have both a gasoline engine and an electric motor. But because the Volt can be plugged into conventional electric outlets, most of us could get to and from work or the store without using any gasoline. This comes at a heavy price, though, with the first-generation Volt expected to sell for $40,000-more than twice the price of a base-model Toyota Camry. Even if electricity were free and gasoline cost $5 per gallon, you'd have to drive 100,000 miles before you made up the extra $20,000 you spent by buying a Volt instead of a Camry.

It's possible that the Volt's price will fall as GM increases production. It's also possible that advances in battery technology will allow the price to fall rapidly and significantly. Again, nobody knows. But that only underscores the importance of bringing the price we pay for fossil fuels in line with the true environmental costs of consuming them. Because this wouldn't single out a "favored" alternative (for example, ethanol), it may simply motivate us to be more frugal in our fossil-fuel consumption as prices inevitably rise, or it may dramatically accelerate our transition to a cheaper, cleaner, but as-yet-unforeseen alternative.

What I do know is this: if the problem is that gasoline is too cheap, the best solution is to raise its price. This levels the field of competition while allowing for the flexibility needed for the best alternative to naturally emerge. Mandating that we use a certain proportion of ethanol or that a certain percentage of our cars be hybrids is at best a politically cowardly way to disguise the cost of addressing the root problem. At worst it's a shameful give-away to special interests.

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