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A February article by Jason Hill in the Proceedings of the National Academy of Sciences estimate that the climate-change cost of burning a gallon of gas is 37 cents per gallon. They also estimate that burning each gallon of gas costs 34 cents per gallon in reduced health outcomes. Taken together, the social cost (presumably not compensated) of burning a gallon of gasoline are in the 71 cents per gallon range.

As I understand it, the federal fuel tax rate is 18.4 cents per gallon. Here in New York the excise tax on unleaded fuel is 31.9 cents per gallon. And in most counties in New York we have a sales tax on top of that that averages about 7.9 cents per gallon. So here in New York, the current per gallon tax is 58.2 cents already.

Canonical textbook discussions of externalities (which are wildly misleading, but I state them here for illustration) suggest that the way to “solve” negative externality problems is to charge a tax to the user of the good causing the external costs, and that tax should be equal to the marginal costs of the damage being done. Ignoring the obvious fact that damage functions are not linear, if we take the research of Hill et al. seriously, it suggests that the marginal damages from burning a gallon of gas are 71 cents. We already impose an external cost of 58.2 cents per gallon on that gas. Therefore, the “eliminate” the externality from gasoline consumption, “we” only need to raise the tax on gasoline by 12.8 cents per gallon. At current price levels (around $3.00), that is roughly a 4% rise in prices. It seems hard to believe that this is a “solution” to such a massive problem. After all, 12.8 cents per gallon is well within the monthly “noise” of gas price changes.

My question then is, what the heck is wrong? I have my ideas, I want to hear yours. Are the external costs of gasoline burning tremendously understated by that above research? Are the real costs of climate change being exaggerated? I understand that gasoline consumption is not solely responsible for the climate change problem. In fact, estimates suggest that cars contribute only around 20% to GHG emissions each year. Taking that as an estimate, it still seems “low” to be able to pay off 20% of the climate change (even throwing in the health damages) damages from gasoline with only a 12.8 cent tax per gallon.

3 Responses to “Social Costs of Burning a Gallon of Gas”

  1. Michael says:

    First off, I find it very surprising that they could find climate-change cost so accurately, especially since the article itself talks about the huge variation in estimating the damage climate change causes. Looking at some articles myself, the ones with significant damage have to discount the damages at less that 1%, and ignore opportunity cost of what else we could be doing with the money.

    I guess my second thoughts are on opportunity cost for this whole problem. Have they calculated the positive externalities associated with better transportation (like having fresh fruit and veggies in the dead of winter)? What about the costs from switching from gasoline to natural gas or electricity? If all things are considered, I wouldn’t imagine gasoline being such a bad option. I guess we could go back to the horse and buggy days and try to figure out what to do with all the manure.

  2. Harry says:

    Mike and Michael,

    After I filled up my car and drove home today, I was thinking about Pennsylvania’s liquid fuels tax, which is partly distributed on a per-mile basis to townships and municipalities to maintain roads, and I thought of that function as one of the most legitimate functions of government. As much as I would like to buy the road that goes by my house and set up a toll booth (only a quarter), it makes sense having our governments run such things, assuming they contract out the paving jobs, so five Penndot workers are not watching one Penndot worker get ready to work. No fooling — that is what I thought, however sick it sounds.

    I hope you both read the WSJ yesterday, where a professor from MIT, a specialist in atmospheric science, lays waste to anthropogenic global warming.

    The social cost of not burning a few gallons of gas to get to work are enormous, because then that person will not get paid and will be unable to provide for his or her family. If that person was going to a Penndot job to watch someone else work, maybe the gas would not have been wasted, but time was wasted nonetheless. If that person sits around long enough, he or she becomes our burden to shelter and feed.

  3. The Unbroken Window » Blog Archive » Environmental Self-Interest says:

    […] per highway gallon in my 2004 Mazda 3, I save about 73 gallons of gas. This means that I am “saving” society about $51.80 of damages due to my driving, and I am saving myself at least $300 in combined […]

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