The Conversations We're Not Having on Fossil Fuel Subsidies

On The Energy Collective, Robert Rapier recently wrote an article examining many of the misconceptions in the ongoing (largely political theater) debate over oil company subsidies. It is a good article, and well worth the read. I say that the debate it centers on is political theater, though, because no one is talking about the largest and most egregious oil subsidy in the US at all.

According to the NHTSA, 193 billion dollars was spent in 2007 on highway construction and maintenance, of which only 51 percent was funded from user fees - user fees being, of course, the gasoline tax and tolls. Rapier's article goes over a good accounting of the fossil fuel subsidies in the US, but his top spot goes to purchases for the Strategic Petroleum Reserve, amounting to $1 billion annually. This might seem like a lot, but I find it difficult to believe that the national conversation has focused only on such explicit subsidies to manufacturing and some minor tax exemptions, and have consistently failed at fingering the largest tax expenditure of all:  the effective subsidy from the general taxpayer pool was 94.6 billion dollars in 2007, and undoubtedly more now.

The explicit subsidies from the general taxpayer pool for unfunded road maintenance are nearly two orders of magnitude larger than the SPR purchases Rapier noted, and we need to bring them into the conversation. In case it isn't obvious, from an economist's perspective, general taxpayer subsidies are less efficient than levying a full surcharge because the costs of driving should be borne proportionate to the amount of maintenance one incurs on roads - that is, on heavy drivers - and a fuel surcharge is a reasonable proxy for taxing vehicle miles traveled (VMT) or, alternatively, some combination of VMT and vehicle weight. An increase in the fuel tax would not be a Pigouvian tax, because the purpose is not to achieve some change but to internalize the cost of a negative externality. It would contribute to overall efficiency.

It should be obvious why the Obama administration is pushing for these small but controversial subsidies to end while ignoring the elephant in the room: gas price rises are political suicide, for him and for anyone else. Even if you accompany gas price rises with a tax cut amounting to an average of $315 a year for every man, woman, and child in America (simple division of $95 billion by 300 million, forgive me), people won't put two and two together. But if we are to have an honest talk about subsidies, then highway subsidies need to be on the table, and in line for the chopping block.