Another Way to Implement Higher Gas Taxes

The Economist's Free Exchange Blog wrote recently about just how effective gas taxes are in spurring investments in alternative energies and in changing consumer behavior. Jim Manzi originally argues that because short term elasticity is so low, gas taxes won't have an effect on consumer behavior and shouldn't really be used as a policy tool. The Economist blogger counters this point by pointing out that either way the tax will achieve something. If elasticity is low, then the tax will be extremely effective at raising funds which could be put towards research, and if elasticity is high then the tax will be extremely effective at changing consumer behavior.

However, for both of these cases we still have price volatility. Assuming that spikes in gas prices occur in the short-term low-elasticity time scales, exogenous spikes will have no behavioral effects, will decrease real disposable incomes, and will lead to a more inefficient allocation of consumer spending as people are spending too much on fuel during these periods of high gas prices.

One would think that a long term expectation of oil price volatility is enough incentive to drive investment into alternative fuels or change consumer behavior. Assuming that it isn't (or won't have an effect for a while), the volatility is simply a dead weight on the economy.

So, how about you set tax policy such that gas prices + tax will always be $6 a gallon no matter what sort of market fluctuations occur? If gas prices are predictably high like this for the consumer, the higher long term elasticity will come into play and behaviors will be more likely to change. Not only that, but simply the expectation of steady but high gas prices will cause the long term behavior to kick in sooner, meaning that behavior will change even more quickly. The dead weight cost of volatility disappears, funds are raised through the tax for research, and behavior will change to demand that research.