Friday, December 15, 2006

A better way to encourage fuel/energy efficiency?

Oversimplifying US oil energy politics, for the past 30 years liberals advocate demand side management while conservatives advocate supply side management. Specifically liberal administrations press for increased/improved government mandated efficiency standards (CAFE) to reduce demand, over the noisy complaints of nearly every participant in the car industry. Government enforces standards. Meanwhile the conservative administrations primarily advocate measures to increase oil supply through drilling anywhere and everywhere. Government is oil pusher.

I’m probably preaching to the choir as most people realize that what may have worked (we managed to get by) over the past 30 years will not work for the next 30 years. Yet what can be done about it? I’ve advocated a carbon tax following Gore’s call for a carbon tax for payroll tax swap. But voters seem to have a counter-rational dislike for taxes: everyone wants the benefit (national security, police protection, working roads, legal system, education etc.) but nobody wants to pay for it. And if voters don’t like it, politicians are loath to enact it.

Perhaps government could offer a big shiny carrot that will motivate private industry to work toward the goal (greater energy efficiency) that actually benefits everyone. For example, with the exception of a handful of automotive executives, everyone understands that we need more efficient cars and we need them yesterday. But these executives only see the cost (lots of R&D expense), not the benefit (reduced spending on oil and less dependence on foreign supply).

I wonder if we could accelerate investment in more efficient vehicles by offering a big tax holiday (say 5-10 years without a corporate tax) to the first major car company (500,000-1M+/yr vehicle sales in the US) that improves vehicle efficiency by a factor of 5-10. Assuming cars now get an average 20mpg (that is about 1 lb carbon emission/vehicle mile), so if an 8x improvement is considered the goal, this could be expressed as the first company that sells 500,000 cars with an average fuel efficiency of 160mpg (0.125lb carbon/mile) gets an 8 year tax holiday.

It seems that this would provide a powerful incentive (imagine the impact on the winning companies share price) to invest in greater efficiency, especially so if competitors start making progress toward the goal. Moreover the cost would not be excessive, lets assume the car company has $10billion/year of profits, and pays a 30% tax rate the cost of the tax holiday would be $3 billion per year (or $24 billion over 8 years).


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