Sunday, May 14, 2006

The Price at the Pump

Gas prices are sky high. The US media is yelling that this is a major failure of the administration and a national calamity. But there's an upside to a higher price at the pump: it may be the only way our society will reduce car emissions. Higher gas prices may also be inevitable and they may be permanent.

The price we pay does not stop at the pump. The rise in oil prices causes a rise in inflation, both directly (gas costs are included in the consumer price index) and indirectly (as the increase in costs trickle down throughout the economy). To dampen inflation, the government raises interest rates, which hurts those of us who have mortgages, loans, and credit card debt.

The price rise could also cause a recession, as it did in the early 80s.

There are things the government could do. They could reduce the excise tax on any gas revenue over a certain price per liter; or remove the GST from the excise tax; or just reduce the excise tax. They could compensate poor people, small businesses, and farmers; or, as California proposed, they could compensate everyone. Since we're an oil producer, another option is to repeat what Trudeau did in the 70s, and set up a two-price system where oil producers can charge the world market price for gas they export but must charge a lower, regulated price for gas used in Canada.

The problem with these schemes is that they could negate the positive effects of a gas price rise: reducing wasteful consumption. We could all significantly reduce our energy use without suffering a reduction in lifestyle. That would reduce pollution, which would mean less bad air days - immediate tangible benefits - not even counting all the benefits from reducing global warming.

I recently read the figure of $1.80/liter as the magic gas price at which Canadians will significantly change their behavior. We're barely at a dollar now. Europe has paid more than the equivalent of $1.80/liter for decades, and the European agricultural sector and small businesses are flourishing. You only have to spend a day in France to see the difference: smaller cars and trucks, better urban transit, intercity trains, higher housing density, more walking-distance shopping, smaller homes, alternate energy sources like solar and wind, a more environmentally aware populace.

The argument that the poor must be compensated sounds very much like saying that everyone has a right to own a car. That sounds absurd... until you think that many of our cities are designed for cars. In my town, for example, the office where we renew our health cards is way out on the outskirts of town.

It would be much easier to control this situation if we had raised prices through more aggressive oil taxes, as Europe did. (A long overdue apology to Joe Clark on that one.) It would be prudent policy (if not politically feasible) for the government to respond to higher gas prices by raising the gas tax and using the revenue to subsidize transit infrastructure, environmental urban planning and the adoption of new technologies.

We're heading into summer, and it's predicted to be long and hot. Last year Ontario had a record 53 bad air days, and unless we can do something to reduce emissions, the trend predicts that this year will be worse. If we can't reduce car emissions through higher gas prices, what chance do we have?



Anonymous said...

You had me right up until you said that the poor must be compensated, or inferred that somehow gas prices are helping the poor.
Pardon me, but the poor are the most likley to suffer from poisoned air and water, and least likely to suffer from not having economical gas to run their machines.
Keep on being environmental!
Pssst! I have it from a good buddy that you can buy a 2006 Lincoln, almost good as new, lightly kissed by Katrina, for a song!
Think about it, no GST!

Yappa said...

Well, actually I argued that the government should raise gas prices further by raising the gas tax, and use the tax revenue to make improvements that will help people who don't drive.

But when there is a cost to things like environmental improvements, I think we need to always be thinking about who pays for it, and be concerned about fairness. That's not an argument against working to reduce our environmental damage - it's just good policy.