Gas prices rose sharply over the last year and currently sit at $4.239 per gallon. These higher prices have angered many people and are likely causing political problems for the current government.
Yesterday, one of the major climate change activist organizations, Sunrise, tweeted that gas price hikes are the result of oil company greed. This set off a series of reactions from all sorts of pundits that ranged from accusations of hypocrisy to hand-wringing about how the episode shows how hard climate change politics will actually be.
New Lollapalooza lineup just dropped!🗣️ pic.twitter.com/wSsmkECxAP— Sunrise Movement 🌅 (@sunrisemvmt) March 22, 2022
I don’t know enough about Sunrise’s full history of positions to say whether it is hypocritical for them specifically to criticize high gas prices, but the idea that gas price hikes of the sort we are seeing right now are a cornerstone of climate change politics is not exactly right.
Many climate change advocates have, over the years, advocated for the imposition of a carbon tax-and-dividend scheme (see our paper from 2018). This scheme would increase the after-tax price of carbon-based energy sources, including gasoline, but it would then return the money raised by these price hikes right back to consumers in the form of a cash transfer.
Under a carbon tax policy, an average family that consumes an average amount of carbon-based energy would pay exactly the same amount in higher gas prices as they receive from their carbon dividend. If they didn’t change their behavior at all, their net income situation would be no different than it is currently.
But if they did change their behavior by, for example, switching out their gasoline-powered car for an electric-powered car or adding solar panels to their rooftop, then the amount they pay in the carbon tax would decline while the amount they receive from the carbon dividend would remain the same. Thus, by making greener choices, their net income would increase relative to the status quo.
The current gas price hikes do not work like this. The proceeds from these higher prices are not sent right back out to consumers in the form of a cash payment but are instead being paid to various owners in the oil and gas value chain. For consumers, the higher prices are a pure loss.
Both types of gas price hikes make greener energy sources more financially attractive. But the carbon tax-and-dividend does this by increasing your income if you make greener choices while the current gas price hike does this by reducing your income if you don’t. These are very different mechanisms, both practically and politically.
In the last few years, some climate activists on the left have rejected carbon tax-and-dividend proposals as political non-starters, neoliberal, or worse. Instead, they have tended to focus on alternatives like “keeping it in the ground” or “eliminating fossil fuel subsidies.” This has been rather frustrating to watch because, as I pointed out in 2018, these alternatives strategies, if effective, would spike consumer prices in the exact same way that a carbon tax would, but without any offsetting cash payment. These policies really would create a situation that mirrors the gas price hikes we are seeing right now. A carbon tax-and-dividend would not.
So for carbon tax advocates at least, it is not at all contradictory to lament the higher gas prices for the effect they are having on the disposable incomes of average Americans. A carbon tax-and-dividend scheme does not reduce the disposable incomes of average Americans relative to the status quo. It has the positive incentive effects of ordinary gas price hikes without the negative income effects.