from Energy, Security, and Climate and Energy Security and Climate Change Program

An Oil Import Fee?

November 09, 2010

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I’m skeptical about the potential for significant progress on energy policy over the next two years. One dark horse, though, is a fee on imported oil. The politics could work: climate hawks could back it because it would cut greenhouse gas emissions; security hawks could back it because it would cut oil imports; deficit hawks could back it because it would raise revenues without raising taxes. It was particularly intruiging to see Mitch Daniels, whom some are trying to draft for a (long shot) bid for the Republican presidential nomination, float the idea a few weeks ago.

I’m ambivalent on the matter, mainly because I haven’t seen a good analysis of it. Here are the questions I think need to be answered:

  1. How much revenue could a realistic fee raise? This one is relatively simple.
  2. What impact would a fee have on U.S. oil consumption? How would that split between transportation (which is the least flexible and hence matters most for economic security) and other sectors?
  3. What impact would a fee have on U.S. oil production? A fee on imports will raise the price of oil seen by U.S. consumers but will not raise the cost of producing oil for U.S. producers. This means that an oil import fee would increase U.S. production.  How big would this effect be?
  4. How would these changes in U.S. consumption and production affect U.S. imports from key producers? How would those producers react?
  5. What net impact would a fee have on U.S. GDP? It would presumably help GDP growth by reducing U.S. exposure to high prices and volatility while hurting GDP growth because of economic distortions.
  6. How would the effects of a fee differ depending on whether it was applied only to oil or also to refined products like gasoline and diesel?
  7. Could an oil import fee be squared with U.S. obligations under the WTO and NAFTA? How?
  8. What would the distributional impacts of a fee be? Regional and income variations could both matter.
  9. What might the politics look like? I presented a simple argument above, but there are complications. Environmentalists would have mixed reactions because of a fee’s impact on U.S. production. Free trade supporters might blanch depending on the WTO and NAFTA implications. Refiners might oppose a fee; so might auto manufacturers. Economic purists might insist that a broad-based tax applied to all oil consumption would be better. Anyone could demagogue the policy, if they wanted to, by pointing out that it would raise the pump price for gasoline.

These are all answerable. Anyone interested in taking a shot?