Gas Prices Don’t Reflect Their Environmental Cost

cross the globe, politicians are fuming about high gas prices—and trying a range of policy mechanisms to bring down costs. Britain has reduced its fuel duty which helped to lower the price for motorists who fill up their vehicles. California legislators have suggested a gas tax rebate to help motorists. Washington also has noticed the possibility of suspension of federal gas taxes.

It is obvious why the campaign was launched: Politicians and their voters hate rising gas prices. When gas prices rise, the cost of filling up the tank chips away at consumers’ discretionary spending and puts the household budgets of the most vulnerable in the red. According to AAA, right now the U.S. average gasoline price is $4.24/gallon. This may be due to the Russian invasion in Ukraine, among other factors.

However, politicians are trying to lower the price of gasoline. I would like to take the time to consider the real cost of driving. This cost does not include the vehicle’s price and the fuel costs. It also includes the social costs associated with operating the car, such as the pollution that causes climate change. Calculating the damage done by pollution and other factors such as traffic and accidents—what economists call externalities—is a fraught process, and economists don’t necessarily agree about all the variables. But one thing is true under any reasoned consideration: driving costs society much more than you’re paying to do it.

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Driving is a responsibility.It is easy to see the impact of costs on society. Well-maintained roads require cars, which are subsidized by the government. This means that more people will use the roads and more money will be required to repair them. Driving can cause pollution to worsen the air quality. This contributes to many health conditions, including asthma and heart disease. Some of these illnesses may eventually lead to death. Traffic wastes people’s time and harms economic productivity. Driving more often means that there is a higher chance of accidents. These car crashes kill thousands each year across the U.S. Data from the U.S. Environmental Protection Agency shows that the average passenger vehicle emits 4.6 metric tones of carbon dioxide per year. And, considered collectively, EPA data shows that transportation is responsible for nearly 30% of the country’s greenhouse gas emissions, more than any other sector.

What does all this cost in dollars or cents? To get an understanding, I dug into the past few decades of economic research and found one paper—a 2007 study from the research group Resources for the Future—that looked at the range of questions at play. Add all of the miles-related costs, such as congestion, accidents and local pollution to the total cost, which is $2.10 per gallon. Climate change was examined separately by the paper, and the average cost to drive to the planet came out to be just six cents per gallon. However, the paper points out one major caveat. The cost of driving to the planet depends on how much climate change costs.

If you substitute the study’s outdated estimate with new figures for how much emitting a ton of carbon dioxide costs, the cost of driving to the planet balloons to 72 cents per gallon. These two factors can make it easy to see why the total cost of these externalities could easily reach $3 per gallon. That’s on top of the actual cost of the fuel; 86% of the gas price at the pump today is made up of the price of the original crude oil, the cost of refining it into usable gasoline, and the cost of distributing and marketing it.

Of course, it’s worth taking the externality estimates with a serious grain of salt. They’re outdated, for one, and many people question the whole practice of putting a monetary value on the loss of human life and very real suffering that will result from the effects of climate change. A fuel tax would not be able to compensate for the full extent of damage caused by driving. This is something that no politician has ever seriously proposed. According to data from Congressional Research Service, the average cost of a gallon is 31 cents more for state taxes than it costs to buy gas. Federal taxes are 18.4 cents higher. Given the political dynamics of gas prices—and the political interest in cutting those fees—any move to increase the gas tax would be political heresy.

“It’s just very difficult to do through fuel taxes alone, because you need big increases in fuel taxes, which are politically difficult,” says Ian Parry, the author of the 2007 paper, who now works as the principal environmental fiscal policy expert at the International Monetary Fund, of the policy needed to transform the transportation sector. Parry and other economists suggest that there are a number of additional levers they can push, such as fees on polluting vehicles, rebates for the purchase of new ones, or road congestion fees.

And, despite the clear economic case for gas taxes, politically-minded policy experts say that there’s a world in which providing some form of gas tax relief could help address climate change if it offers politicians the latitude to pursue other ambitious climate policies. “Do I, on this substance, support this? No, of course not,” says Gernot Wagner, a professor of climate economics at New York University, of proposals for a gas-tax holiday. But “if you basically trade off 18.4 cents for much, much more ambitious policies? You can. Let’s go for it.”

Still, no matter what happens with the political debate over high gas prices, it’s useful for drivers to be aware—both as consumers and citizens—that there is a much higher cost to driving than they’re paying at the pump.

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