Thursday, January 25, 2007

POTUS: Closet Pigovian?

A loyal reader takes exception to my description of President Bush's energy proposal as a "tangle of regulation." He suggests that it is, in fact, a Pigovian tax in disguise. He writes:
A big biofuel mandate + safety valve = gas tax where biofuel producers get to keep the first chunk of revenue (until the price of a biofuel credit reaches the safety valve price). It's paying a bribe to be allowed to do a gas tax.
In other words, if we impose very costly regulations on gasoline producers but allow these producers access to a "safety value" under which they get excluded from the regulations for a price of $X per gallon, then we have in effect imposed a $X tax. The "bribe" occurs because the price of biofuel will be bid up until the marginal cost of the regulations equals $X.

Bottom line: The proposed energy policy may be one way to impose a gasoline tax while avoiding the word "tax."

Clarification: Based on the comments, it seems that my explanation was not completely clear. Under the proposed system, as I understand it, the producer would pay the price of invoking the safety value $X to the government. For producers using the safety value, this mechanism has precisely the same effects on incentives and government revenue as a tax.