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Michael Chiacos: How to Solve California’s Budget Woes

In a time of want and need, gas-price stability may be the key to a rebound and recovery

Could we fix California’s unprecedented budget crisis, reduce greenhouse gases, and stimulate the green jobs economy all in one fell swoop? The win-win-win answer is yes, by implementing a gasoline “price floor.”

Michael Chiacos
Michael Chiacos

A California gas price floor of $3 per gallon would, according to a recent analysis by Severin Borenstein, director of the UC Energy Institute at UC Berkeley, generate around $25 billion per year, if oil prices stayed around the current price of $42 a barrel. Thus, over the next 18 months, a gas price floor could raise almost the same amount as California’s projected budget deficit of more than $40 billion through June 2010. Gas prices of $3 a gallon would have been considered a bargain just six months ago. Although the idea of a national gasoline price floor has been written about by Thomas Friedman, author of The World Is Flat, and supported by an editorial in the New York Times, President Obama has stated that he isn’t considering this solution. California must once again be a pioneer.

A gas price floor would also help California meet its aggressive greenhouse gas-reduction goals laid out in AB 32, the Global Warming Solutions Act of 2006. Borenstein calculates that gas at $3 a gallon would reduce greenhouse gases by 2 percent in the near term and 9 percent in the long term, as consumers react to a stable price for gasoline by choosing alternatives to driving alone and driving more efficient vehicles. An ancillary benefit would be to reduce congestion. Shaving just a few percent off vehicle miles traveled during peak times provides large decreases in congestion. Spending less time in traffic is something all Californians will applaud.

Furthermore, a stable price for gasoline would add support to the booming clean vehicle and alternative fuels technology sector in California. Our state is the clean-tech leader of the world, as Gov. Arnold Schwarzenegger summed up recently.

“Our policies are creating California’s New Gold Rush, because billions of dollars in clean technology investment are flowing into our state,” he said.

So how would it work? According to Borenstein’s model, every $1 change in the world price of oil equates to around a 2.4-cent change in wholesale gas prices. At $82 for a barrel of oil, gas prices would be around $3 a gallon, which includes oil costs as well as refining, distribution and other costs. Every month the price of oil would be noted and for every dollar below the target floor, an appropriate surcharge would be assessed. If oil were at $42 a barrel, around $25 billion would be raised; at $62 a barrel, more than $12 billion would be raised annually. Part of this money could go into the general fund and part could go toward strategic investments in clean tech as well as consumer buydowns of alternative and efficient technologies. Thus consumers would benefit by getting an opportunity to save on better vehicles while our clean-tech sector would receive additional state support.

What are the drawbacks? Well, besides the obvious political issues of pushing any tax during these tough times, the price of oil will change, and likely will increase as we move out of the current recession. Over time the surcharge might generate less revenue. The gas floor could be seen as a one-time Band-Aid to reduce the deficit while providing a pot of money for clean-tech investment and efficient and alternative vehicle buydowns. When oil hits $82 a barrel, hopefully, the economy will have recovered, putting more money in California’s coffers. The gas surcharge would buy enough time for California legislators to figure out an appropriate long-term solution to the budget quagmire.

Another option would be for the gas price floor to rise, say, to $4 a gallon as our economy recovers. This would slow the decrease in revenue and provide even greater greenhouse gas reductions. California could also implement an oil severance tax on state oil producers, a proposal that has been extensively considered by Schwarzenegger and some legislators. This tax base would grow as oil prices increased, providing some hedge against reduced gas price floor revenues. The state could also hedge some risk by investing in oil futures.

Another drawback is that the surcharge is regressive, as lower-income people spend a higher percentage of their income on gasoline. However, the lowest-income people, who tend to use public transit and do not own vehicles, wouldn’t be as affected. Also, the other options on the table are even more regressive. Cutting vital state programs will certainly affect lower-income people more, and a sales tax is more regressive than a gasoline surcharge.

There are other smaller issues, such as implementation and price differences with neighboring states, but these are minor issues that could be dealt with easily in a well-designed program.

Our state budget crisis is very serious. The solutions being considered — such as cuts to education, mass transit and preventive-health programs will make our problems worse. Right now, we have an opportunity to help mend our budget, reduce greenhouse gases, and provide a stimulus and more even playing field for clean tech, one of the fastest-growing and most exciting sectors of our economy. Legislators should seize this opportunity to make a win-win-win solution to our most pressing problems.

— Michael Chiacos is the Community Environmental Council’s transportation specialist and primary author of its Transportation Energy Plan, part of the Fossil Free By ’33 program.

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