Greg Mankiw is constantly hyping his Pigou Club, which is based on the concept that there should be a higher tax on gasoline.
If the goal is to lower gasoline consumption, then Greg Mankiw is correct that a tax on gasoline is the most sensible way to accomplish this goal. A higher price for gasoline will cause consumers to seek the most efficient way to reduce their gasoline consumption, which is superior to the government creating arbitrary regulations like fuel economy standards and tax breaks for hybrid cars. However the tax will have to be a lot higher than the one dollar per gallon proposed by Greg Mankiw because, as I've written before, demand for gasoline is highly price inelastic.
But I fail to see a reason why the government should be discouraging gasoline usage. In other words, I fail to see that gasoline usage results in net negative externalities. I used the word "net" in there because most pundits fail to mention the positive externalities of gasoline usage. When you drive in your car you don't just benefit yourself, but there's almost always some other party who benefits. If you drive to work your employer benefits, if you drive to the store the store owner benefits, if you drive to visit friends and family they benefit from seeing you. To discourage driving is to discourage commerce, and commerce is a good thing.
Now let's examine the supposed negative externalities that result from gasoline usage.
(1) Global warming. A bigger source of global warming is from cows, not cars. Therefore, if the goal is to reduce global warming, it makes a lot more sense to go after cows. There is much that can be done to reduce greenhouse emissions from cows. By giving cows feed which results in less gas, breeding cows for less burping and farting, giving them additives like bovine growth hormone which make cows more efficient, the greenhouse gases emitted from cows can be reduced by a significant amount with only a small increase in the price of meat. Rather than go after gasoline, why not go after the low hanging fruit (or in this case, the low hanging meat)? [I was wrong to overemphasize bovine methane, so please see my follow-up post on Nuclear Energy and the Pigou Club.]
(2) Air pollution. Modern cars emit very little air pollution because of their catalytic converters. However, the catalytic converters don't work when they are cold, which is when they are first started up. It is estimated that 60% to 80% of total pollution from cars occurs within the first 3 minutes of the engine being started. Thus air pollution from cars is correlated with how often the car is started and not how many miles they are driven. If a higher gasoline tax encourages people to take shorter trips, there will be barely any effect on air pollution if they take the same number of trips. A more efficient way to reduce air pollution is to tax cars based on how much pollution they emit after they are started. There are possible ways to improve performance of the catalytic converters, such as moving them closer to the engine so that they heat up faster. However taxing gasoline will do nothing to create more efficient catalytic converters.
(3) Traffic congestion. We all want less congestion, but I don't see how taxing gasoline will lower traffic. Traffic is at its worst during the rush hour, which for most people is a non-discretionary drive to work. People will attempt to save gas by avoiding discretionary trips which usually occur when the roads are emptier. Furthermore, the most likely response to higher gas prices is more fuel efficient cars rather than less miles driven, so a reduction in gasoline usage will do little if anything to lower traffic congestion, especially during the busiest times of day.
(4) Reduce dependence on foreign oil. Given how much oil is used by the United States, it is impossible for the United States to be energy independent without a radical change in our lifestyle. Yet even if this were accomplished, it is not clear how the United States would benefit from not being dependent on foreign oil. There is no general goal for the U.S. to be completely independent from other countries. Just the opposite, the same people who preach energy independence support free trade in all other respects.
Some people, perhaps, have the foolish dream that, if only the world could reduce its oil consumption enough, the Middle East and its crazy conflicts will become irrelevant to the rest of the world. That's not going to happen no matter how high we raise gasoline taxes. Even if the U.S. reduces oil consumption, other countries will see the benefits of using imported oil, so the Middle East will remain an important exporter of this valuable commodity. As long as there is free trade, the price of oil in the U.S. will reflect its price in the world market. And as long as oil is scarce, wars in the Middle East pose the danger of causing oil price shocks.
There is also the myth that the U.S. presence in Iraq is related to oil, when that's not at all true. We invaded Iraq to remove a dictator, and we are still there because people believe we need to restore order to the country. Certainly the status quo before the invasion was more beneficial to low oil prices.
Furthermore, it's not clear how low oil prices will bring stability to the Middle East. Just the opposite, wealth tends to increase stability, so money flowing into the Middle East is probably making the place more stable rather than less stable. The problem with the Middle East is the crazy religous beliefs of the people who live there. It has nothing to do with the price of oil being too high or too low.
But if we really want to lower our dependence on foreign oil, why not open up Alaska to more oil drilling? Often, the same people who say "oh no we import too much oil" are the same people who seem to be doing everything possible to prevent domestic production from increasing.
I'm not joining Greg Mankiw's Pigou Club because I don't see why we need to reduce our gasoline usage.