Using Gasoline Taxes to Encourage the Use of Renewable Energy

Raising taxes on fossil fuels can be a proactive way to encourage the use of renewable energy while increasing revenues for public investments

In the United States, the federal government levies a tax on gasoline and fuel oil under President Hoover’s Revenue Act. States are also allowed to raise taxes and fees on gasoline to finance the construction of new roads, bridges, tunnels, and also for maintenance and repairs.

California’s government has been raising its gasoline taxes to encourage the use of renewable fuels, align its tax rules with its environmental and climate change policies, and to raise funds for much-needed repairs to the state’s transport infrastructure, particularly roads and bridges.

As the largest economy in the United States and the world’s fifth-largest economy, behind Germany but ahead of France and Italy, and its more than 15 million vehicles on the roads at any given time, changes in California’s fossil fuel taxation rates have a significant impact.

Some challenges of raising gasoline taxes include the fact that raising taxes disproportionately affect people with lower incomes, and those located in suburban areas that need to commute by car on a regular basis. A gasoline tax also impacts the cost of goods and their transportation.

California’s oil and gas industry is also a leading economic driver and a major source of employment for state residents, generating more than $148 billion in direct economic activity, which is approximately 2.7 percent of the state’s Gross Domestic Product. Any reduction in oil and gas sales will also require that the state take into account the jobs lost in the industry. 

Further, since renewable energy sources are not taxed at the same level as oil and gas, the shift will also cause a reduction in tax revenues collected by the state.

Gasoline taxes should be considered in relation to taxation levels in other areas, however. For instance, property taxes in California are at a rate of 0.81 percent, which is substantially less than the national average of 1.2 percent, and the 2.35 percent of New Jersey. Such comparisons provide a broader perspective than the tax rates of a single sector or activity.

This transition has been possible in California in part because the state is the biggest producer of renewable energy from solar, geothermal, and biomass sources of the nation, and fourth in hydropower. It also has the highest number of electric vehicles and charging stations and outlets in the country.

A transition to renewable energy sources can also help the state reduce its air quality problems, particularly those associated with the release of gasoline vapors and fumes such as nitrogen oxides, monoxide, unburned hydrocarbons, and particulate matter. Assembly Bill 32, among others, already incorporated provisions for air quality changes, including the design of market-based mechanisms to prevent increases in the emission of toxic air contaminants.

Raising gasoline taxes is not exempt from risks for some sectors of society and the economy, but such measures are intended to bring important benefits in the long run, especially if one considers the opportunity cost of the continued use of fossil fuels, which reduces the chances for renewable energy sources to gain even greater levels of adoption among the population.

California is well known nationally for its progressive stance in the environmental policy arena, and the use of taxes as a means to advance that agenda is no exception. California is not alone in using gasoline taxes to encourage the use of renewable energy, however, as several other states are also walking a similar path.