The times, they are a changin'

I think it is a really bad idea to raise CAFE without a concurrent raise of the gas tax. We don't want people to drive more frequently because it becomes cheaper.

I think a policy of slowly increasing the gas tax makes a lot of sense. Start it in a few years, so the market can respond, but send a clear signal to the market that fossil fuel prices are going up.

I remember reading in E's class that at least to date, the rebound effect you are talking about has been negligible. So I think we would still see net gasoline consumption per capita go down. Another problem with higher standards though is that people only buy new cars so often, so the gains we get with higher standards take a long time to be realized. People might even be reluctant to give up their gas guzzlers so would wait even longer.

One way to make a gas tax more politically palatable would be to lower income taxes at the same time. Al Gore has taken this to the extreme, calling for eliminating all income taxes in favor of a carbon tax. Of course, this begs the question of how regressive a gas tax would be. A gas tax would also help Detroit become profitable on sales of their smaller cars.  Word has it GM supports a gas tax, probably in lieu of mileage standards, though I can't find any statements on their website.

One of the big concerns for me about the gas tax is the rural/urban equity issue. A gas tax is a valid vehicle to increase the cost of single occupancy vehicle use and transfer it to alternatives. The key, though, is that there must be alternatives. Public transit is a great alternative that should be expanded. It does not work for everyone everywhere, though. Public transit is most effective when there is a concentration of riders and destinations. In the urban areas it is easy to design a good transit network to provide an effective transportation alternative.....it just takes the will power and money.

In rural and even exurban areas it's much more difficult. In some cases you have some clear employment destinations transit can be organized around. Say a remotely located large factory or industrial node. In my hometown there are a number of large employers located along the road south of town (from 10 - 30 miles) and in neighboring towns to the east (20 to 50 miles). Car pooling has been popular for years and some public transit is now being provided. A large number of the trips in the area, though, are from widely dispersed starting points to widely dispersed destinations. Public transit in this case is not an option. Another common concern are the small business owners and contractors that are limited in their ability to reduce trips and the availability of cost competitive fuel efficient vehicles to meet their needs.

To me, the many concerns about the gas tax can be resolved if you look at it from the viewpoint of pushing people to effective alternatives, and providing those alternatives, while not disproportionately harming those who don't have alternatives. Push people to use public transit instead of driving, purchasing more efficient vehicles, driving only when necessary and trip chaining, moving closer to destinations, etc. But then use a portion of the taxes to offset the impact on those who do not have the alternatives.

It's pretty clear, though, that a gas price increase from a slowly phased in gas tax is much more preferable than one due to market forces. Not only does it put money in hands that can help smooth out the equity issues it also allows for public investment in the alternatives important for it to work. As Christopher said, it also gives a signal to the market to allow prepatory changes rather than having to absorb the increased cost due to short-term inelasticity. Last, it removes some ability to control prices from OPEC who try to keep them artificially low in order disincentivise innovation and development of alternatives.