Cheap gas hurts the middle class

Updated: Dec 06, 2012 9:49 PM UTC

By Jason Scorse, contributor

FORTUNE -- Gasoline in Norway currently costs more than $9 a gallon. In Germany the price is more than $8. Prices between $6 and $10 per gallon are common throughout most EU countries. In the U.S., by comparison, the highest average per-gallon price is close to hitting $5, and we grumble about it.

No one needs a crystal ball to imagine what would happen in the U.S. if we woke up one day to find gasoline prices on par with Europe. Americans would be apoplectic and politicians of all stripes would respond in kind.

So why have Europeans accepted such high gas prices?

In Europe, where there is universal healthcare, low-cost daycare, and free or low-cost university education, people are much more willing to pay higher energy costs to support environmental goals. Put simply, $9 a gallon gasoline doesn’t make people poor in Norway or Germany, because generous social safety nets—partially funded by environmental taxes—more than offset the negative economic impacts.

According to recent data from the OECD, environmental taxes account for approximately 2.4% of GDP in Europe, compared to .8% in the U.S. (the lowest of all OECD countries). Given that the U.S. GDP is approximately $15 trillion (Europe’s economy is more than $17 trillion), this 1.6% difference would provide the U.S. government with $240 billion annually in extra revenue if it taxed energy and pollution at the same rates as in Europe.

Norway is an oil-producing nation, the world’s 5th largest oil exporter. Norway taxes gasoline heavily and exports its oil resources for the purposes of supporting a very generous welfare state. All told, Norway applies a 78 % income tax on oil producer’s profits, and an additional gasoline consumption tax equal to about two-thirds the price of a gallon of gasoline at the point of sale.

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The U.S. is the third largest oil-produce in the world, and yet we tax oil at very low rates. This has, along with the increase in gas prices over the past decade, contributed to record profits for U.S. oil companies. Our wealth is also spread very unevenly—the average American citizen receives much less support on everything from healthcare to education to job security than almost any country in the EU. Further, U.S. median income has stagnated since 1997, while the cost of healthcare and education has skyrocketed (70 percent and 119 percent, respectively).

Asking citizens to pay higher prices for gas and electricity, when tens of millions are struggling to make ends meet, is simply asking too much, unless they are also provided with offsetting social benefits that improve their daily lives.

Although most environmentalists are hesitant to admit it, in the short to medium term any legislation that puts a price on greenhouse gas emissions will make energy and consumer goods even more expensive. Estimates are that a cap and trade bill that imposed a modest $30 a ton price on carbon would cost the average U.S. consumer $800-$1,600 a year in higher prices. (Most economists believe that the carbon price needs to be significantly higher to get the U.S. on a path to 85% carbon reductions by 2050.)

As long as the middle class in America continues to face the mounting pressures of ever-increasing healthcare and education costs, declines in housing and retirement wealth, and the prospects of even less economic security—as debates about cutting Social Security and Medicare continue apace—it will be difficult for robust energy and climate policy to generate sufficient popular support to overcome the formidable political obstacles.

Americans care deeply about the environment, and most believe that climate change is a real and growing threat. They are acting rationally, however, when they oppose higher energy prices at a time of great economic insecurity.

The best hope for accelerating America’s move away from its reliance on fossil fuels and towards a clean energy future is for environmental groups to team up with other progressive organizations, especially labor unions, and push for environmental policies in tandem with policies to boost economic security. The environmental movement faces a choice: expand its scope to include a broad middle class agenda or become increasingly irrelevant.

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The only way to end the lingering distrust between environmental groups and labor is to acknowledge that generating support for environmental goals requires increasing economic benefits for the middle class. Doing so will require environmental groups to take a strong stand in support of universal healthcare, stronger Social Security and Medicare, progressive taxation, and financial support for education from preschool to college. No doubt many environmental groups will find it difficult or risky, but maintaining the illusion that environmental goals can be kept distinct from the economic decline of the middle class is no longer tenable.

Even a modest $25/ton tax on carbon pollution would raise over $100 billion a year in new revenue, which could provide funding for many popular programs with high rates of social return. The revenue would be enough to cover health insurance costs for 32 million uninsured Americans, while providing universal preschool education would only cost $35 billion; and if the revenue from this carbon tax was used to provide other forms of tax relief, the Earned Income Tax Credit could be tripled and the 10% bottom rate eliminated entirely.

Some environmental groups have already recognized the need to use more populist language that takes note of basic economic concerns. In late 2011, the Sierra Club sent out an email urging its members to stand with those fighting against economic inequality and injustice. This was a great start—but only a start.

Organized labor is making its voice heard as well. On January 12, 2012 Richard Trumka, President of the AFL-CIO, gave a speech at the UN Investor Summit on Climate Risk, in which he made the point that asking people in fossil-fuel dependent industries to support climate policy that will threaten their jobs doesn’t make sense in the face of weak social safety nets.

The day that the leaders of the AFL-CIO, SEIU, and UAW along with the Sierra Club, Greenpeace, the Environmental Defense Fund (EDF), and the Natural Resources Defense Council (NRDC) share a joint press conference and announce their commitment to an escalating greenhouse gas tax where the revenue will be used for a combination of middle class tax relief and universal preschool for all American families, will mark the beginning of a new era in environmental policy. With declining union membership and an environmental movement demoralized by more than a decade of disappointment, an alliance between these two camps could help reinvigorate both.

The economics is unambiguous, and the math adds up. What is lacking is the political clarity, vision, and courage to put all of the pieces together and craft an effective narrative that the American middle class can rally behind.

Jason Scorse is an Associate Professor at the Monterey Institute of International Studies, a graduate school of Middlebury College.