Now that the $100 tax rebate proposed by the Senate Republican leadership as a response to rising gasoline prices has been discarded, it is time to get serious. Any effective response to climbing gas prices must recognize a geological reality, namely that the earth's oil reserves are shrinking.

The amount of oil pumped has exceeded new discoveries since 1980. And the gap is widening. In 2004, for example, the world pumped nearly 31 billion barrels of oil while discovering fewer than 8 billion barrels of new oil.

Instead of encouraging gasoline use with tax rebates or gas tax holidays, we need a way to reduce gasoline use, one that is practical and politically acceptable. We need a higher gas tax, but the only way to get a gas tax rise large enough to wean us from imported oil is to offset the rise with a reduction in the tax on income.

The gas tax boost should be substantial-a rise that will send a strong, clear signal to consumers-and it should be gradually phased in. A gasoline tax hike of 30¢ a gallon per year for the next 10 years would send the right signal. This eventual increase of $3 per gallon would be offset at every step of the way with a reduction in income taxes.

A $3 per gallon tax on gasoline in addition to the existing federal tax of 18¢ sounds like a lot. And it is, but our economic future is at stake. Such taxes are not unheard of. Motorists in Germany pay a tax of $3.76 per gallon, French drivers pay $3.46, and in the United Kingdom the figure is $4 per gallon. Prices at the pump in these countries typically range between $5 and $6 a gallon.

A number of countries in Europe have been shifting taxes in recent years-lowering the tax on income and raising those on energy. Sweden, now the leader, is in the middle of a 10-year shift of $1,100 per household from income taxes to energy taxes. This is an integral part of Sweden's plan to be oil-free by 2020.

A planned long-term rise in the price of gasoline would enable automobile owners and manufacturers to plan intelligently for an oil-short future. It would encourage motorists trading in older cars to look for more fuel-efficient vehicles, including the highly efficient gas-electric hybrids. And it sends the right signals to manufacturers, enabling them to shift to more fuel-efficient vehicles over time.

The shift to gas-electric hybrid cars offers another option. If we add a second storage battery and a plug-in capacity to hybrids it will enable us to do our short-distance driving, such as the daily commute or grocery shopping, almost entirely with electricity. Cars could be recharged at night when the demand for electricity is low.

If we build not merely hundreds of wind farms but thousands of them to feed cheap electricity into the grid, then we can do our short-distance driving with wind energy. The wind electricity equivalent of a gallon of gasoline costs roughly 50¢. Wind energy is inexpensive, inexhaustible, and it is ours.

Rising gas prices will also encourage investment in public transportation, enabling us to reach the levels of convenience and reliability of systems in Western Europe and Japan. They will also facilitate creation of the increasingly popular bicycle- and pedestrian-friendly transport networks. And higher gas prices are already mobilizing billions of dollars of investment in the production of alternative fuels, such as corn-based ethanol.

There is also the pressing question of who gets the revenue from oil price increases. It is in the interest of oil-exporting countries to raise the price of oil as high as possible without causing a global economic recession or depression. If we let the Organization of Petroleum Exporting Countries (OPEC) keep raising the price of oil, and hence of gasoline, the increases will end up in OPEC treasuries.

If, however, we shift taxes, more of the additional money spent on gasoline will end up in our treasury, and individuals will benefit from lower income taxes. Higher U.S. gas taxes will also reduce the global demand for oil, making it more difficult to raise the price.

A world where oil use is climbing is totally unprepared for the peaking and subsequent decline of world oil production. Whether peak oil comes this year, next year, or ten years from now, we need to be ready for it. The adoption of a 10-year tax shift as outlined above would accelerate the shift to alternative energy sources, and help reestablish U.S. leadership in building a sustainable energy future.

Copyright © 2006 Earth Policy Institute