While prices send important signals about availability and marginal cost, volatility in fuel prices can be quite problematic. It impedes effective planning, causes abrupt swings in capital and wealth allocation, and sometimes leaves people hoping for future low prices, rather than investing in efficiency now. At the same time, there is an issue of inter-generational equity when it comes to fossil fuels. They are marvellous things: portable, packed with energy, and thus far relatively cheap and easy to extract. Recent generations have benefitted handsomely for their use (though future generations may suffer even more from the consequences of the emissions). A case can be made that some fossil fuel use has served to benefit future generations, because it has helped create the conditions for their material prosperity. Other uses are unambiguously selfish. The difference is akin to that between borrowing to invest and borrowing to finance consumption.
There does seem to be a fairly straightforward mechanism through which both of these problems can be made more manageable. The government could put a floor on fuel prices: pocketing any difference between the market price and the sale price as revenues. Those could then be invested in a fund that will pay out annual dividends to future generations. This would be akin to the oil-funded pension system that has been established in Norway. In this way, members of future generations will at least profit in some proportion of this generation’s fossil fuel wealth. It would also simplify planning for all those who use fuels, since they would be certain of paying at least a pre-set amount at any point in the future.
This isn’t an approach that the world as a whole could take, or even any major players in it. If the government set a floor price of $2 for a litre of gasoline, gas suppliers could just expand their prices to that point and eliminate any payments to government. Since Canada isn’t large enough to substantially affect the international price of oil, however, there may be scope to tax the difference between the floor price and the international price for an equivalent amount of crude oil / coal / etc.
No doubt, this system would cause some economic and equity-related problems I haven’t anticipated. That being said, it is perhaps an example of the general kind of approach that governments should be considering.