If there are any ranches in Detroit, President Obama has just bet one on his yet-unborn plan to cap greenhouse gasses. Obama has effectively ordered GM and Chrysler to build more fuel-efficient cars in return for billions more in federal bailout money. But will enough people buy those cars with gas at $2-a-gallon to make this a successful strategy?

I suspect Obama knows they won’t. Thus, what he’s leaving out of the equation for now is that he wants government to raise the price of gasoline and other fossil fuels by imposing massive new taxes on their consumption.

This could be done directly, with an energy tax. However, Obama prefers doing it indirectly, through a cap and trade program that requires producers to buy government permits to emit CO2. Today, two senior House Democrats proposed their version of such a measure. But the president may discover that while such a program will significantly increase the cost of coal (and thus much electricity), even it may raise gas prices by too small an amount to encourage consumers to buy energy efficient, but expensive, new cars.

A candid discussion of energy tax increases is not exactly a political winner these days, especially with the economy mired in recession. Obama’s budget assumes about $65 billion a year in “climate revenues” but does not describe them. And keep in mind that $65 billion is only about half the revenue that would be produced by the kind of a full blown cap and trade system Obama promised in the campaign.

So for now, the President is focusing on the carrots. Both the stimulus bill and his budget are filled with new tax breaks for producing or buying green. But there is little evidence that these baubles alone will do much to build a market.  

In a nice paper he presented to a TPC and Tax Analysts conference last fall, Tax Notes columnist Marty Sullivan laid out some of the inefficiencies of these energy tax subsidies. For instance, Marty found that a buyer of a 2006 Toyota Prius got a significantly lower subsidy per gallon of gas saved than the buyer of a Chevy Tahoe SUV, even though the Prius got twice the mileage as the Tahoe. The buyer of a 2008 Prius got no subsidy at all. Why? Like most tax law, there is no why. It just is.

For his climate change plan to work, and, now, for his Detroit bailout to work, Obama is going to have to have a serious talk with the American people about the relationship between price and consumption. The House bill, introduced today by Energy Committee Chairman Henry Waxman (D-CA), finesses the issue of price increases. But sooner or later, it must be addressed. And it may be that only a direct tax on gasoline may do the job. But whatever the means, thanks to Obama’s decision to shove Detroit headlong into producing energy efficient cars, the future of the U.S. auto industry now depends on dramatically higher fuel costs.