Behavioral responses to higher gas prices
In policy terms I have been concerned about regressive impacts of a carbon tax, and was pleased to see that BC’s carbon tax is being partly recycled into refundable tax credits for low-income families. But the $10 per tonne carbon tax starting in July is rather small (2.4 cents per litre), and in spite of a tripling of the rate to $30 a tonne of CO2 five years from now, it is still going to be small (7.2 cents per litre).
Yet since the tax was announced in February, gas prices have already gone up by more than ten cents per litre. So we are witnessing the market driving up prices, in part due to the base price of oil and also due to some gouging on the part of companies (leading to record profits), but with no compensation whatsoever at the bottom of the distribution. Higher transportation costs must crowd out other expenditures or lead to changes in behaviour (more public transit, carpooling, less frequent trips, etc).
I’m all for changing behaviour but I don’t much like the idea of some higher-income families being able to buy their way out of this situation. Just as we should recycle some of the carbon tax revenues back to low-income families, we might well do the same for market-driven price increases. I suggest an excess profits tax on oil and gas companies that would be redistributed to households, maybe even all households so that this is not just about the poorest. The price would stay high, providing the same incentives to change behaviour in a more environmentally friendly fashion, but no family would be punished.
As for the behavioural change side of things, we are now learning about some interesting developments in terms of the amount of driving, new vehicle purchases, and even rethinking the distance between work and home. Higher prices are indeed working, though it seems to have taken some time for the data to come in.
Dave Thompson writes me to flag a story in the Boston Globe. Dave summarizes:
American SUV sales are apparently down 32.3% from a year ago.Â That is a huge drop. This is no doubt partly due to the slowdown in the US economy.Â However, small car sales are actually up 18.6%, suggesting that gas prices are having a major impact on fleet composition.
Paul Krugman shows with a nice table that Canada better than the US in car orientation but we still have some way to go when compared to Europe. And in another post on the elasticity of of demand for gas, he remarks:
Weâ€™ve seen real gasoline prices go through big swings over the past 35 years, and we also have cross-sectional evidence: European countries, which arenâ€™t that far off US levels of per capita income, have gasoline prices several times as high as ours.
So you can do econometrics; some of the evidence (and a lot of international data) is here (pdf).
In the long run, the best estimate of the price elasticity of demand for auto fuel seems to be -0.7. That is, a 10 percent rise in prices will reduce gas consumption by 7 percent. Of this, 4 points come from shifting to cars with better mileage, 3 points from driving less.
Of course, you go into an energy crisis with the auto fleet you have, not the auto fleet you want. So right there is a reason for a much lower short-run demand response. Plus, a good part of the reduction in miles driven involves long-term choices too â€” where you choose to live and/or work, how you arrange your life. So the short-run elasticity of demand is fairly small.