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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.  That is a huge drop. This is no doubt partly due to the slowdown in the US economy.  However, small car sales are actually up 18.6%, suggesting that gas prices are having a major impact on fleet composition.

This is echoed in a post from Sightline on driving patterns. Meanwhile, the Vancouver Province has a story on folks in the burbs looking for work closer to home to avert the daily commute.

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:

We’ve seen real gasoline prices go through big swings over the past 35 years, and we also have cross-sectional evidence: European countries, which aren’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 — where you choose to live and/or work, how you arrange your life. So the short-run elasticity of demand is fairly small.

Enjoy and share:


Comment from Stephen Gordon
Time: May 12, 2008, 3:50 pm

I suggest an excess profits tax on oil and gas companies that would be redistributed to households

I dunno; given how inelastic the various demand curves are, those taxes would just be passed on to the consumer anyway. It’d be simpler to implement a carbon tax – which we know would be passed on to the consumer – and use those revenues to correct for its regressive effects.

Like we do with the GST.

Comment from Stuart Murray
Time: May 12, 2008, 4:21 pm

It’s always the curse of pigouvian taxes that it has no effect on the rich. I think as the carbon tax increases, a larger number of people who like to pass themselves off as rich will have to change their behaviour. The truly wealthy will of course indulge in conspicuous waste just to show their social rank. And of course average people who spend way too much on gasoline will have to start acting normal.

I say leave the pigouvian taxes to change aggregate behaviour, and leave progressive income tax and the social insurance system to redistribute the wealth. Let’s not blame policy tools for failing to deliver on things they were never intended to address. Like the minimum wage; all sorts of right-wingers blame it for failing to reduce poverty, even though it was never intended to reduce poverty but rather to set a floor for labour market competitiveness, which it does quite well.

Comment from Robert
Time: May 12, 2008, 6:34 pm

We should buy American synthetic motor oil, it lasts longer and improves your fuel mileage. It will help with demand and keep our money in the US. I recommend AMSOIL. Check out this website:

Comment from travis fast
Time: May 12, 2008, 6:42 pm

There is always the problem that those who control the means of production can, within limits, pass on the misery to those who don’t. Sounds dogmatic I know. But I have always experienced the effects of power as a kind of dogma.

Comment from Shaun
Time: May 13, 2008, 2:20 pm

Get a bike.

Comment from David Simms
Time: May 18, 2008, 1:19 pm

I think that, instead of a carbon tax with its reliance on government to do the redistribution, the DTQ (domestic tradable quota) or the TEQ (same idea) has the potential to be a far more effective tool. With the DTQ, every citizen receives his/her carbon quota, on a periodic basis, whether or not it is needed. Those who don’t use some, or all, of their quota can place it on an Ebay-type exchange, sell it in an auction environment and use the proceeds as they please.
So, the low-income, single parent who doesn’t drive, could sell off some quota and enhance her quality of life. If I have chosen to drive a 60mpg car, as I have for the last 15 years, I could sell off excess quota and perhaps put it toward a solar panel which might free up even more quota. Ditto, if I were able to access public transport.
Of course, those who spend their excess wealth on consuming ever greater quantities of energy would be reminded, at every turn of the wheel, that they would be running low on quota and that they would have to pay out for more.
These mechanisms have the advantage that they would virtually insure that the nation meets its emission targets.
Perhaps these ideas haven’t met with much acceptance is that they would operate outside of government hands and that government would be unable to access the funds, for its own priorities. Maybe, its redistributive properties are also too effective within the present globalized political climate.

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