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The Progressive Economics Forum

Road Trip Economics

I’m recently back from a family vacation, which consisted in driving down to Northern California and back, camping along the way. Our 1992 Corolla keeps on rolling, and in my mind it is better to keep it humming and wait it out for something electric in a few years time, than to buy a new hybrid that emits a third the GHGs but has huge indirect GHGs embodied in its manufacturing, and may well be relatively fuel inefficient halfway through its lifecycle.

We drove about 2,400 km and put about $250 in the tank, or about 9-10 cents per km travelled. So even though the cost of gas has shot up, a fairly major road trip is still relatively affordable compared to flying anywhere (or even taking the ferry to Vancouver Island, which alone would have cost us $164 round-trip). This was a bit of a shocker to me as I was pschologically prepared for a bigger hit given all of the media attention to high prices.

It is hard to say if record high gas prices eased congestion in campgrounds. They seemed pretty full to me, and there are still an astonishing number of huge trailers on the roads, some of them the size of the buses used by touring rock bands, and towing an SUV to boot. At the Oregon dunes, gas prices were sadly not enough to deter hordes of dune buggies cruising all over and being a general nuisance (as an aside, I have a major pet peeve at similar activities, including jet-skis and snowmobiles, where the user’s fun is created by making everyone else worse off due to noise contamination, especially in prisine natural places – a classic negative externality).

There is a variation in gas prices down the west coast and it would be interesting to see if this matters much in terms of usage and consumption of fuel. The cost of gas in California is about 7-10% higher than in Oregon and Washington, averaging $4.70 a gallon compared to $4.35 in the other two. A gallon is 3.785 litres so this is $1.24 a litre in California and $1.15 in Wa/Or, with the difference in exchange rate not affecting the rounding of these numbers. In BC, which introduced its 2.4 cent carbon tax on July 1, prices peaked just over $1.50 per litre but have then dropped back a few cents.

There is an empirical relationship between price and use, but the response is relatively inelastic. There may be nonlinearities in this relationship, thresholds at which the response becomes much more elastic, and the recent wave of price increases in 2008 may now have passed that point. Also, the more we stray from historical price changes the less we know about how people will respond. Lately, I have been more skeptical of the assumed behavioural changes in models of carbon pricing and GHG emisssions. The approximately $300 per tonne carbon tax equivalent relative to three years ago is way beyond what is being modeled by Mark Jaccard and company. Modeling from three years ago would have associated such an increase phased in by 2050 with substantial emissions reductions (like 65-80%, if I recall correctly).

It is true that we are still in the short term, and that long-run elasticities are about three times higher, according to studies. There are various modes by which this happens (fewer trips, more carpooling, buying more efficient vehicles, more transit) but if we were to look forward based on current prices staying where they are, it is not obvious that the recent increase will deliver that big a number. Because mobility is so important to us, and we are highly locked in to our current patterns, it will take some time for change to occur. The difference is likely to come from purchases of new vehicles and the cumulative impact if zero/low emissions vehicles can be mainstreamed and replace the fleet over the next generation. Some mix of incentives and mandated standards coming from governments is also going to be necessary to push the envelope in a complementary manner. We are already seeing this in small steps but there is a lot more that could be done.

If we are at peak oil, I generally see that as more a blessing than a curse, as it will accelerate the transition that needs to happen. The main policy priority is that highly redistributive fiscal policies are going to be required to offset the regressive impact of such price increases. The irony of the BC carbon tax debate is that the carbon tax revenues actually more than offset the average tax at the bottom (for the next year at any rate; future budgets could deviate from this objective), whereas there is no income offset whatsoever for the much larger increase in prices driven by the market, a lot of which has made its way into the pockets of Big Oil. And the politicians don’t seem to have picked up on this, with the BC NDP prefering to go after the Liberal government, and the federal NDP going after the federal Liberals.

Enjoy and share:

Comments

Comment from Erin Weir
Time: July 19, 2008, 12:34 pm

The way to compensate consumers for rising energy prices is for the public sector to capture a larger share of the windfall profits created by these prices. Governments need to increase the resource royalties and/or corporate taxes paid by energy companies.

Many NDP politicians have, in fact, picked up on this. I am unfamiliar with the BC NDP’s positions, but believe that it has opposed the BC Liberals’ corporate tax cuts. The Alberta NDP has been a leading advocate of higher resource royalty rates for at least a decade. The federal NDP has been the only consistent Parliamentary opponent of corporate tax cuts. Notwithstanding the former Saskatchewan NDP government’s poor record on both issues, the NDP deserves some credit for being the only party proposing to redistribute wealth from energy companies to citizens.

Comment from Rod Smelser
Time: August 1, 2008, 4:25 pm

“The irony of the BC carbon tax debate is that the carbon tax revenues actually more than offset the average tax at the bottom (for the next year at any rate; future budgets could deviate from this objective), … ”

No kidding, Marc. Those future budgets are known unknowns to borrow a Rumsfeld phrase. What is known is that the $100 payouts are a one time affair that has attracted a fair bit of circus like publicity. But I am sure that’s unintended and accidental, aren’t you?

Something I found provocative in this debate over revenue neutrality was this item from an SFU “names in the news” roundup on Feb 29:

http://www.sfu.ca/sfunews/Stories/sfunews02290801.shtml

“The Canadian Press, Canwest News Service, CBC Radio and TV, CTV, GlobalTV and La Presse Canadienne covered a new report saying the average Canadian would see a 50-per-cent income tax cut if the federal government phased in a new tax to crack down on activities that contribute to global warming. The authors: environmentalist David Suzuki and SFU’s Mark Jaccard.”

Notice the emphasis. The big thing about a carbon tax is the opportunity to CUT INCOME TAXES. Global warming? Oh yeah, that too. I cannot help but think that this wording is nearly Fruedian and allows a very clear albeit brief glimpse of the thinking and motivations of the BC carbon tax’s most zealous promoters.

“… And the politicians don’t seem to have picked up on this, with the BC NDP prefering to go after the Liberal government, and the federal NDP going after the federal Liberals.”

Life must be hard for Canada’s Liberals and their heroic stance on carbon taxes, what with the opportunistic NDP trying to turn a political debate into a political debate. How bloody irresponsible of them!

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