Climate Change and Gas Prices

Is it good news or bad news that a carbon tax sufficient to reduce emissions by 10% won't have much impact on gas prices or miles driven?:

Climate change and gas prices: Less impact than you might think, CBO: CBO released a brief today on climate-change policy and CO2 emissions from passenger vehicles (for the PDF, click here).

Discussions about addressing climate change (e.g., through a cap-and-trade program or a carbon tax) often focus on the transportation sector. The brief argues, however, that most of the reduction in CO2 emissions would occur in other sectors (e.g., the electricity sector) and that the effects on vehicle emissions would be modest, especially in the shorter run.

To be sure, a cap-and-trade system or a carbon tax would raise the price of gasoline, encouraging consumers to drive less and to buy more fuel-efficient cars– but the magnitude of these effects would be relatively small. For example, CBO has estimated that a price of $28 per metric ton of CO2 in 2012 would lead to a reduction of about 10 percent in total U.S. emissions compared with a no-action scenario. Vehicle emissions, though, would remain relatively constant in the short run, and even over time they would decline only by around 2.5 percent — much less than the 10 percent reduction in overall emissions.

Several factors account for the relatively small influence that a price on CO2 emissions would have on passenger vehicles and driving behavior. First, a CO2 price of $28 per metric ton would raise gas prices by about 25 cents per gallon, far less of an increase than consumers have recently born with little behavioral result. (Between 2003 and 2007, gas prices increased from $1.50 to more than $3.00 per gallon. Vehicle miles driven, driving speeds, and the purchase of larger vehicles have all responded only modestly despite the dramatic increase in prices.) An increase in gas prices of 25 cents or so per gallon is unlikely to generate massive changes in driving behavior.

In addition, recent changes to corporate average fuel economy (CAFE) standards will require substantial gains in fuel economy over the next dozen years. Especially over the longer term, gas price increases are not likely to have a large effect beyond what CAFE standards will require.

Finally, cultural, historic, and geographic considerations drive the extent to which Americans have become dependent on automobile travel, and their choices tend towards larger and more powerful (and less fuel efficient) automobiles. While dramatic increases in gasoline prices (or shifts in cultural norms) might eventually influence these considerations, the magnitude of gas price increases under most legislation under consideration would likely have little effect.

Comments

[Patricia Shannon]

Vampire Clan
copyright Louise Bennett 1995

We are a vampire clan,
sucking blood from the earth,
as if the earth could plan
for infinite vampire births.

Sucking blood from the earth,
some say the land will die,
for infinite vampire births
cannot sustain themselves. Why?

Some say the land will die,
the children have nothing,
and cannot sustain them selves. Why?
Should we take a stand?

The children have nothing,
we take more than we replace.
Should we take a stand,
are we not a human race?

We take more than we replace
as if the earth could plan.
Are we not a human race?
We are a vampire clan

[Patricia Shannon]

I meant to put the above poem on another thread, but it is fitting here, too.

[a student of economics]

It's a win whether or not it affects behavior.

If raising gas prices will have little effect on behavior then standard tax theory says it is an efficient place to raise revenue. Raise carbon taxes, reduce tax on work or investment, and decrease deadweight loss.

If behavior is modified, then we have less pollution, congestion and accidents, which are all large negative externalities. Again, the result is a move toward more efficiency.

Gotta love those Pigouvian taxes -- we win either way.

[Alex Tolley]

But the point of carbon taxes is not to efficiently raise taxes, but rather to change behavior.

If correct, then this suggests that we do need some other means to reduce CO2 emissions, although if we could reduce it in the electricity generating sector rather than automobiles, then I have no problem with that as a result, no need to demonize automobiles. It would be nice to have low consumption vehicles and electric vehicles too, but the main goal is to reduce CO2. If that can be achieved at $28/tonne, then let's get on with it.

[Ken Houghton]

Good news, on balance. The reason the reduction is so low is that there is already decent emission controls on carscompared to several other carbon-residue-producing processes.

Alex Tolley - You want to ignore the gain because that one area isn't reduced as much as you might like? It does come from behavior modification: driving gets reduced only a little, but other parts of the budget are adjusted. (We must assume Utility remains optimal: people who choose to drive a little more also must choose to eat out a little less.)

[bakho]

The solution has never been economic. It has always been technological. Current technology is not sustainable. It must be replaced by another technology. Economics can provide incentives, but not the solutions. The only purpose of carbon taxes is to provide incentives.

The short term solution to high gas prices is conservation. However, conservation runs counter to record oil profits, so Bush has vetoed conservation from his agenda.

[Roger Chittum]

The only reason to make any public policy change about CO2 emissions is to save the planet from global climate change. Conventional wisdom is that the best way to do that is to impose a tax or permit cost on CO2 emissions, and all viable Congressional and international initiatives are based on this strategy. Now comes a report by a reputable body, reinforcing the work of other studies and, may I say, common sense, that says it won't come close to achieving the emissions reductions that climatologists say must be achieved. This may be even less effective and even more expensive than Paulson's TARP.

Quoting 2 more paragraphs from the last page of the CBO report:

"That comparison suggest that gasoline prices might have to rise above $6.50 per gallon--for example, from a CO2 price that added $2.00 or $2.50 per gallon to gasoline prices--for the average fuel economy of new vehicles in the United States to approach the 35 mpg that the new CAFE standards will require. But the CO2 prices contemplated in current U.S. climate legislation and in prominent international policy analyses would add much less than $2.00 to the price of gasoline. Thus, such pricing, by itself, would probably not increase average fuel economy beyond what the CAFE standards will require.

"CBO has estimated that under S. 2191, the America’s Climate Security Act of 2007, the price of a CO2 emissions permit would rise from about $23 per metric ton in 2009 to about $44 in 2018 as the stringency of the bill’s cap on greenhouse-gas emissions was gradually increased. Such permit prices would raise gasoline prices by about 20 cents per gallon in 2009 and 40 cents per gallon in 2018. A recent report by the Intergovernmental Panel on Climate Change (IPCC) suggests that a permit price of as much as $80 per ton of CO2 might be necessary by 2030 to reduce emissions enough to achieve a stabilized climate by 2100. That pricing policy would add about 70 cents per gallon to the price of gasoline in 2030. Even the much greater and much earlier reductions called for in the Stern Review on the Economics of Climate Change (requiring a current estimated permit price of $95 per ton of CO2, rising to $191 per ton by 2050 and higher after that) would not cause gasoline prices in the United States to be as high as they already are in Europe. The permit prices in the Stern report would add roughly $0.85 to $1.70 per gallon to gasoline prices over the next four decades."

(Emphasis added.)

[foo]

The problem with the study is that it stops in 2007, and gas prices of $3.00/gallon. Forward to 2008, and $4.00/gallon, and observe the changes in driving behaviour. A significantly different conclusion would be drawn.

What seems more realistic to me, is that 25c/gallon DOES make a difference - it all depends on the base that it's built on, and the message that it sends to consumers about future gas prices.

[Sock Puppet of the Great Satan]

"Good news, on balance. The reason the reduction is so low is that there is already decent emission controls on cars—compared to several other carbon-residue-producing processes."

No no no no no no no. There are decent *NOx, hydrocarbon, and SOx* controls on cars, not CO2 emissions controls, which are related to the energy consumption of the engine.

There are other options for reducing CO2 emissions (conservation, wind, CO2 sequestration, switching from coal to natural gas fired power plants), some of which are only practical for point-sources like power plants. We don't care how CO2 and other greenhouse gas emissions are reduced, all we care about is that they are reduced.