The Effect of a Gasoline Tax on Carbon Emissions

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A gasoline tax increase of the magnitude currently contemplated by policymakers would have only a modest short-run impact on carbon emissions.

Some policymakers and economists have proposed a carbon tax for the United States. In practice, such a tax must take the form of a tax on the consumption of energy products, such as gasoline. How effective would this be in controlling carbon emissions?

In Estimating the Effect of a Gasoline Tax on Carbon Emissions (NBER Working Paper No. 14685), authors Lucas Davis and Lutz Kilian seek to answer that question by exploiting the historical variation in U.S. federal and state gasoline taxes. Their preferred estimates imply that a 10 cent tax increase would decrease U.S. carbon emissions from the transportation sector by about 1.5 percent and decrease total U.S. carbon emissions by about 0.5 percent. To put this estimate in context, total U.S. carbon dioxide emissions increased by 1.1 percent annually between 1990 and 2007, so a 10 cent gasoline tax increase would approximately offset half a year of growth in total U.S. emissions.

These estimates capture only the short-run response (up to one year). In the short-run, drivers can adjust discretionary driving patterns, drive slower, for example, or improve fuel efficiency by increasing tire pressure. The long-run price elasticity is likely to be larger as agents may employ additional margins of adjustment. For example, one would expect to see widespread substitution toward more fuel-efficient vehicles, some of which may not even be available when the tax is first implemented. Because the vehicle stock turns over slowly, the full impact of a tax change will not be realized for many years. Likewise households may choose to relocate closer to their workplace in an effort to cut down on commuting or they may demand improved public transportation. Predicting such long-run effects is beyond the scope of any econometric model based on historical data.

These short and long-run changes in the transportation sector are important because nearly 40 percent of carbon dioxide emissions in the United States come from vehicles. Even very large changes in gasoline consumption in the United States, however, would have only a modest impact on global emissions. Carbon dioxide emissions in the United States are growing less quickly than emissions in other countries, most notably China, India, and Brazil. By 2030, according to predictions from the U.S. Department of Energy, the United States will represent only 16 percent of total world carbon dioxide emissions.

-- Lester Picker