The Price Isn’t Quite Right Yet (Gristmill)
It’s Easier to Be Green if It Also Saves Money
It’s Easier to Be Green if It Also Saves Money (NYT economics column)
Soaring Fuel Prices Take Withering Toll On Truckers
Soaring Fuel Prices Take Withering Toll On Truckers (NY Times)
Hints Of A Decline In Air Travel As Fares Spiral
Hints Of A Decline In Air Travel As Fares Spiral (NY Times travel columnist)
We Explain Gasoline Demand (including why it’s sticky)
Note added April, 2017: A more current and in-depth treatment of the price-elasticity of U.S. gasoline usage may be found in our Sept 2015 blog post, What an Energy-Efficiency Hero Gets Wrong about Carbon Taxes. — editor.
With gas at $3.50 a gallon in April, the U.S. mainstream media is replete with stories of drivers abandoning SUV’s, hopping on mass transit, and otherwise cutting back on gasoline. Yet a year or two ago, when pump prices were approaching and even passing the $3.00 “barrier,” the media mantra was that demand for gasoline was so inelastic that high prices were barely making a dent in usage.
Which story is correct? We lean toward the more “elastic” view, and here we’d like to share some of the data that inform our belief.
I’ve been tracking official monthly data on U.S. gasoline consumption for the past five years, and compiling the numbers in this spreadsheet. You’ll find that it parses the data in several different ways: year-on-year monthly comparisons (say, March 2008 vs. March 2007); three-month moving averages that smooth out most of the random variations in reporting; and full-year comparisons that allow a bird’s-eye view.
Here’s what we see in the data:
- Gasoline demand is trending downward, though only slightly. In the 49 year-on-year comparisons, monthly gasoline use dipped below the year-earlier level only eight times, but these include each of the last five months (see Moving Avgs worksheet in the cited spreadsheet).
- Gasoline’s short-run price-elasticity is rising. After a low of -0.04 in 2004, the short-run price-elasticity increased to -0.08 in 2005, -0.12 in 2006 and -0.16 in 2007. (I assume an “income-elasticity” of two-thirds in calculating price-elasticity; again, see Full Years worksheet.)
- A big reason that gasoline use kept rising until recently was the growing economy. Demand is heavily affected by economic activity. The minimum year-on-year GDP growth for any month in all four years was plus 1.7% (see Moving Avgs worksheet).
- Another reason gasoline demand was slow to drop is that the price signal, while significant, was less than advertised. Adjusted for general inflation, the average 2007 pump price was only 54% higher than the 2003 price. Amid all the talk of a doubling or even tripling in gas prices, it’s sobering to learn that you have to go all the way back to 1998 to find the last year that the real price was just half the 2007 price.
- The biggest market barrier of all may have been gasoline price volatility. The spreadsheet spans 63 months, allowing 62 month-to-month comparisons. In 29 of these, the price went down (see 1-yr comparison worksheet). That’s right: the average gasoline price was less than the prior month’s an astounding 47 percent of the time (see graph). Pump prices have been so volatile that consumers didn’t know whether the price three months later would be up or down. The result? American families and automakers alike found it hard to justify long-term investments in more-efficient cars. And allied policies like de-subsidizing sprawl didn’t get taken seriously.
- Nevertheless, gas prices have now risen five years in a row and are virtually certain this year to chalk up a sixth. There hasn’t been a comparable period of sustained increases since the late 1970s.
The big takeaway for carbon taxes is that the short-run price-elasticity of gasoline demand is rising (Point #2). (The long-run price-elasticity is probably around minus 0.4, as we discuss here.) While a rising elasticity contradicts the standard economic model in which price-sensitivities don’t change much over time, Point #5 provides a reasonable explanation: gasoline prices (and energy prices in general) had fluctuated so wildly for decades, and a sense of entitlement to cheap gasoline had become so ingrained in American society, that it took a long time for households and businesses to internalize the rise in pump prices — to regard it as real.
Perhaps now, however, a line has been crossed. Maybe the trigger was the price of crude breaching $100 a barrel, or the unspooling credit crisis signaling a fundamental change in the U.S. economy. Or it may simply have been the accumulating weight of price increases noted in Point #6. Whatever the reason(s), Americans seem, finally, to be getting the message that higher gas prices are here to stay.
That’s good news for the climate, national security, and green jobs. But bitter medicine for hard-pressed families as well as business and jobs that aren’t oil-intensive but are being pulled under by gasoline-caused belt-tightening. Imagine if the price rises had been delivered not by a rapacious market but via socially determined ramped-up increases in the gasoline tax (as some commentators have proposed since the 1970s, including, with renewed urgency, after 9/11).
Americans would have had time to adapt, along with real choices such as truly fuel-efficient cars and smaller houses in more-compact developments. And the extra revenues from the higher-priced gasoline would have belonged to all of us rather than just the owners of oil reserves. Those revenues could have been returned to households and businesses via tax-shifts or dividends, and not skimmed off for private enrichment.
The analogy to a revenue-neutral carbon tax couldn’t be more clear.
Car and Driver: Plummeting Auto Sales Show Value Of Putting A Price On carbon (Wash. Post editorial)
Car and Driver: Plummeting Auto Sales Show Value Of Putting A Price On carbon (Wash. Post editorial)
Frustrated Owners Try to Unload Gas Guzzlers (Boston Globe)
Frustrated Owners Try to Unload Gas Guzzlers (Boston Globe)
Indiana and North Carolina Voters Reject Gas Tax Holiday, Open Door to Consideration of Revenue-Neutral Carbon Tax
CARBON TAX CENTER
PRESS RELEASE
Press contacts:
Daniel Rosenblum, Co-Director • 914-837-3956 • dan@carbontax.org
Charles Komanoff, Co-Director • 212-260-5237 • kea@igc.org
OPEN DOOR TO CONSIDERATION OF REVENUE-NEUTRAL CARBON TAX
NEW YORK (May 7, 2008)
Voters yesterday rejected Senator Hillary Clinton’s proposed gas tax “holiday” and, with it, the idea that energy taxes are political poison. The resounding victory in North Carolina and unexpectedly strong showing in Indiana by Senator Barack Obama, the only presidential candidate to oppose the Clinton-McCain tax holiday, could open the door to consideration of a revenue-neutral carbon tax.
While not every election serves as a referendum on a particular policy issue, yesterday’s clearly did. The proposal to suspend the federal gasoline tax this summer was the major policy issue distinguishing Senator Clinton from Senator Obama between the April 22 Pennsylvania primary and today. The issue received extensive media coverage due to both senators’ focus on it amid widespread concern over gasoline prices. [Update – As the New York Times noted this morning, "In both states, the candidates’ final arguments centered on a summertime suspension of the federal gasoline tax, which Mrs. Clinton proposed as an economic lift for voters and Mr. Obama derided as a political gimmick."] In rebuffing Senator Clinton’s quick and simplistic fix, voters demonstrated that they will consent to a tax when it advances important economic, environmental and national security priorities.
“Voters sent a powerful message yesterday that they are not willing to sacrifice the environmental and economic benefits of the gasoline tax for trivial, short-term benefits,” said Daniel Rosenblum, co-director of the Carbon Tax Center. “Voters in Indiana and North Carolina have driven a spike through the conventional wisdom that supporting a tax is political suicide. The path is cleared for consideration of a revenue-neutral carbon tax-and-dividend approach that cost-effectively reduces greenhouse gas emissions, strengthens the economy, reduces America’s dangerous dependence on foreign oil and returns the tax proceeds to all Americans through monthly dividends,” Rosenblum said.
“These past few weeks, Sen. Obama has stood up for energy prices that tell the truth about climate damage and national insecurity,” said Charles Komanoff, co-director of the Carbon Tax Center. “The voters have rewarded Obama’s political courage and sent a clear signal to Washington that they support price incentives to conserve oil and curb carbon emissions,” Komanoff added.
As Senator Obama stated in his North Carolina victory speech last night, “the American people are not looking for more spin. They’re looking for honest answers to the challenges we face.” An honest answer to the climate change challenge includes truth in energy pricing.
The Carbon Tax Center is a non-profit educational organization launched in 2007 to give voice to Americans who believe that taxing emissions of carbon dioxide — the primary greenhouse gas — is imperative to reduce global warming. Co-founders Charles Komanoff and Daniel Rosenblum bring to CTC a combined six decades of experience in economics, law, public policy and social change.
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Photo: Flickr/cecily7.
The Gas Tax and the Un-Tax
Guest Post by James Handley
Will you sell your vote for $25? Presidential candidates John McCain and Hillary Clinton are betting you will. They’re campaigning for a “holiday” on federal gasoline taxes for the summer months.
Of the three presidential contenders, only Barack Obama has demurred. Obama said last week:
[T]he federal gas tax is about 5 percent of your gas bill. If it lasts for three months, you’re going to save about $25 or $30, or a half a tank of gas.
Obama insists that the only permanent solution to rising gasoline and diesel fuel prices is to reduce consumption and increase use of alternative fuels.
Haven’t we been down this road before? Yes, a dozen years ago. The New York Times excoriated the same “gas tax holiday” in May 1996:
Fill ‘er up, America, this is the Memorial Day holiday and the start of the “summer driving season.” We are a road-running, gas-guzzling people and Bob Dole, Newt Gingrich and Bill Clinton all say our Federal tax should be lowered 4.3 cents a gallon. But the tax relief, if it ever comes, will be trivial — and will have a negative impact on public policy. It is, in short, something of a political fraud.
Low prices and higher demand by consumers, many of them all too willing to pay any price to drive at and over higher state speed limits, will only increase American dependency on foreign oil. If people are worried about energy, not to mention the environment and the budget deficit, suspending the 1993 gasoline tax increase (many politicians would make it permanent next year) is exactly the wrong way to go.
Now the specter of catastrophic global warming is snapping into sharp focus like a jack-knifed tractor trailer blocking all lanes as we careen along at 75 mph. Sirens are wailing and lights are flashing thanks in large part to the Nobel-winning work of the Intergovernmental Panel on Climate Change and Dr. James Hansen’s NASA-Goddard Climate team, un-muzzled despite Bush Administration threats.
And yet, U.S. energy policy is still “pedal to the metal” on the global warming accelerator — with McCain and Clinton urging us to “step on it” with a gas tax break. The exact opposite of what economists say is the essential step: pricing carbon emissions.
Yale economics professor William Nordhaus offers this litmus test:
[W]hether someone is serious about tackling… global warming can readily be gauged by… what they say about the carbon price. Suppose you hear a public figure who speaks eloquently of the perils of global warming… propose regulating the fuel efficiency of cars, or requiring high efficiency light bulbs or subsidizing ethanol, or providing research for solar power — but nowhere mentions the need to raise the price of carbon.
You should conclude that the proposal is not really serious and does not recognize the central economic message about how to slow climate change. To a first approximation, raising the price of carbon is a necessary and sufficient step for tackling global warming. The rest is largely fluff.
By declining to dangle the $25 bribe before the electorate, Sen. Obama has avoided the fluff. But he hasn’t yet taken the pro-active step of using prices to put the U.S. economy on a low-carbon diet.
Nordhaus provides the intellectual model, explaining that taxes on “bads” such as pollution and waste make our economy more productive and efficient and should therefore be viewed as the opposite of taxes on “goods” like products, income and employment.
Seven-Up soft drink was advertised in the ‘70s as the “Un-Cola.” Perhaps it’s time to market a carbon tax as the “un-tax.”
Photo: Flickr / pbo31
U.S. Gasoline Demand Dropping (Finally!)
On the same day that real crude oil prices broke a 28-year record, the Wall Street Journal heralded a long-awaited drop in U.S. gasoline consumption.
The Journal’s lead story today, Americans Start to Curb Their Thirst for Gasoline, was a powerful rebuttal of the notion that gasoline use is inelastic, and a vote of confidence in carbon tax advocates who have insisted that rising fuel prices will dampen energy demand.
Here are excerpts from the Wall Street Journal story, spiced with our commentary.
As crude-oil prices climb to historic highs, steep gasoline prices and the weak economy are beginning to curb Americans’ gas-guzzling ways.
In the past six weeks, the nation’s gasoline consumption has fallen by an average 1.1% from year-earlier levels, according to weekly government data.
That’s the most sustained drop in demand in at least 16 years, except for the declines that followed Hurricane Katrina in 2005, which temporarily knocked out a big chunk of the U.S. gasoline supply system.
This time, however, there is evidence that Americans are changing their driving habits and lifestyles in ways that could lead to a long-term slowdown in their gasoline consumption.
Economists and policy makers have puzzled for years over what it would take to curb Americans’ ravenous appetite for fossil fuels. Now they appear to be getting an answer: sustained pain.
Of course, unlike the pain of "market-driven" high prices, the pain of socially mandated carbon pricing would be offset by rebating the revenue or tax-shifting.
Over the past five years, the climb in gasoline prices, driven largely by the run-up in crude oil, hardly seemed to dent the nation’s growing thirst for the fuel.
Conventional thinking held that consumption would begin to taper off when gasoline hit $3 a gallon.
But $3 came and went in September 2005, and gasoline demand didn’t flinch. Consumers complained about the cost of filling their tanks, pinched pennies by shopping at Wal-Mart, and kept driving.
Economists who study the effects of gasoline prices on demand say consumers tend to look at short-term price spikes as an anomaly, and don’t do much to change their habits. They might spend less elsewhere to compensate, or take short-term
conservation measures they can easily reverse, such as driving slower or taking public transportation, but the impact is minimal.Regular gasoline prices jumped to $2.34 a gallon at the end of 2006, up 62% from 2003, according to the EIA. Yet demand continued to grow at an average 1.1% a year. Consumers were better able to absorb the increase because it was spread over
four years, and the economy was doing fairly well.
Then again, annual demand growth of just 1% while the economy was expanding at 3% was strong evidence of at least some short-run price-elasticity.
Today, a weakening economy is intensifying the effects of high gasoline prices… The combination of forces is prompting Americans to cut back on driving, sometimes taking public transportation instead. It’s also setting the stage for what may be a long-term slowdown in gasoline demand by forcing Americans to become more fuel-efficient faster.
"If you think about the fact that U.S. motorists are responsible for one out of nine barrels of oil consumed in the world…and that consumption is no longer growing the way it used to, that’s a major structural change in the market," says Adam Robinson, analyst with Lehman Brothers.
The longer gasoline prices remain high, the greater the potential consumer response. A 10% rise in gasoline prices reduces consumption by just 0.6% in the short term, but it can cut demand by about 4% if sustained over 15 or so years, according to studies compiled by the Congressional Budget Office.
The implied 0.4 long-run price-elasticity noted above is precisely the level we (CTC) assume in our 4-sector carbon tax impact model, which may be downloaded here.
As consumers make major spending decisions, such as where to live and what kind of vehicle to drive, they are beginning to factor in the cost of fuel. Some are choosing smaller cars or hybrids, or are moving closer to their jobs to cut down on driving. Those changes effectively lock in lower gasoline consumption rates for the future, regardless of the state of the economy or the level of
gasoline prices.Anne Heedt, of Clovis, Calif., has been moving toward a more fuel-efficient lifestyle for the past few years. She owns a Toyota Prius hybrid but takes her bike on errands when weather permits.
"We’re not always going to have the same accessibility to gasoline that we’ve had in past decades, so we do have to start thinking about what we’re going to do over the next 50 years," said the 31-year-old Ms. Heedt, who used to work at a
medical office but is between jobs.
Way to go, Anne. You should be CTC’s poster child!
The housing boom encouraged the development of far-flung suburbs, contributing to longer commutes. Now developers are building more walkable neighborhoods close to city centers and public transit, and Americans are beginning to migrate back toward their workplaces, city planners and other experts say.
David Hopper, who lives in the rural community of Markleville, Ind., is preparing to move to a new house in Plainfield, cutting his commute to Indianapolis to 15 miles from 47 miles. Mr. Hopper decided to move closer to the city last summer, when gas prices hit
$3.40 a gallon in his area.
Together, Anne’s and David’s examples suggest the broad range of ways in which individuals respond to carbon-pricing signals. It’s heartening to see this reporting in a major paper like the Journal.
Pinched consumers also are speeding up their shift to more fuel-efficient cars. Sales of large cars dropped by 2.6% in 2006 and by 10.5% in 2007. In January, they plummeted 26.5% from a year earlier, according to Autodata Corp.
Car dealers are selling fewer minivans and large sport-utility vehicles. In fact, only small cars and smaller, more fuel-efficient SUVs, are showing a rise in sales. Small-car sales in January were up 6.5% from a year earlier, while sales of crossover vehicle grew 15.1%, Autodata Corp. says.
These trends evidently deepened in February. The New York Times reports that sales of SUV’s and pickups in the U.S. fell 14% last month, vs. a 5% drop in car sales.
Music to our ears. Meanwhile, the The Times is reporting that crude oil prices finally surpassed the historical inflation-adjusted peak from April 1980. How sad for Americans that the record-high price includes fabulous "rents" for oil owners and extractors. How much better instead to tax carbon fuels and re-allocate the revenues to American families.
Photo: bicyclesonly / Flickr