Carbon Tax Salience and Gasoline Demand

Abstract

We demonstrate that the carbon tax imposed by the Canadian province of British Columbia, a unique carbon pricing policy that comprehensively applies to all fossil fuels, caused a decline in short-run gasoline demand that is significantly greater than would be expected from an equivalent increase in the market price of gasoline. That the carbon tax is more salient, or yields a larger change in demand than equivalent market price movements, is robust to a range of specifications including intuitively plausible and strong instrumental variables. Along with calculating the reduction in carbon dioxide emissions attributable to the tax, we discuss potential explanations for the differential consumer responses to the carbon tax relative to the marketdetermined price.

Tax Preferences for Environmental Goals

“…This is consistent with a body of literature indicating that there may a higher responsiveness of consumer behaviour to taxor other policy-induced price changes than normal market-price fluctuations, due to a "salience" or "signaling" effect (see: Rivers and Schaufele, 2012;Li, Linn and Muehlegger, 2012;Sunstein and Taylor, 2008). The resulting uncertainty underlines the risks in predicting the take-up and cost of tax subsidies.…”

From value-added tax to a damage and value-added tax partially based on life cycle assessment: principles and feasibility

“…In British Columbia, the levy in 2008 of a carbon tax gradually increased to 30 CAN $/tCO 2 eq (corresponding to an increase of roughly 0.07 CAN $ per liter of gasoline) was accompanied by a 18.8% reduction of per capita consumption of fuels subject to the tax compared to the rest of Canada (Elgie and McClay 2013). Rivers and Schaufele (2012) showed that this reduction is 4.9 times greater than that expected from an equivalent increase in just the price of fuel (as opposed to a fuel tax). This is likely related to the fact that the provision of environmental information to consumers reduces their willingness to pay for the most polluting products (Michaud et al 2017;Ji et al 2017).…”

Gasoline Taxes and Consumer Behavior

“…4 In the context of gasoline consumption, recent studies including Davis and Kilian (2011), Barandini and Weber (2012), Rivers and Schaufele (2012), and Scott (2012) all provide evidence that consumer respond to gasoline taxes differently from other components. Barandini and Weber (2012) examine gasoline demand in Switzerland using time-series data.…”

“…Barandini and Weber (2012) examine gasoline demand in Switzerland using time-series data. Rivers and Schaufele (2012) use province-level panel data to investigate the consumer response to a carbon tax on fossil fuels in British Columbia, Canada. Finally, Davis and Kilian (2011) and Scott (2012) both employ U.S. state-level panel data on gasoline consumption from 1989 to 2009.…”

“…First, our main goal is to directly estimate consumer responses to gasoline taxes. Our empirical analysis includes two price components, the gasoline tax and tax-exclusive price, which permits estimates of consumer responses to the two components; Rivers and Schaufele (2012) and Scott (2012) adopt a similar approach. In contrast, Davis and Kilian (2011) use the tax-inclusive gasoline price as the key regressor in the gasoline demand equation and use gasoline taxes as the instrument for the price variable.…”