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Cleaning the Bathwater with the Baby: The Health Co-Benefits of Carbon Pricing in Transportation

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  • Christopher R. Knittel
  • Ryan Sandler

Abstract

Efforts to reduce greenhouse gas emissions in the US have relied on Corporate Average Fuel Economy (CAFE) Standards and Renewable Fuel Standards (RFS). Economists often argue that these policies are inefficient relative to carbon pricing because they ignore existing vehicles and do not adequately reduce the incentive to drive. This paper presents evidence that the net social costs of carbon pricing are significantly less than previous thought. The bias arises from the fact that the demand elasticity for miles travelled varies systematically with vehicle emissions; dirtier vehicles are more responsive to changes in gasoline prices. This is true for all four emissions for which we have data—nitrogen oxides, carbon monoxide, hydrocarbon, and greenhouse gases—as well as weight. This reduces the net social costs associated with carbon pricing through increasing the co-benefits. Accounting for this heterogeneity implies that the welfare losses from $1.00 gas tax, or a $110 per ton of CO2 tax, are negative over the period of 1998 to 2008 even when we ignore the climate change benefits from the tax. Co-benefits increase by over 60 percent relative to ignoring the heterogeneity that we document. In addition, accounting for this heterogeneity raises the optimal gas tax associated with local pollution, as calculated by Parry and Small (2005), by as much as 57 percent. While our empirical setting is California, we present evidence that the effects may be larger for the rest of the US.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17390.

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Date of creation: Sep 2011
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Handle: RePEc:nbr:nberwo:17390

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  1. Jonathan E. Hughes & Christopher R. Knittel & Daniel Sperling, 2008. "Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 29(1), pages 113-134.
  2. Glazer, Amihai & Klein, Daniel B. & Lave, Charles, 1995. "Clean on Paper, Dirty on the Road: Troubles with California's Smog Check," University of California Transportation Center, Working Papers qt5514s0hg, University of California Transportation Center.
  3. Michael Greenstone & Elizabeth Kopits & Ann Wolverton, 2011. "Estimating the Social Cost of Carbon for Use in U.S. Federal Rulemakings: A Summary and Interpretation," NBER Working Papers 16913, National Bureau of Economic Research, Inc.
  4. Stephen P. Holland & Jonathan E. Hughes & Christopher R. Knittel & Nathan C. Parker, 2011. "Some Inconvenient Truths About Climate Change Policy: The Distributional Impacts of Transportation Policies," Working Papers, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research 1116, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  5. Nicholas Z. Muller & Robert Mendelsohn, 2009. "Efficient Pollution Regulation: Getting the Prices Right," American Economic Review, American Economic Association, American Economic Association, vol. 99(5), pages 1714-39, December.
  6. Meghan R. Busse & Christopher R. Knittel & Florian Zettelmeyer, 2009. "Pain at the Pump: The Differential Effect of Gasoline Prices on New and Used Automobile Markets," NBER Working Papers 15590, National Bureau of Economic Research, Inc.
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Cited by:
  1. Justine Hastings & Jesse M. Shapiro, 2012. "Mental Accounting and Consumer Choice: Evidence from Commodity Price Shocks," NBER Working Papers 18248, National Bureau of Economic Research, Inc.
  2. Bento, Antonio M. & Hughes, Jonathan E. & Kaffine, Daniel, 2013. "Carpooling and driver responses to fuel price changes: Evidence from traffic flows in Los Angeles," Journal of Urban Economics, Elsevier, vol. 77(C), pages 41-56.
  3. Mérel, Pierre & Smith, Aaron & Williams, Jeffrey & Wimberger, Emily, 2014. "Cars on crutches: How much abatement do smog check repairs actually provide?," Journal of Environmental Economics and Management, Elsevier, vol. 67(3), pages 371-395.
  4. Michael L. Anderson, 2013. "Subways, Strikes, and Slowdowns: The Impacts of Public Transit on Traffic Congestion," NBER Working Papers 18757, National Bureau of Economic Research, Inc.
  5. Mark Hoekstra & Steven L. Puller & Jeremy West, 2014. "Cash for Corollas: When Stimulus Reduces Spending," NBER Working Papers 20349, National Bureau of Economic Research, Inc.
  6. Christopher R. Knittel, 2012. "Reducing Petroleum Consumption from Transportation," NBER Working Papers 17724, National Bureau of Economic Research, Inc.

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