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Fuel Taxes versus Efficiency Standards – An Instrumental Variable Approach

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  • Manuel Frondel

    ()

  • Colin Vance

Abstract

Using household travel diary data collected in Germany between 1997 and 2012, we employ an instrumental variable (IV) approach to estimate fuel price and efficiency elasticities. The aim is to gauge the relative impacts of fuel economy standards and fuel taxes on distance traveled. We find that the magnitudes of the elasticity estimates are statistically indistinguishable: higher fuel prices reduce driving by the same degree as higher fuel efficiency increases driving. This finding indicates an offsetting effect of fuel efficiency standards on the effectiveness of fuel taxation, calling into question the efficacy of the European Commission’s current efforts to legislate CO2 emissions limits for new cars given prevailing high fuel taxes.

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Bibliographic Info

Paper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0445.

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Length: 23 pages
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:rwi:repape:0445

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Keywords: Automobile travel; panel estimation models; rebound effect;

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References

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  1. Kleibergen, Frank & Paap, Richard, 2006. "Generalized reduced rank tests using the singular value decomposition," Journal of Econometrics, Elsevier, vol. 133(1), pages 97-126, July.
  2. Austin, David & Dinan, Terry, 2005. "Clearing the air: The costs and consequences of higher CAFE standards and increased gasoline taxes," Journal of Environmental Economics and Management, Elsevier, vol. 50(3), pages 562-582, November.
  3. Brons, Martijn & Nijkamp, Peter & Pels, Eric & Rietveld, Piet, 2008. "A meta-analysis of the price elasticity of gasoline demand. A SUR approach," Energy Economics, Elsevier, vol. 30(5), pages 2105-2122, September.
  4. John C. Chao & Norman Rasmus Swanson, 2004. "Consistent Estimation with a Large Number of Weak Instruments," Yale School of Management Working Papers ysm374, Yale School of Management.
  5. Zia Wadud & Daniel J. Graham & Robert B. Noland, 2010. "Gasoline Demand with Heterogeneity in Household Responses," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 47-74.
  6. Sorrell, Steve & Dimitropoulos, John & Sommerville, Matt, 2009. "Empirical estimates of the direct rebound effect: A review," Energy Policy, Elsevier, vol. 37(4), pages 1356-1371, April.
  7. Robert W. Crandall, 1992. "Policy Watch: Corporate Average Fuel Economy Standards," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 171-180, Spring.
  8. Michael P. Murray, 2006. "Avoiding Invalid Instruments and Coping with Weak Instruments," Journal of Economic Perspectives, American Economic Association, vol. 20(4), pages 111-132, Fall.
  9. Manuel Frondel & Colin Vance, 2009. "Do High Oil Prices Matter? Evidence on the Mobility Behavior of German Households," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 43(1), pages 81-94, May.
  10. Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers 0151, National Bureau of Economic Research, Inc.
  11. Binswanger, Mathias, 2001. "Technological progress and sustainable development: what about the rebound effect?," Ecological Economics, Elsevier, vol. 36(1), pages 119-132, January.
  12. Manuel Frondel & Nolan Ritter & Colin Vance, 2010. "Heterogeneity in the Rebound Eff ect – Further Evidence for Germany," Ruhr Economic Papers 0227, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  13. Brookes, Leonard, 2000. "Energy efficiency fallacies revisited," Energy Policy, Elsevier, vol. 28(6-7), pages 355-366, June.
  14. Frondel, Manuel & Schmidt, Christoph M. & Vance, Colin, 2011. "A regression on climate policy: The European Commission’s legislation to reduce CO2 emissions from automobiles," Transportation Research Part A: Policy and Practice, Elsevier, vol. 45(10), pages 1043-1051.
  15. Manuel Frondel & Jorg Peters & Colin Vance, 2008. "Identifying the Rebound: Evidence from a German Household Panel," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 145-164.
  16. Andrew N. Kleit, 2004. "Impacts of Long-Range Increases in the Fuel Economy (CAFE) Standard," Economic Inquiry, Western Economic Association International, vol. 42(2), pages 279-294, April.
  17. J. Daniel Khazzoom, 1980. "Economic Implications of Mandated Efficiency in Standards for Household Appliances," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 21-40.
  18. John Bound & David A. Jaeger & Regina Baker, 1993. "The Cure Can Be Worse than the Disease: A Cautionary Tale Regarding Instrumental Variables," NBER Technical Working Papers 0137, National Bureau of Economic Research, Inc.
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