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Estimating the Effect of a Gasoline Tax on Carbon Emissions

  • Lucas W. Davis
  • Lutz Kilian

Several policy makers and economists have proposed the adoption of a carbon tax in the United States. It is widely recognized that such a tax in practice must take the form of a tax on the consumption of energy products such as gasoline. Although a large existing literature examines the sensitivity of gasoline consumption to changes in price, these estimates may not be appropriate for evaluating the effectiveness of such a tax. First, most of these studies fail to address the endogeneity of gasoline prices. Second, the responsiveness of gasoline consumption to a change in tax may differ from the responsiveness of consumption to an average change in price. We address these challenges using a variety of methods including traditional single-equation regression models, estimated by least squares or instrumental variables methods, and structural vector autoregressions. We compare the results from these approaches, highlighting the advantages and disadvantages of each. Our preferred approach exploits the historical variation in U.S. federal and state gasoline taxes. Our most credible estimates imply that a 10 cent per gallon increase in the gasoline tax would reduce carbon emissions from vehicles in the United States by about 1.5%.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14685.

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Date of creation: Jan 2009
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Publication status: published as Journal of Applied Econometrics, 2011, 26(7), 1187-1214
Handle: RePEc:nbr:nberwo:14685
Note: EEE PE
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  1. Lutz Kilian, 2008. "The Economic Effects of Energy Price Shocks," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 871-909, December.
  2. Rotemberg, Julio J & Woodford, Michael, 1996. "Imperfect Competition and the Effects of Energy Price Increases on Economic Activity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 550-77, November.
  3. Lutz Kilian & Clara Vega, 2011. "Do Energy Prices Respond to U.S. Macroeconomic News? A Test of the Hypothesis of Predetermined Energy Prices," The Review of Economics and Statistics, MIT Press, vol. 93(2), pages 660-671, May.
  4. Fullerton, Don & West, Sarah E., 2002. "Can Taxes on Cars and on Gasoline Mimic an Unavailable Tax on Emissions?," Journal of Environmental Economics and Management, Elsevier, vol. 43(1), pages 135-157, January.
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  6. Christopher Knittel & Daniel Sperling, 2006. "Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand," Working Papers 625, University of California, Davis, Department of Economics.
  7. Lutz Kilian, 2010. "Explaining Fluctuations in Gasoline Prices: A Joint Model of the Global Crude Oil Market and the U.S. Retail Gasoline Market," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 87-112.
  8. Ramsey, J B & Rasche, R & Allen, Bruce T, 1975. "An Analysis of the Private and Commercial Demand for Gasoline," The Review of Economics and Statistics, MIT Press, vol. 57(4), pages 502-07, November.
  9. Ivanov Ventzislav & Kilian Lutz, 2005. "A Practitioner's Guide to Lag Order Selection For VAR Impulse Response Analysis," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 9(1), pages 1-36, March.
  10. David L. Greene & James R. Kahn & Robert C. Gibson, 1999. "Fuel Economy Rebound Effect for U.S. Household Vehicles," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 1-31.
  11. Dahl, Carol A, 1979. "Consumer Adjustment to a Gasoline Tax," The Review of Economics and Statistics, MIT Press, vol. 61(3), pages 427-32, August.
  12. GONÇALVES, Silvia & KILIAN, Lutz, 2003. "Bootstrapping Autoregressions with Conditional Heteroskedasticity of Unknown Form," Cahiers de recherche 2003-01, Universite de Montreal, Departement de sciences economiques.
  13. Lutz Kilian, 2008. "Exogenous Oil Supply Shocks: How Big Are They and How Much Do They Matter for the U.S. Economy?," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 216-240, May.
  14. James Alm & Edward Sennoga & Mark Skidmore, 2009. "Perfect Competition, Urbanization, And Tax Incidence In The Retail Gasoline Market," Economic Inquiry, Western Economic Association International, vol. 47(1), pages 118-134, 01.
  15. Doyle Jr., Joseph J. & Samphantharak, Krislert, 2008. "$2.00 Gas! Studying the effects of a gas tax moratorium," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 869-884, April.
  16. Peter C. Reiss & Matthew W. White, 2008. "What changes energy consumption? Prices and public pressures," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 636-663.
  17. Chouinard, Hayley & Perloff, Jeffrey M., 2003. "Incidence of Federal and State Gasoline Taxes," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt5q74052d, Department of Agricultural & Resource Economics, UC Berkeley.
  18. Dahl, Carol & Sterner, Thomas, 1991. "Analysing gasoline demand elasticities: a survey," Energy Economics, Elsevier, vol. 13(3), pages 203-210, July.
  19. Edelstein, Paul & Kilian, Lutz, 2007. "Retail Energy Prices and Consumer Expenditures," CEPR Discussion Papers 6255, C.E.P.R. Discussion Papers.
  20. Cooley, Thomas F. & Leroy, Stephen F., 1985. "Atheoretical macroeconometrics: A critique," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 283-308, November.
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  23. Katharine G. Abraham & John C. Haltiwanger, 1995. "Real Wages and the Business Cycle," Journal of Economic Literature, American Economic Association, vol. 33(3), pages 1215-1264, September.
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