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By James Hamilton on Feb 16, 2012 with 5 responses

Reducing Petroleum Consumption from Transportation

MIT Professor Christopher Knittel has a new paper on the potential for the United States to reduce petroleum consumption.

From the paper’s abstract:

The United States consumed more petroleum-based liquid fuel per capita than any other OECD-high-income country– 30 percent more than the second-highest country (Canada) and 40 percent more than the third-highest (Luxemburg). This paper examines the main channels through which reductions in U.S. oil consumption might take place: (a) increased fuel economy of existing vehicles, (b) increased use of non-petroleum-based low-carbon fuels, (c) alternatives to the internal combustion engine, and (d) reduced vehicles miles traveled. I then discuss how the policies for reducing petroleum consumption used in the US compare with the standard economics prescription for using a Pigouvian tax to deal with externalities. Taking into account that energy taxes are a political hot button in the United States, and also considering some evidence that consumers may not correctly value fuel economy, I offer some thoughts about the margins on which policy aimed at reducing petroleum consumption would have the largest impact on economic efficiency.

Knittel begins by noting that fuel taxes differ tremendously across OECD countries.

Motor fuel taxes (dollars per gallon) in different countries as of Jan 1, 2010. Source: Knittel (2012).

And these differences in taxes are associated with huge differences in per capita consumption. The graph below shows a pretty strong correlation: countries with lower fuel prices have higher fuel consumption. The slope of the fitted curve raises the possibility that, given time, long-run responses to higher gasoline prices could be substantially stronger than time-series correlations might suggest.

Vertical axis: consumption of transportation fuel per person. Horizontal axis: gasoline price. Source: Knittel (2012).

Knittel feels that while raising gasoline taxes may be politically infeasible for the U.S., corporate average fuel economy (CAFE) standards are a reasonable alternative. Current standards call for an average fuel economy of 34 miles per gallon by 2016 and 54.5 by 2025. One of the reasons Knittel thinks these may be attainable is his earlier research (which we called to the attention of Econbrowser readers last year) showing that historically, technological improvements have gone more toward increasing weight and horsepower than to fuel efficiency. He thinks those CAFE standards could be attained by a combination of further technological improvements, modest reductions in size and horsepower, and more electric and hybrid vehicles.

Attributes of Honda Accord over time. Top row: weight and horsepower. Bottom row: torque and fuel economy. Source: Knittel (2009).

As U.S. oil consumption continued to increase during the oil price run-up over 2003-2007, I became pessimistic about how hard it would be to make adjustments in the quantity consumed, and indeed Knittel himself produced some earlier research consistent with that conclusion. However, the more recent data do suggest Americans have started to make some significant adjustments.

U.S. petroleum products supplied, average of most recent 12 weeks, in millions of barrels per day, Jan 25, 1991 to Dec 30, 2011. Data source: EIA.

This article originally appeared on Econbrowser.

  1. By Paul N on February 16, 2012 at 11:22 pm

    James, 
    Welcome to CER.
    Some interesting charts there.
    While the correlation between fuel price and per capita consumption is unquestionable, that doesn’t necessarily mean that raisng the US price to euro levels will reduce consumption to anything like the same.  
    In the post war years, the development of US and Europe have been on quite different tracks.  Almost all the post was cities in the US are planned entirely around the car – many people have no alternative.
    I am in favour of higher fuel taxes, and they will reduce consumption, but I think the level of about Australia is the best that can be hoped for in the medium term (<10yrs)

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  2. By Paul N on February 16, 2012 at 11:29 pm

    One other note on the taxes table.
    It would appear that New Zealand has no tax on diesel fuel – this is not quite true.They have an alternative road tax scheme, called road user charges, for vehicles that use any fuel other than gasoline, (including electricity) based on the weight, axle configuration and the miles driven.  This is intended to reflect the difference in road damage caused by heavy vehicles (goes up as the 4th power of the axle load), and to separate the tax from the fuel type.  So heavy trucks pay considerably more per mile in tax than do diesel (or electric) cars, but the cars are still paying a per mile road tax.
    Details of the scheme are here;

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  3. By Ben on February 19, 2012 at 7:36 pm

    Prof. Hamilton
    Apart from “welcome” and we look forwaqrd to your contributions, the only thing I have to offer is this minor observation.  Anyone intelligent enough to be on faculty at UCSD and, as importantly, have the sensibility to live in proximity to that gorgeous campus, well, that’s a very bright fellow, indeed.  I speak with only a small measure of insight here; the emerald fairways of Torrey Pines and the 2008 U.S. Open.  Enough said:)
    Ben
     

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  4. By Walter Sobchak on February 20, 2012 at 12:54 pm

    I have never understood how CAFE could do the work of a sales tax. CAFE acts, in fact, as a sales tax on new automobiles. The total fleet of light vehicles in the US is about 240 million, annual sales this year will be about 14 million, although they have been as high 18 million in the last decade. That means the fleet turns over at the rate of 5% per year. The result is that CAFE’s effect is very small and takes a long time to be noticed.

    Besides, CAFE can be scammed.
    So, here, soley as a thought experiment, is a possible scam. When you buy a car, you will have to buy two
    cars. One of them will be a regular car that gets CAFE 30 mpg. The other
    one will get 100 mpg. That will cause the mfg’s CAFE average to remain
    at 65 mpg.
    The 100 mpg car will be brutal. No power anything, plastic body,
    plastic windows, no HVAC. 25 hp two cyl engine, manual transmission. A
    Tata Nano without the charm.
    You will take delivery of the two cars, and get plates for both of
    them. Once that is done, you will take (probably on a trailer) the mini
    car, to a special dealer who will buy it from you at a decent percentage
    of list price. That dealer will ship the car to a parts company that
    will reduce it into parts small enough not to require a VIN. The parts
    company will sell the parts to an OEM, which will build a new 100 mpg
    car with them.
    WRR.

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  5. By Walter Sobchak on February 20, 2012 at 12:57 pm

    Ooops. The first line above should have been: I have never understood how CAFE could do the work of a sales  gas tax.

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