The case for pricing carbon

by Aaron Wherry

Ontario’s environment commissioner makes the case for carbon pricing.

Some jurisdictions are responding to this existential threat by pricing carbon pollution. Australia has implemented a carbon pricing program that charges companies the equivalent of $24 for every tonne of CO2 they emit and intends to link this program with the European Union Emissions Trading System. Japan implemented a carbon tax in April 2012, and China has created seven different pilot carbon pricing programs with a view to rolling out the best Annual Greenhouse Gas Progress Report 2012 model nationally by 2015. In North America, several provincial and state governments are taking steps to enact domestic carbon pricing policies. California and Quebec have put a legislated cap on carbon emissions and will require large emitters to comply through the purchase and trade of carbon allowances starting in 2013. 

British Columbia has re-afrmed its commitment to a carbon tax program that has earned international recognition as an effective model for climate action. As evidence that smart climate action does not hurt economic performance, in the four years since B.C.’s carbon tax took effect (2008–2011), the province’s economic growth (as measured in gross domestic product) has outpaced the rest of Canada, and personal and corporate income tax rates have been reduced to among the lowest in the country. At the same time, per capita fossil fuel consumption in B.C. has dropped substantially – declining 16.4 per cent more than the rest of Canada – and hybrid vehicle adoption has been twice the national average.

While it may be premature to make a direct correlation between the carbon price and these trends, they are nonetheless consistent with experiences in other jurisdictions that have had a carbon price in place for over a decade (e.g., United Kingdom, Germany and Sweden). These benets have also been recognized by the Canadian Council of Chief Executives, which has argued that a “price signal is the most powerful incentive for both industry and consumers to conserve energy and enhance efciency. Coupled with the appropriate overall policy framework, carbon pricing can lead to innovation and new technologies that have positive outcomes for consumers and position Canadian rms to be suppliers of less carbon-intensive products and services.”

The commissioner formally recommends that the Ontario government ”conduct an analysis of the environmental, social and economic impacts of alternative carbon pricing mechanisms and release it to the public for discussion.” The ministry responds as follows.

Ontario has been clear that we are not developing a carbon tax. Emissions trading is an alternative carbon pricing approach. Ontario is developing a greenhouse gas reduction proposal which includes working with our Western Climate Initiative partners and stakeholders to develop a regional emissions trading program.


The case for pricing carbon

  1. Wow…. More Carbon Tax cheerleading from Aaron Wherry. What a surprise

    • Wow! More idiotic bleating from Bill in the peanut gallery.

      • Even you I suspect (if you were being honest) cannot deny that there has been an obsessive amount of Carbon tax cheerleading from Wherry. Google “Aaron Wherry carbon tax” if in doubt…..

        • I for one see a big difference in advocating for a carbon tax and in pointing out the hypocrisy and cognitive dissonance of a party that once had a policy almost identical to that of another party trying to make that other party look sinister via constant dissing of that policy.

          If the CPC were to come forward and say “After careful study of our previous policy, we decided that the alternative of regulatory measures is the better, more cost effective route for x reasons, and the NDP is therefore on the wrong track with their policy” then that would be a legitimate, reasoned and debatable approach to the issue.

          “Nyah-nyah carbon tax carbon tax evil NDP” is not.

          • Explaining’s for losers…you’re assuming they care.[ or should care]

        • It is very simple. If you don’t like him you are free to leave. Who the hell are you to talk about “obsessive” anything? You’ve camped out on one journalist’s doorstep to endlessly bleat about his journalism and question his ethics. One might be forgiven for thinking you were paid to be here.

          • Biff/Chet in another guise trying to intimidate the press

            Cranky ole white guys often have time on their hands too

          • The correlation of tps between Bill, Andrew and some of the others is uncanny at times. Have we ever seen them on the same post…i suppose so…that would be too obvious.

          • Same tps come in the memos from HQ. The writing style often gives them away though…..and the games are the same.

            They spent years writing coordinated….even form letters … the editor before we got site commentary.

          • Pity they didn’t teach them how to think then.

          • They don’t think it’s a necessary skill….you’ve seen QP. LOL

          • Unlike you, I simply do not believe that partisan shills in the media are a step in the right direction, hence why I voice my opinion. You are free to disagree with me as you generally do.

          • No, but i see you are very selective in who you consider to be partisan shills. As are most of your ilk who somehow magically find their way to this blogsite.
            Tell me did you bother to express the same outrage over the Wente fiasco? Or at the farcial Sun tv?

          • Wherry is easily one of the most blatant partisan shills of the Ottawa press gallery so yes, I make an effort to expose his ongoing political charades and clearly there are others who agree. I don’t follow Wente at all and as I have already pointed out Ezra Levant, unlike Wherry who is a coward in hiding, Levant has the fortitude to openly admit and disclose that he is a Conservative media personality. If Wherry would do likewise and disclose that he is a “progressive” media personality I would back off. I believe it is important that we see more accountability in our media and less selective media shilling of which Wherry is one of the worst offenders.

          • I haven’t noticed you successfully expose anything yet. As for EL, I’m no expert on him, but I’ve yet to hear that mea culpa from him. In fact he’s ludicrously claimed to be a liberal on at least one occasion. Any comparisan between the two is laughable.
            I don’t for a moment believe you have any interest in media ethics on current evidence.

          • Don’t feed the troll.

          • You’re absolutely right.

  2. “Some jurisdictions are responding to this existential threat by pricing ….”

    Climatologists Baffled By Global Warming Time Out

    Global warming appears to have stalled. Climatologists are puzzled as to why average global temperatures have stopped rising over the last 10 years. Some attribute the trend to a lack of sunspots, while others explain it through ocean currents.

    Wired ~ Apocalypse Not:

    Over the five decades since the success of Rachel Carson’s Silent Spring in 1962 and the four decades since the success of the Club of Rome’s The Limits to Growth in 1972, prophecies of doom on a colossal scale have become routine. Indeed, we seem to crave ever-more-frightening predictions—we are now, in writer Gary Alexander’s word, apocaholic. The past half century has brought us warnings of population explosions, global famines, plagues, water wars, oil exhaustion, mineral shortages, falling sperm counts, thinning ozone, acidifying rain, nuclear winters, Y2K bugs, mad cow epidemics, killer bees, sex-change fish, cell-phone-induced brain-cancer epidemics, and climate catastrophes.

    • There are reasons beyond climate change to want to control CO2 emissions.

      1) Higher CO2 concentrations in the oceans reduces the pH, disrupting sensitive and complex ocean ecosystems.

      2) CO2 emissions are associated with the burning of coal, an activity that kills tens of thousands per year through particulate emissions, mercury pollution, etc.

      3) Taxing carbon could prove less economically harmful that other activities subject to taxation, such as investing and earning income. Shifting taxation in this way could prove to be an economic boon.

  3. Some Canadian historical data on how prices at the fuel pump affect consumption.

    Many economists claim that CAFE regs for automobile emissions are ineffective/too expensive and a widespread carbon tax is better. Yeah, that’s what the textbook says, and repeated by some journalists as gospel. Drive up the price of gasoline and people will drive less. Make vehicles more efficient, and people will drive more. Economics 101, right?

    So, what has Canadian driving experience been over the past number of years? Some individual commenters here have claimed that price has no impact, that drivers will continue to drive the same amount. Others claim that slap on a $0.10 per litre carbon tax and emissions will go down.

    I decided to do what no one else has appeared to do – look at actual StatsCan data.

    Here’s what I found: Over the period of 1999 to 2011, when the price more than doubled (from $0.63 to $1.31 per litre) the per capita fuel consumption did not change.

    My conclusion: For vehicles, improving fuel efficiency (and hence reducing emissions) CAFE regs are necessary. Gasoline consumption, in Canada, over the period from 1994 to 2011 is completely inelastic.

    I sent my research results out by twitter (all the economists ignored and are in the witness protection program, it seems) but Colby, to his credit, did engage. Seems I did manage to get him to agree with me. The graph and part of the ensuing discussion here:

    • Not to mess with your research but diesel cars and trucks are typically between 20-40
      percent more fuel efficient and the same model of vehicle with a gas engine. Diesel powered vehicles also carry a financial surcharge to own as they are more expensive then the same model of vehicle with a gas engine. Yet in spite of that the
      sales of diesel powered vehicles continues to climb both here in Canada and the United States. Increased fuel efficiency is credited as the number one reason why most people spend the extra money to buy a diesel powered vehicle.

      • True, I left out diesel volumes (the gasoline consumption was using net unleaded) because I believed it was composed mostly of transport trucks which would be less price sensitive.

        Still, if there was a significant shift to diesel in Canada over the period in study, this means the per capita numbers for non diesel drivers are even higher with higher prices.

        • Commercial transport is actually fairly sensitive to fuel prices. Large freight companies are willing to invest in fuel saving technologies (improving aerodynamics, using hybrid tractors for urban deliveries, etc.). As long as the ROI is sufficient, the investment is made.

          • I hate it when economics-trained individuals use terms such as “actually fairly sensitive to fuel prices”.

            But, I would agree that in a commercial operation these type of economic decisions are more robust. How frequent the rolling stock is turned over is an issue. But, this is not a new issue for commercial ops.

            In any event, not covered by the CAFE standards.

      • Because he’s graphed it on a liters/capita measure though, this really shouldn’t matter.

        Unless you’re arguing, like I did, that we’re doing a lot more with less — and if we were at the same level of efficiency as before, our GDP might have grown even further.

        • I was mostly looking to point out that some people are willing to pay more money upfront for a more fuel efficient vehicle, in this case diesel powered. To me that is a point that should not be overlooked.

          • I agree. But, I look at that additionally as an investment with a +ve return. Andrew Coyne and others claim it is a tax if regulated. I don’t know why – because it is mandatory? Makes no sense to me (Coyne’s argument).

          • Not sure which of Coyne’s arguments you are referring to, but if you mean regulations versus a straight carbon tax or cap-and-trade, it’s this: complying with the regulations introduces extra costs which get passed along to consumers – hence, following the same logic the CPC has applied to the NDP cap-and-trade approach, we are “taxed” for the compliance.

            The difference between regs and other forms of encouraging emissions reductions is that regs often specify the form the eduction must take – so in a way it discourages innovation in comparison with cap-and-trade or a straight tax. But all three methods end up costing. Interestingly, I am not aware of any effort on the CPC’s part to make the regs revenue-neutral to the end user (i.e. dropping taxes specifically to offset the higher costs associated with regs compliance).

          • It was his column today, yeah, I think that was the passage.

            hence, following the same logic the CPC has applied to the NDP cap-and-trade approach, we are “taxed” for the compliance.

            Yeah, well he shouldn’t. That’s my point.

            But all three methods end up costing.

            Define “costing”. Not if you take financial benefits into consideration. The proposed Regs on cars do not “cost” (assuming numbers are correct).

          • There is an increased cost in terms of development, testing and compliance that is borne by the manufacturer and passed on to us. As the retail cost of the vehicle rises, so does the sales tax collected. So we are both directly and indirectly hit with costs associated with the regs. Will the fuel savings offset those costs?

            If not, then the regs are not revenue neutral and are thus every bit as much a tax, in the very broad sense the CPC itself is currently bandying about. It’s just better hidden (something the CPC is very good at).

          • Look, new vehicles are developed by manufacturers all the time – rarely is fuel savingsa new year’s model identical to the previous year’s.

            Now they will develop a fleet to meet CAFE standards which are fleet averages. Some will be higher, some will be lower than the target.

            OK, let’s accept that all of the costs are passed onto the consumer. $1800 + HST – so say $2000. Still just over a 2 year payback @$900 savings per year.

            Can’t afford it? Take out say a 5 yr loan @say 10% interest. That’s $510 per year PIT. At savings of $900 you’re $390 ahead each year. Why I suggest it shouldn’t be treated as a tax (notwithstanding “mandatory” nature).

          • I think you are underestimating the cost and overestimating the savings, but the numbers don’t really matter, as any you and I toss out there would be speculative.

            The government is constantly harping on about how any measure that increases costs to taxpayers in an effort to curb carbon consumption is a “carbon tax”. They have not made any attempt to demonstrate how their regs will save money or at least be revenue neutral; in fact they have been rather silent on that issue. Given their tendency toward braggadocio, I’m assuming there is a net cost – which, in their own over-broad definition of “tax”, make their regulatory scheme a hidden tax.

            It’s not the definition I would normally apply to “tax” and so normally I would agree with your assessment that it doesn’t qualify as such. But if the CPC is going to create new definitions of “tax”, then it is incumbent upon them to show clearly how their own policies do not meet that definition.

          • I agree with what you are saying. But, if the CPC is being evasive in explaining their policies, and reverting to cheap politics, it doesn’t follow that journalists and other apoliticals should do the same. In fact, I would argue that labeling this as a “$36 billion car tax” does more public harm than good.

          • Carbon tax + offsetting tax cuts also does not cost, then.

          • It may not for some. If revenue neutral at a macro level, and no additional social spending. That is debatable.

            But independent of decision to purchase gas. One (offset IT taxes) not dependent upon purchase of fuel.

          • Keith, in other words, on a net present value (NPV) basis. From the consumer’s perspective. This is the proper analysis, IMO.

          • I agree, a regulation is not a tax.

            A regulation is intended to achieve a goal. Any increase in cost goes to achieving that goal.

            A tax is a transfer of money to the government, an increase in cost that goes toward nothing in particular, particularly when the demand for gas is completely inelastic as you say.

            A tax has the added effect of increasing the power of government at the expense of citizens, giving the government more of our money to spend. A regulation does not.

    • I remember seeing American research that found people start buying smaller, more fuel efficient vehicles when the price of gas reaches somewhere around $3.80/$4 gallon. People are wedded to driving – gas price increase makes people buy smaller cars or they give up other things – like skip a meal or not go to the cinema – before they drive significantly fewer kilometres.

      American gas is cheapest, Canada in middle while European countries more expensive. Could compare how far people drive in different countries depending on how expensive gas is but European countries are smaller than Canada, obviously, so they don’t travel the same distances as North Americans do.

      Carbon tax is a sin tax for middle classes who believe they are polluting the world but don’t actually want to radically change their habits.

      • That supports part of my argument. You’d really need to put a heck of a carbon tax on gasoline to drive the price up to get a change in behaviour. And then that shift would take ages, relative, to CAFE standards implementation.

        • Not necessarily, if people are aware they are also being offered more choice through their tax returns. At least if they are aware of the connexion between the two.

          • huh? I don’t follow. People get automatic feedback when they drive up to a gas pump. Or when they pay their credit card at the end of the month. They don’t need to refer to their tax returns.

          • I just meant[ as in BC] if people were more aware of the contex of a revenue neutral carbon tax.
            I wonder what level of awareness there is in the general public?

        • It is my understanding that carbon tax, or any other tax, would have to be fairly punitive to get people to significantly change how much they drive. High gas prices at the moment mean people are buying more fuel efficient vehicles but they are not radically changing their driving habits.

          Time ~ New Car Sales ~ Aug 2012:
          The subtle fluctuations in new car fuel economy average pretty much mirror this year’s rise and fall of gas prices. The average fell slightly during the spring and early summer, when gas prices were dropping, and then crept back up in July hand in hand with rising prices at the pump. Similarly, when gas prices spiked earlier in 2012, sales of compacts and other small cars soared, pushing average new-car fuel economy upward.

          • Statistical noise over one year while US still in recovery.

    • Couple of things to note. First, adjusting for inflation flattens your price graph out considerably. (Not entirely.. but considerably)

      Second, there is a difference between a .10 hike in gas prices overnight, and a 60c climb over a decade or more. That’s less than 6 cents per year. That’s only a few thousandths of a cent every day.

      So no. You’re not going to see any sort of change in habits, because the change in price is slow enough that people can accommodate it within their habits. They don’t notice each month they have a few cents less than they did last month.. they just notice that over the course of the year, things seem to be getting tighter, but they don’t know why, because nothing’s appreciably changed at any point.

      The other thing that your graph doesn’t address is intensity of use. GDP has gone up. A lot more fuel is being used for purely work purposes — hell, for the oil sands alone. It could be that these industrial uses of fuel are masking a decline in individual use.

      I mean, it’s a decent starting point, but there’s still way too many openings to come to any real conclusion that a tax would have no effect on usage.

      • Ok, let’s take your points one by one.

        1) Using nominal vs. real prices. Yeah, I did that on purpose. But, wouldn’t take much to correct. Using the period from 1999 to 2011, using 2% infl 1.02**12 = 1.27, so knock 27% off 1.30 about 95 cents. That’s still > 50% increase. And no movement in consumption.

        2) The BC carbon tax, which this article claims was successful in reducing GHG emissions by 16% (I am very skeptical over the period in question including a recession) I believe now sits at 7 cents/litre, phased in over a number of years. It wasn’t a one time price shock. I doubt any proposed carbon tax would be as drastic as the price increase in #1 (assuming gasoline prices remain constant in real terms, which I highly doubt).

        3) GDP effects. Yeah, but what makes you think this will not continue over the proposed carbon tax/Regs period? Canada is a very rich country. Even more reason to suggest that a simple carbon tax will simply be paid without a significant change (ie cost of doing business – oil sands is a good example).

        • 1. When I used the bank of Canada’s inflation calculator, it worked out to about .83 cents, so your estimate is actually giving me considerable benefit of the doubt. It’s more like a 2/3rds increase. As I said, it doesn’t entirely flatten out the graph, just lessens the slope considerably.

          2. You’ve missed the point here entirely. If anything, your comment on the BC carbon tax *strengthens* my point, because mine was that the total amount of price increase is far less significant than the rate at which the price increases. If the BC carbon tax case is at all accurate, then it shows that a much lesser price increase, applied over a *much* shorter period of time, can have significant effects. So a full on carbon tax, applied in one fell swoop, would likely have very significant effects.

          3. Because the counter-factual thought experiment is what would have happened if prices hadn’t rose? What happens if we take the liters used, but instead of looking at them in relation to how many people are using them, look at them in relation to how much production we’re getting for each litre. Now we have a graph where litres used per GDP unit descend rapidly as the price increases.

          Do we consume less fuel over-all? No. But if we get more out of every litre we use, well, that’s certainly a good place to start. After all, it’s not like people are going to suddenly just start needing less energy.

          • 2.That’s a whopping big “IF”. I’m sure a LOT of carbon tax proponents are using the BC data. I personally don’t accept the results w/o actually seeing the raw data (and I haven’t seen mention that car emissions went down 16%. Could be that a number of saw mills shut down longer than expected, or the gas bubble burst in the NE and the O&G recession persists). Got a source for the BC study? I could analyse BC’s gas consumption – but think all of Canada over 17 years more representative.

            3. Your point is irrelevant. Canada has absolute GHG reduction targets. Whether we are being more efficient on a GDP basis matters not when it comes to absolute reductions. Btw, the George Bush White House used to use this argument as well CO2/GDP to claim reductions, meanwhile the emissions continued to climb.

          • 2. Yes, it is. But you seem to understand what I was getting at now.

            3. Wow.. where’d those goal-posts come from? The ones we were talking about are back here. “Do carbon taxes prompt people to use less fuel?” In terms of absolute numbers, your graph suggests perhaps not. In terms of efficiency ratios, perhaps so.

          • No, you miss the point of my first comment. I claim CAFE Regs are more any effective than carbon tax on vehicles. In Canada. Today. And furthermore, economic.

            Economists claim otherwise. My data, IMO, supports my position.

          • Except it doesn’t. Your data is not replicative of a tax because no tax comes on at the rate of 16 thousandths of a cent per day.

            They’re also less effective because CAFE applies to one thing only. Vehicles. A carbon tax applies to pretty much everything. So unless you’re proposing CAFE type taxes on everything– from manufacturing to home building, etc.. you still have no comparison.

          • You can do both, which is my preference. CAFE standards for vehicles, plus a carbon tax of some sort.

            The CAFE standards reduce fuel consumption. The carbon tax, on gasoline, the evidence suggests, will be revenue used to offset taxes elsewhere. In the absence of CAFE standards, not nearly as effective.

          • Carbon taxes can and should be modulated to keep the country on track toward meeting emissions reduction targets. Command and control regulation like CAFE cannot provide that level of quick and direct feedback, CAFE standards take a long time to implement, and then a long time to feed into the vehicle fleet (at an average age of over ten years). Carbon pricing provides a stronger incentive to retire inefficient vehicles from the fleet.

          • CAFE standards are in effect now – and have been for sometime. I believe the first gets us to 2016 models, the next more stringent one to 2025. Not that far off.

            You remain of the opinion that simply raising gasoline prices will cause a shift in consumer behaviour and/or purchasing of more efficient vehicles (assuming they are as readily available in the absence of CAFE standards).

            I agree in principal – but I differ on effectiveness and timing. I believe you’d have to really crank up the tax on gasoline and wait a much longer time than CAFE (do both is my preference). Seventeen years of data (1994-2011) supports my assertion.

          • Thwim, here’s a thought experiment.

            Let’s take the EPA numbers as given. A forecast of $1800 additional cost per vehicle avg, with a savings in fuel of $900/yr. We’ll assume you are an average driver – consistent with what EPA used in their forecasts. Say the upgraded vehicle is available today.

            So, say a $30 k vehicle. plus $1800 CAFE improvements to double fuel efficiency.

            Here’s the deal. I will pay the $1800 for you, but, for the life of the vehicle, every time you fill up, you keep the receipt and pay me the same amount. So, a $100 fill-up, you pay me an additional $100. You can drive the vehicle coast to coast, take it onto the well sites or oil sands construction sites, commute weekends from Calgary to Ft. McMurray. The more you use it, the more gas you buy, the more you pay me.

            Deal, or no deal? (my financial backers are waiting)

          • Obviously there’s no deal here, because I can pay the 1800 myself, which works out to a hell of a lot less in the long run than doubling my fuel costs — and then I don’t have to be as careful how I drive.

            However, I’m afraid I don’t see what you’re getting at. If you’re trying to compare this to a carbon tax, it fails because people don’t get the choice whether to pay the tax or not.

          • If you’re trying to compare this to a carbon tax, it fails because people don’t get the choice whether to pay the tax or not.

            CAFE standards (mandated efficiency that have an economic payback) are not a “tax”. At least in my dictionary. If you don’t want the same vehicle with improved efficiency, buy some other model.

            A carbon tax is a tax. You pay it to the gov’t everytime you fill up.

          • What model do you propose to buy that doesn’t have the mandated efficiency? You may want to consider the word “mandated”.

          • Your argument is that government regulation is unnecessary, because the required changes are already economic.

          • I am saying that Canadian drivers are either not price sensitive to gasoline during the period under study, at the current pump price, in this economy and/or this means manufacturers do not invest to develop such vehicles to the extent required to reduce overall gasoline consumption.

            Why I believe automobile companies support mandated CAFE standards – critical mass etc.

      • Good points. Anecdotally i can back some of that up.[ i discussed this with Dot earlier]

        I drive around 10,000 kms a year at least between the north and the BC coast. My family has gradually gone from occasional use of two vehicles to make the trip, to one van and now one reasonably fuel efficient campervan[ 10-12 /100kms] Obviously we have attemped to save on accomodation and food costs, since it wasn’t possible to lower our fuel consumption much more than we already have[ partly due to inability to find affordable import campers that run on diesel - but that's another story]

        Mostly though, i’d say we drive as much as we did when we owned less fuel efficient vehicles, but we do consume less gas. I don’t feel an incentive to drive more. Just find ways to stretch the dollar more.

        Of course i may not be typical. My brother in law makes good coin in the oil patch, owns the requisite monster 5th wheeler, but even so they seem pretty careful of the distance and frequency of their trips.

    • What about the impact of kms travelled? Canadians may (likely did) use the same amount of fuel to travel farther. You don’t know the counterfactual, so it is not correct to say that gasoline demand is perfectly inelastic.

      Private cars are not the only source of emissions. Car fuel economy may not be the most efficient way of reducing emissions, either. A carbon price is necessary to provide a holistic emissions reduction policy. Implementing CAFE asserts that consumers are wrong and cannot be trusted to choose how they would like to allocate carbon emission scarcity.

      Of course, if you’re right, you could implement something like CAFE in addition to a carbon tax. But CAFE does not obviate the need for measures beyond car fuel consumption.

      • It has also to do with supply/demand of fuel efficient vehicles. And what models car companies market.

        I agree with your last paragraph, tho.

    • Also, your argument that the price elasticity of gasoline is zero has as a consequence the implication that is fuel prices were halved, consumption would not change. Do you stand by that assertion?

      • Andrew, I was waiting for you to show up.

        So, essentially going back to early 90′s prices or late 80′s. The evidence suggests limited impact. Here’s why I think it’s different:

        Say you commute to work each day and it costs you $20/day in fuel. So, about 16 litres/day @$1.25/l. Say your car uses on average 8 litres/100 km combined city and highway. So, you are driving the equivalent of 100 km. each way (more likely 60 km hwy and 10 km city). Say 90 minutes commute each way.

        I now give you $20/d raise. Are you going to spend it all on additional driving? Very doubtful, if any (sure some). That’s because time is money or time is more valuable doing other things.

        An occasional excursion to visit the folks in Ottawa from Toronto? This is essentially different, economically, than saying you half the price for a consumer good, will you consume more, because it requires you to spend your time to consume it. The example I am providing @$20 gift for two 90 minute drives, works out to less than $7/hr. About min. wage. Your private time not worth more than min. wage?

        • Consumers will make different choices about what kind of car they drive, and where they choose to live in relation to where they work in an environment where fuel costs $0.6 vs $1.20/L.

          Your example is at the extreme margin. If every person responds to lower fuel prices by driving a few extra KMs per day, taking that job that is just a bit further from home, etc. then the increase in consumption can be significant. It is remarkable to say that a good is perfectly price inelastic. Not even heroin, water, etc. have this property. The burden of proof is pretty high, and I don’t think your analysis is quite robust enough to support that claim.

          • I have StatsCan data. Same type of source of much argument on WCI blogs and now EconoWatch. Only good when it supports the theory?

          • They generally are not making claims as strong as demand for a good being completely immune to changes in price. That is a very strong claim.

            You did not control for many other variables, such as VMTs, GDP growth, etc. Your result is interesting, but I think it requires more substantial analysis to support the claim that demand for gasoline is perfectly inelastic. Ie, we could quintuple fuel prices again without seeing any reduction in fuel consumption per capita.

            You could look at evidence from other jurisdictions, other time frames, etc. Maybe examine the impact of the removal of fuel subsidies in countries like Iran and Venezuela.

            The fact of the matter is that internal combustion engines have become significantly more efficient. It’s just that consumers have opted to use that improvement in inefficiency to power cars that are larger or more powerful. Draconian CAFE regulations will take away consumer choice, even if they are willing to pay for the privilege.

            It seems to me your other argument is better: consumers are irrational and won’t make investments in fuel economy (higher sticker price) that have high return on investment. There are behavioural economics reasons why this might be the case (hyperbolic discounting). The way around that is maybe with nudges (requiring the life-cycle cost of ownership to be advertised along with the MSRP) that don’t come down to command and control approaches (which should be a last resort). I’m not opposed to such regulations when there is a very good argument in favour of them. I don’t think you’ve made that argument. You’re saying we should skip all the less draconian approaches and go straight for telling people that they can’t drive cars that use more fuel than you like.

          • I have qualified my observation of inelasticity by limiting it to Canada, during the period from 1994-2011, in this strong economy.

            Extrapolating beyond 2011, to include a significant rise in gasoline prices (either through market or carbon tax) or in a dissimilar economic environment is debatable and more risky. As is all forecasting.

          • If that is the extent of your claim, then it is not relevant for policy going forward. It doesn’t have much predictive power, given other counterexamples of falling fuel consumption in response to price rises (same ‘naive’ analysis not controlling for business cycle, etc.).

            Perfect inelasticity is ceteris paribus, and we did not hold everything else constant over the time frame you examine. You have to consider that the late 1990s also were marked by some regulatory arbitrage, where consumer demand shifted from vehicles governed under CAFE to vehicles outside of it (ie, large SUVs). Regulations are a lot easier to game and are subject to lobbyist influence than simple, broadly applied taxes.

          • I have not stated it has no predictive power. I am acknowledging that there may be other factors. However, to blindly assert that CAFE standards are ineffective, and a carbon tax in the neighbourhood of $0.10 /l or thereabouts is more cost effective without looking at actual Canadian data, frankly, is bordering on negligence. It would be in my profession.

            Want me to dig up old studies, in Canada, that suggested such a carbon tax would significantly reduce gasoline consumption? They exist not so many years ago. Well, history on this topic suggests otherwise.

            You and other economists should acknowledge as much. We do not live in an ideal world.

          • Check out this:

            “This contrasts with Statistics Canada’s more dour observations: we drove 5% more in 2006 than in 2002. Stats Can reported that higher incomes and lower prices for other goods have partially offset the cost of higher consumption rates and gasoline prices between Census years (2001, 2006). As this article was released in August of 2008 before the current economic crisis had taken hold in Canada, things may have started to shift. StatsCan noted that in two earlier recessionary periods, Canadians did in fact consume less gasoline:

            - The volume of gasoline purchased by consumers fell 12.1 per cent between 1980 and 1984, when prices rose 65 per cent
            - Consumption fell 5.1 per cent from 1989 to 1991 when prices increased 12 per cent.

            The effects in Canadian cities, then, are still to be seen. In the US, with many cities cutting transit routes, laying off transit operators, and raising fares due to the recession, ridership may not remain at the historic 2008 levels in the coming year.”

            Andrew Fransen

          • Two periods, 1980-84 and 1989-91 were in whopper recessions. I am old enough to remember. Why I don’t also trust BC data for their carbon tax results over a similar period.

    • Stop making sense, it disagrees with the “evidence-based” trope from the left.

  4. And meanwhile, what do average Canadians think about climate change and carbon pricing? This anonymous 2 minute survey seeks to find out:

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