Understanding the sensitivity of gasoline demand to changes in prices and income has important implications for policies related to climate change, optimal taxation and national security, to name only a few. While the short-run price and income elasticities of gasoline demand in the United States have been studied extensively, the vast majority of these studies focus on consumer behavior in the 1970s and 1980s. There are a number of reasons to believe that current demand elasticities differ from these previous periods, as transportation analysts have hypothesized that behavioral and structural factors over the past several decades have changed the responsiveness of U.S. consumers to changes in gasoline prices. In this paper, we compare the price and income elasticities of gasoline demand in two periods of similarly high prices from 1975 to 1980 and 2001 to 2006. The short-run price elasticities differ considerably and range from -0.034 to -0.077 during 2001 to 2006, versus -0.21 to -0.34 for 1975 to 1980. The estimated short-run income elasticities range from 0.21 to 0.75 and when estimated with the same models are not significantly different between the two periods. One implication of these findings is that gasoline taxes would need to be significantly larger today in order to achieve an equivalent reduction in gasoline consumption. This, coupled with the political difficulties in adopting gasoline taxes, suggests that policies and technologies designed to improve fuel economy are likely becoming relatively more attractive as a means to reduce fuel consumption.

A low carbon fuel standard (LCFS) seeks to reduce greenhouse gas emissions by capping an industry’s carbon emissions per unit of output. California has launched an LCFS for automotive fuels; others have called for a national LCFS. We show that this policy causes production of high-carbon fuels to decrease but production of low-carbon fuels to increase. The net effect of this may be an increase in carbon emissions. The LCFS may also reduce welfare, and the best LCFS may be no LCFS. We simulate the outcomes of a national LCFS, focusing on gasoline and ethanol as the high- and low-carbon fuels. For a broad range of parameters, we find that the LCFS is unlikely to increase CO2 emissions. However, the surplus losses from the LCFS are quite large ($80 to $760 billion annually for a national LCFS reducing carbon intensities by 10 percent), and the average carbon cost ($307 to $2,272 per ton of CO2 for the same LCFS) can be much larger than damage estimates. We propose an efficient policy that achieves the same emissions reduction at a much lower surplus cost ($16 to $290 billion) and much lower average carbon cost ($60 to $868 per ton of CO2).

A low carbon fuel standard (LCFS) seeks to reduce greenhouse gas emissions by capping an industry’s carbon emissions per unit of output. California has launched an LCFS for automotive fuels; others have called for a national LCFS. We show that this policy causes production of high-carbon fuels to decrease but production of low-carbon fuels to increase. The net effect of this may be an increase in carbon emissions. The LCFS may also reduce welfare, and the best LCFS may be no LCFS. We simulate the outcomes of a national LCFS, focusing on gasoline and ethanol as the high- and low-carbon fuels. For a broad range of parameters, we find that the LCFS is unlikely to increase CO2 emissions. However, the surplus losses from the LCFS are quite large ($80 to $760 billion annually for a national LCFS reducing carbon intensities by 10 percent), and the average carbon cost ($307 to $2,272 per ton of CO2 for the same LCFS) can be much larger than damage estimates. We propose an efficient policy that achieves the same emissions reduction at a much lower surplus cost ($16 to $290 billion) and much lower average carbon cost ($60 to $868 per ton of CO2).

A low carbon fuel standard (LCFS) seeks to reduce greenhouse gas emissions by capping an industry’s carbon emissions per unit of output. California has launched an LCFS for automotive fuels; others have called for a national LCFS. We show that this policy causes production of high-carbon fuels to decrease but production of low-carbon fuels to increase. The net effect of this may be an increase in carbon emissions. The LCFS may also reduce welfare, and the best LCFS may be no LCFS. We simulate the outcomes of a national LCFS, focusing on gasoline and ethanol as the high- and low-carbon fuels. For a broad range of parameters, we find that the LCFS is unlikely to increase CO2 emissions. However, the surplus losses from the LCFS are quite large ($80 to $760 billion annually for a national LCFS reducing carbon intensities by 10 percent), and the average carbon cost ($307 to $2,272 per ton of CO2 for the same LCFS) can be much larger than damage estimates. We propose an efficient policy that achieves the same emissions reduction at a much lower surplus cost ($16 to $290 billion) and much lower average carbon cost ($60 to $868 per ton of CO2).