One of the themes I’ve consistently emphasised when discussing looming threats like peak oil is that policy responses must take account of the adaptability of markets and consumers. Drivers will respond to higher petrol prices by, for example, travelling less, changing to smaller fuel-efficient cars and moving to more accessible locations. Manufacturers will respond by producing vehicles that use less fuel and/or alternative fuels.
One of Australia’s leading public intellectuals, left-leaning economist Professor John Quiggin, reckons that “peak gasoline” has in fact already happened. He points to the 8% decline in petrol consumption in the US since 2006 (per capita consumption declined by more than 10%) and, prospectively, to even tighter standards requiring a 40 per cent improvement in the average efficiency of new cars, relative to the existing fleet, by 2016. I’ve previously discussed how the rate of growth in per capita car travel has been slowing for some time in Australia (and other western countries) and has actually declined in recent years.
We know that motorists respond to price increases by reducing petrol consumption. One estimate of the elasticity of demand for petrol in Australia with respect to price is around -0.1 in the short term and -0.3 in the longer term i.e. a 10% increase in the pump price of petrol would initially reduce demand for petrol by
10% 1% and, in the longer run, by 30% 3%. Some of this reduction comes via higher public transport patronage but the vast bulk comes from car-related adaptations like more efficient trip-making and smaller, lighter and more fuel-efficient vehicle.
In the US, this review of hundreds of elasticity coefficients found that the in the short-run, “estimates for the demand for gasoline range from 0 to -1.36, averaging -0.26 with a median of -0.23 for the studies included here. Long-run price elasticity estimates range from 0 to -2.72, averaging -0.58 with a median of -0.43”. So in the longer term (more than a year), US drivers respond to a 10% increase in price by reducing their consumption of petrol, on average, by
Professor Quiggin allows that the GFC has had an effect on travel behaviour in recent years (petrol consumption tends to rise and fall with income) but still thinks that estimates of elasticities for the US are conservative:
I suspect that the full long-run elasticity, including induced innovation, is near 1, meaning that if current real prices are sustained, consumption could fall as much as 70 per cent below the level that would be expected if prices had remained at the 2000 level.
For my money, where the “peak gasoline” hypothesis gets really interesting is his argument that per capita global oil production peaked in 1979, but per capita output of goods and services nevertheless increased substantially over the subsequent 30 years, with the fastest increases in the developed world. In other words, personal living standards increased while personal oil consumption declined. “That seems pretty conclusive as far as apocalyptic versions of the Peak Oil hypothesis are concerned”, he says. Read the rest of this entry »
Tony Abbott made a surprising claim on Sunday that a $40/tonne carbon tax would increase the retail price of electricity by 100%. Fortunately, John Quiggin has ‘done the maths’ on Abbott’s assertion and points out that it would result in a much lower increase in the retail price to households – around 20%.
So let’s look at the likely effect of a carbon tax on the price of petrol. This CSIRO report, Fuel for Thought, estimates that a $40/tonne emissions permit would only increase the retail price of petrol by 10 cents per litre. So the additional cost of the $23/tonne carbon price touted by the Greens would seem to be no more than the weekly fluctuations in price at my local servo!
That’s hardly a great big new tax. But what’s important from a policy perspective is that a price on carbon of this order isn’t really going to have a significant effect on what we drive and how we drive. Read the rest of this entry »