NCPA - National Center for Policy Analysis


May 12, 2009

Some policymakers and economists have proposed a carbon tax for the United States.  In practice, such a tax must take the form of a tax on the consumption of energy products, such as gasoline.  How effective would this be in controlling harmful emissions ask researchers Lucas Davis and Lutz Kilian?

For example, if the federal gasoline tax were increased by 10 cents per gallon:

  • The tax would reduce U.S. gasoline consumption by 4 percent and reduce total U.S. carbon emissions by about 1.3 percent; this is roughly equal to the typical annual increase in U.S. carbon emissions.
  • Assuming that, in the absence of a carbon tax, U.S. carbon emissions would continue to increase at historical rates, then over the next ten years they would rise by 12 percent.
  • The results imply that this cumulative rate of increase would drop to 10.7 percent if a ten-cent increase on gasoline taxes were adopted today.

The impact on global carbon emissions would be even smaller.  Davis and Kilian conclude that there is no statistical evidence that a gasoline tax increase of the magnitude recently contemplated by policymakers would reduce carbon emissions enough to reach the targets described by the United Nation's Intergovernmental Panel on Climate Change in 2007:

  • Because nearly 40 percent of carbon dioxide emissions in the United States are derived from the transportation sector, the responsiveness of gasoline consumption to tax changes may determine how overall carbon dioxide emissions will respond to policy interventions.
  • A tax of $10 per ton of carbon dioxide, which some economists have suggested, would increase gasoline taxes by approximately 27 cents per gallon.
  • Based on their estimates, Davis and Kilian find it unlikely that a gasoline tax of this magnitude would materially affect U.S. carbon emissions.
  • The 1.3 percent reduction cited above falls far short of the emissions reductions targets discussed by the United Nation's Intergovernmental Panel on Climate Change in 2007.

Although it is not clear how well the predictions of econometric models hold up in the presence of historically unprecedented tax changes, Davis and Kilian's estimates suggest that even a U.S. tax of $1 per gallon would reduce world carbon emissions by only 2.8 percent.

Source: Lester Picker, "The Effect of a Gasoline Tax on Carbon Emissions," NBER Digest, May 2009; based upon: Lucas W. Davis and Lutz Kilian, "Estimating the Effect of a Gasoline Tax on Carbon Emissions," National Bureau of Economic Research, Working Paper No. 14685, January 2009.

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