Salience of Carbon Taxes in the Gasoline Market

Abstract

We demonstrate that the carbon tax imposed by the Canadian province of British Columbia caused a decline in short-run gasoline demand that is significantly greater than would be expected from an equivalent increase in the market price of gasoline. That the carbon tax is more salient, or yields a larger change in demand than equivalent market price movements, is robust to a range of specifications. Along with calculating the reduction in carbon dioxide emissions attributable to the tax, we discuss potential explanations for the differential consumer responses to the carbon tax relative to the market-determined price.

Keywords: Carbon tax, tax salience, instrumental variables, environmental pricing, gasoline demand

JEL Classification: C26, H23, H29, Q41, Q58