Frugal Cars or Frugal Drivers? How Carbon and Fuel Taxes Influence the Choice and Use of Cars

Abstract

British Columbia’s carbon tax was introduced in 2008 and reached its current level of $30 per tonne of carbon dioxide in 2012. Per-capita gasoline demand in B.C. Has decreased by about 15% between 2007 and 2014. Is this decline attributable to BC’s carbon tax and other fuel taxes? This paper assesses the empirical evidence and finds that higher taxes reduce gasoline consumption over time. We also find evidence of carbon leakage, particularly during the 2010-14 period of high cross-border travel due to the strong Canadian Dollar. While the intensive margin of adjustment (car use) may be subject to highly volatile gasoline prices and exchange rates, the extensive margin of adjustment (car purchases) is also influenced by increasing taxes. We find conclusive evidence that higher fuel taxes and BC’s carbon tax are shifting car purchases towards higher fuel efficiency. A counterfactual simulation suggests that without BC’s carbon tax fuel demand per capita would be 7% higher, and the average vehicle’s fuel efficiency would be 4% lower.

Keywords: Carbon Tax; Fuel Tax; Carbon Leakage; Automobiles

JEL Classification: Q53