Gasoline Price and New Vehicle Fuel Efficiency: Evidence from Canada

Abstract

Using data on all vehicles registered in Canadian provinces from 2000-2010, we estimate the elasticity of the fuel economy of the new vehicle stock with respect to gasoline price. We demonstrate that a 10% increase in gasoline price causes a 0.8% improvement in the fuel economy of new vehicles. We show that consumers in dense urban areas respond more to changes in fuel price than other consumers and that fuel taxes cause a much larger response in vehicle fuel economy than other components of the gasoline price. This finding has important implications for the assessment of market-based policies for reducing greenhouse gas emissions.

Keywords: gasoline demand, vehicle choice, elasticity

JEL Classification: c23, r48