Study: Gas taxes are six times as effective as stricter fuel-economy standards

What's the best way to curtail gasoline consumption? Economists tend to agree on the answer here: Higher gas taxes at the pump are more effective than stricter fuel-economy standards for cars and trucks.

The ol' tax versus standards debate.

Much more effective, in fact. A new paper from researchers at MIT's Global Change program finds that higher gas taxes are "at least six to fourteen times" more cost-effective than stricter fuel-economy standards at reducing gasoline consumption.

Why is that? One of the study's co-authors, Valerie Karplus, offers a basic breakdown here: Fuel-economy standards work slowly, as manufacturers start selling more efficient vehicles, and people retire their older cars and trucks. That turnover takes time. By contrast, a higher gas tax kicks in immediately, giving people incentives to drive less, carpool more, and buy more fuel-efficient vehicles as soon as possible.

A great deal also depends on whether biofuels and other alternative fuels are available. A tax on gasoline makes these alternative fuels more competitive, whereas fuel-economy standards don't. “We see the steepest jump in economic cost between efficiency standards and the gasoline tax if we assume low-cost biofuels are available,” Karplus said in an MIT press release.

And yet... all this economic research never seems to have any effect on lawmakers. Since 2007, Congress and the Obama administration have moved to increase federal fuel economy standards, now scheduled to rise to 54.5 miles per gallon by 2025. According to the MIT estimates, this will cost the economy six times as much as simply raising the federal gas tax from its current level of 18.4 cents per gallon to 45 cents per gallon. Yet no one in Congress has even proposed the latter option.

One explanation is that the public just prefers things this way. Higher fuel-economy standards do impose costs, but they're largely "hidden" costs — in the form of pricier vehicles in the showroom. A higher gas tax, by contrast, is visible every time people fill up at the pump.

In fact, a recent NBER paper by MIT's Christopher Knittel found that this has been the case for decades. Between 1972 and 1980 the price of oil soared 650 percent. There was endless public debate during this period about how best to reduce reliance on fossil fuels. And, as Knittel discovered, the public consistently preferred price controls and fuel-economy standards over higher gas taxes. That was true no matter how often people were informed that gas taxes were the superior option.

"Given the saliency of rationing and vehicle taxes," Knittel concluded, "it seems difficult to argue that these alternative polices were adopted because they hide their true costs." In other words, the public seems to have an (expensive) preference for inefficient regulations over higher taxes to curb gasoline. Economists find it maddening, but it's hard to change.

Further reading:

--On the other hand, if you want to see a rare economic argument for fuel-economy standards, check out this 2006 paper (pdf) by Christopher Knittel. He found that Americans were becoming less sensitive to fuel prices over time — which strengthened the case for policies like CAFE standards.

--A short history of America's gas tax woes. Note that we've now reached the point where gas tax revenue is no longer enough to cover highway spending.

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Neil Irwin · February 22, 2013

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