The Consumer Burden of a Carbon Tax on Gasoline

Gasoline is one of the major fuels consumed in the United States and the main product refined from crude oil. Consumption in 2007 was about 142 billion gallons, an average of about 390 million gallons per day and the equivalent of about 61% of all the energy used for transportation, 44% of all petroleum consumption, and 17% of total U.S. energy consumption.[1] About 47 barrels of gasoline are produced in U.S. refineries from every 100 barrels of oil refined to make numerous petroleum products. While gasoline is produced year-round, extra volumes are made and imported to meet higher demand in the summer. Gasoline is delivered from oil refineries mainly through pipelines to an extensive distribution chain serving about 167,500 retail gasoline stations in the United States.

Most gasoline is used in cars and light trucks. It also fuels boats, recreational vehicles, and farm, construction, and landscaping equipment. A major concern with the use of gasoline today is in the context of climate change. The use of gasoline in transportation results in carbon-dioxide (CO2) emissions which have been increasing at a rapid pace since the 1990s. In 2007, total carbon dioxide emissions stood at 6,022 MMT, an increase of more than 17 percent since 1990. The vast majority of carbon dioxide emissions come from the combustion of fossil fuels such as petroleum, coal and natural gas, with petroleum accounting for nearly 43 percent of all emissions from these energy sources.[2]

The Energy Information Administration further provides a breakdown of energy use by end-use sectors. In 2007, the transportation sector was the largest source of emissions relative to the residential, commercial and industrial sectors, accounting for about 34 percent of all CO2 emissions.[3]

In discussions over how best to address climate change issues, there are essentially two market-based approaches that are being considered, a carbon tax and a cap and trade system. In this paper, we focus on the effect of a carbon tax on gasoline to reduce carbon dioxide emissions, though our results essentially carry through for a cap and trade program as well.[4] A carbon tax is essentially a market-based instrument that creates a cost to emissions by directly taxing the carbon content of fuels. In the case of gasoline, this is essentially a tax on petroleum. . . .

Click here to view the full text of this working paper as an Adobe Acrobat PDF.

Kevin A. Hassett is a senior fellow and the director of economic policy studies at AEI. Aparna Mathur is a research fellow at AEI. Gilbert E. Metcalf is a professor of economics at Tufts University and a research associate at the National Bureau of Economic Research.

Notes

1. The rest is about 24 percent diesel, 8% jet fuel and 2% natural gas.
2. "Emissions of Greenhouse Gases in the United States 2007" (EIA, 2008)
3. "Emissions of Greenhouse Gases in the United States 2007" (EIA, 2008)
4. For our paper on the distributional consequences of cap-and-trade, see Hassett, Mathur and Metcalf (2009), "The Consumer Burden of a Cap-and-Trade Program," AEI Working Paper#144

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