MLI Paper: Gasoline tax would need to rise by $2.30 per litre to cut motor vehicle GHG emissions by 30 percent
MLI author says that the costs far outweigh the benefits when it comes to reducing transportation-related GHG emissions
February 22, 2012, Ottawa, ON – Canadians overwhelmingly depend on the convenience and savings of private automobiles. Despite this, policymakers are constantly solicited to use public policy to reduce private vehicle use and increase use of public transit as a means to reduce transportation-related greenhouse gas (GHG) emissions. Thus both the costs and benefits to Canadians of discouraging private vehicle use must be considered in arriving at sensible policy choices.
In a new study released today by the Macdonald-Laurier Institute, The High Price of Low Emissions: Benefits and Costs of GHG Abatement in the Transportation Sector, Professor Ross McKitrick examines how much transportation contributes to total GHG emissions in Canada, how costly it would be to shift motorists to mass transit, and how raising the cost of gasoline (through a carbon tax) would affect GHG emissions. The study points strongly to the conclusion that the potential social costs of trying to engineer a large change in Canadians’ transport choices likely outweigh any potential benefits.
One of McKitrick’s more telling analyses was calculating the price Canadians would need to be charged for gasoline in order to reduce GHG emissions from motor vehicles by 30 percent in the short term. McKitrick estimated that in the short-run it would require a gasoline tax of $2.30 per litre, which represents a carbon tax of $975 per tonne. This is totally disproportionate to the actual cost to Canadians of CO2: most research indicates that cost to be around $25 per tonne.
McKitrick extends this analysis to examine the total benefits from such a tax compared to the total costs. He concludes that Canadians would lose $9.6 billion, even after accounting for environmental benefits, if such a tax were put in place.
Higher gasoline taxes do not produce all their effects immediately. They affect, for example, the kind of vehicles people choose to buy, but they make such decisions relatively infrequently. McKitrick therefore also calculated the level at which the tax would have to be set to achieve the same reduction over a longer period of time. McKitrick estimates that in this case a 30 percent reduction in motor vehicle emissions would require a $195 per tonne carbon tax, representing about 46 cents per litre. The overall loss to Canadians from such a tax would be reduced, but still substantial at $2.9 billion annually.
Interestingly, McKitrick also examined alternative mechanisms to a carbon tax, such as cap-and-trade and other regulatory measures to achieve the same result. McKitrick concluded that these alternatives would cost each Canadian household roughly $1,600 per year after accounting for the environmental benefits.
Moreover, he adds that the cost of transit is not the main reason people prefer cars: convenience and time savings matter more. Improvements in transit service (such as introducing light rail within cities) might benefit existing transit users, but would be unlikely to generate large switches away from private vehicle use. Likewise, increasing the cost of parking and road usage might prompt greater interest in mass transit, but survey evidence indicates that such changes would still be relatively small.
McKitrick concludes, “Since the use of cars does not significantly change in response to making cars more expensive to drive or to improvements to transit, policymakers must therefore be careful not to assume GHG abatement provides a rationale for transportation policy decisions that would otherwise fail an ordinary cost-benefit test. In other words, bad policy ideas do not become good policy ideas just because they slightly reduce GHG emissions.”
Ross McKitrick is a Professor of Economics at the University of Guelph where he specializes in environmental economics. He is author of The High Price of Low Emissions: Benefits and Costs of GHG Abatement in the Transportation Sector released by the Macdonald-Laurier Institute.
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