A new paper shows that people drive less and slow down when gasoline prices rise.
I drive an electric vehicle. So I am, of course, better than you and now get to say all sorts of snarky things about you gas guzzling large vehicle enthusiasts. So here we go. We energy economists spend most of our time complaining about the absence of a carbon tax and the rest of our time quantifying aspects of human behavior. Some of the most interesting questions are in the transportation sector, which is the main source of greenhouse gas emissions in California. More driving plus heavier, less fuel efficient and more quickly driven cars lead to more gas consumption, local and global pollution. More driving and bigger cars also lead to more congestion.
In the US we have tried to put downward pressure on gasoline consumption by regulating the fuel economy of the fleet. More efficient vehicles are of course more efficient, but also decrease the cost per mile driven, which provides an incentive to drive more. This is called the rebound effect. If you face a lower price of gasoline (either implicitly through more fuel efficiency or explicitly through lower prices at the pump), how does your behavior change? Do you drive more? If so, how much? Do you drive faster, which burns more fuel per mile driven?
While most of us were passed out in a tryptophan or soy induced daze on our couch, Energy Institute alum (and now fancy MIT Sloan Professor) Chris Knittel and his coauthor Shinsuke Tanaka released a really interesting and pleasantly short new working paper providing some interesting new answers. They start with a jealousy-inducing new dataset from Japan, which via a mobile phone app collected detailed micro-level information on gasoline consumption, vehicle distance traveled, and gasoline prices paid for each fill up for over 90,000 drivers for 10 years!!!! This is next-level stuff. For comparison, most of the papers so far use monthly consumption data aggregated to the US state level, which does not allow you to study the finer aspects of consumer behavior. Specifically, they shine some light on three aspects of behavior.
- They can tell us how each driver’s gasoline consumption responds to changes in gas price at the vehicle level. They know how much each driver and vehicle buys at the pump, the odometer reading at each visit, and they know the price!
- They can decompose these changes in consumption into how many miles the car is driven versus changes in driving behavior. That is, do drivers turn on their inner Jeff Gordon or Danica Patrick when gas is cheap or ignore fuel saving maintenance actions since the actions now save less money?
- Finally, they can take a look at whether consumers “learn” from past price changes, which helps them form habits.
The results are the best kind: interesting and policy relevant. First off, they find that drivers are much more price responsive than the majority of the existing literature finds. This is relevant, as government agencies use these numbers to project energy consumption at the national level. Is the difference small? No! An order of magnitude (that is 10x for you non-nerds) smaller. They estimate that a 10% increase in gas prices leads to a 3.7% decrease in gas consumption, when most of the literature suggests a 0.3% decrease. Wow.
Second, they decompose this response and show a significantly larger response of Vehicle Miles Travelled (VMT) to changes in gas prices than the remainder of the literature. Of the 3.7% price response, 3% can be attributed to decreases in VMT. The remaining 0.7% are attributed to changes in “driving behavior”. This could either be driving your car more slowly and getting better fuel economy, or increasing fuel saving maintenance such as properly inflating your tires. Why is this so cool? Nobody has been able to estimate this parameter before. This is nerd speak for “we have actually measured a hypothesized type of behavioral response in the wild”! When astronomers discover a black hole, the world gets excited! This is our version of actually seeing a black hole. Bam.
Third, they examine whether changes in prices a long time ago versus more recently have differential behavioral effects. Do we learn over time and form habits as we drive through life? The answer is no. There is no evidence of this. Drivers seem to react to the most recent fluctuations in prices.
Finally, and this is really cool, they show that humans are strange creatures. When we teach intermediate economics, we generally argue that price responses are symmetric. This means if price goes up by one percent and you consume 3 fewer marshmallows, we would assume that if price dropped by one percent, you would eat 3 more marshmallows. This paper shows that the consumers in the sample do not exhibit this symmetry. The price response is twice as high when prices go up compared to when they go down. I guess we are a “tank is half empty” type of society.
There are a bunch of caveats. This paper deals with very short run fluctuations in gas prices and hence characterizes very short responses of drivers. Also, this is Japanese drivers over the past decade who self-selected into signing up for the app. The road network, public transportation infrastructure and vehicle and gas pricing are very different from what they are in the US. But beyond the caveats, what the authors suggest is that gas taxes alone may have a transitory effect on driving behavior and may need to be supplemented by fuel efficiency standards and other policies such as feebate policies (which I am a HUGE fan of). However, I am somewhat skeptical of that interpretation as gas taxes are permanent price changes, which consumers react to differently than to short run price fluctuations.
Overall, this is a major step forward in what we know about consumers’ response to short run gas price fluctuations – in Japan! I am hoping that someone will replicate this study in the US, Europe and possibly a lower income country to see whether these responses are similar.
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Suggested citation: Auffhammer, Maximilian. “Taking The Pedal Off The Metal” Energy Institute Blog, UC Berkeley, December 2, 2019, https://energyathaas.wordpress.com/2019/12/02/taking-the-pedal-off-the-metal/
Maximilian Auffhammer is the George Pardee Professor of International Sustainable Development at the University of California Berkeley. His fields of expertise are environmental and energy economics, with a specific focus on the impacts and regulation of climate change and air pollution.