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Gas, Energy, etc

Gas, Energy, etc. Peter Berck 2003. Cost of Cars. Private cost is mostly capital cost Starts at 51c/mile for a recent Taurus Declines with age IRS estimate of 37c/mile (all ages) Marginal costs about 13c/mile. Taxes. External Costs. How to Regulate. Full marginal cost pricing

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Gas, Energy, etc

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  1. Gas, Energy, etc Peter Berck 2003

  2. Cost of Cars • Private cost is mostly capital cost • Starts at 51c/mile for a recent Taurus • Declines with age • IRS estimate of 37c/mile (all ages) • Marginal costs about 13c/mile

  3. Taxes

  4. External Costs

  5. How to Regulate • Full marginal cost pricing • Hard to do, since must measure • Emissions • Dangerous driving • Place of driving • Gas tax (possibly by vehicle type) • Reg. Fees • Tolls (including for use of inner city) • Emissions standards • Refund/disposal fee systems for toxics: oil, batteries, tires • Subsidize alternative means of transport

  6. Tolls • Proost and van Dender (1999) Brussels in the year 2005. • Cordon pricing results in about 50% of the welfare gain of full marginal cost pricing. • Geoghegan • Substantial gains from higher tolls on bay bridge, both congestion and pollution—pollution lowest at medium speeds.

  7. Less Cars or Miles • Increased costs result • Less miles per car • Less cars • How much less?

  8. Demand for Gas • Two Choice variables • Miles driven • Vacation choice (short run) • Bus/train v. car for commute (short run) • Location of job or house (long run) • Car fleet • About 10 years to adjust • Scrappage important • Many characteristics, including mpg, size, horsepower, safety, pollution

  9. Rebound Effect • Demand Elasticity: • gasoline use (G), • vehicle miles traveled (VMT) • miles per gallon (MPG). • G=VMT/MPG. • VMT is a function of c, the price per mile of travel, which in turn • depends on the price p of fuel and the fuel economy, that is, • c = p / MPG. • ln G = ln ( VMT( ln c ) ) - ln MPG ( p ), • Elasticity formula. • EG.p = EVMT.c ( 1 - EMPG.p ) - EMPG. • Note that increasing MPG has indirect effect of making driving cheaper.

  10. First Thoughts • Elasticity from derived demand • IRS estimate is about 37 cents per mile for full cost of driving • 1/25 gallon per mile at $2/gallon = 8 cents • A 1% increase in gasoline price is a • .08/37 = .0022= 0.2% increase in cost of driving • Worse if one puts in time cost • E.g. 25 miles/hr at $10 per hour; 40 cents per mile! • Will take massive increase in price of gas to discourage gas consumption.

  11. Another way • $cost of fuel price increase • 12,000 miles per year • 1/25 gallons / mile • 480 gallons of gas per year • 50 cent increase gallon (25%) • = $240 additional expense • Or lower gas mileage • 1/12.5 gallons per mile; 960 gallons; coincidentally $960 more • At 7% for 10 years: $7214 or about 1/7 the cost of a hummer.

  12. Espey Meta Study

  13. Short run elasticity • Short run keeps vehicle fleet constant • Regressions are quantity on current price, income, car fleet characteristics and size, etc. • Might include some lag structure

  14. Long Run Espey

  15. Long run • Long run allows car fleet to adjust • Appropriate price must be present value of expected gasoline prices. • Expected price changed much less than instantaneous price, so long run price elasticity would be woefully underestimated.

  16. Real Gasoline Prices

  17. Prices • $1,132.06 • $1,146.62 • $1,145.23 • $1,145.96 • $1,153.37 • $1,131.05 • 843 is 2002 value • Present value at 7% of previous 10 years of gas prices 1975-1984; 1976-1985; etc • Notice that pv price declines steeply post 80-89. also that pv price is at top is 1.36 times price at bottom—nothing like the 26c to 2.15c per gallon nominal that I remember.

  18. Espey meta results • Regresses (long run) elasticity on characteristics of study • Inclusion of mpg, car type, leads to less elastic estimate • Using only quarterly lags (1 qtr?) leads to less elastic • 70% of response occurs within time frame of static models (nonsense.) • Inclusion of countries other than US lead to greater elasticity (not surprising: $1 per gallon v. $4 gallon) • More long run elastic if estimated from more recent data.

  19. Wheaton • Estimate, for countries by year: • Mpg • Autos per cap • Miles/ auto • As a function of gas prices and income. • Use the three equations to get income and demand elasticity of gas.

  20. Wheaton

  21. More detail • Could track fleet: • New purchase decision • Exog: gas price, income distribution, topography, regulation, price of new auto(maybe) • Predetermined: existing auto • Endog: mpg, horsepower, longevity, number of autos, etc • Scrap decision • Same variables as above, but expect that income of lower quartile more important for scrapping • Also makes sense to track potential drivers.

  22. Stoker Schmalensee • Income elasticity of demand • Key to forecast demand growth • Done partially non-parametrically • Adding drivers to equation costs effect of income on total gallons in half. • Inc elast for inc over 12K is .2 • Driver elast is .6 • Implies that gallons will go up more slowly since number of drivers isn’t expanding quickly anymore. (not true for Calif or rest of world)

  23. Price elasticity • RTECS doesn’t really have prices, just an average cost of gasoline by region. Hence estimate of price elasticity are spurious

  24. Environment and Cars • Lit reviewed leads to strong link between gas price and mpg, however reducing fuel requires sustained high price. Doubling prices probably leads to 40% fuel savings. • Political suicide. • CAFÉ also saves fuel. No political will. • Tradeable mileage certificates would also do the job—need certifs to buy Hummer, get certifs if bought Prius. • Only way to get CO2 down is to get fuel down.

  25. Nox and Sox • Regulation directly makes cars cleaner (converters, in tune engines, etc.) • Regulation adds to cost of car and decelerates scrapping, hence makes fleet dirtier on average from older cars. • Effect depends on how long cars are held when new car price goes up • Effect depends on how well pollution control equipment stands up on older cars. • Again, suicide to ban older cars, but ok to buy them up and scrap them.

  26. Reality Check • Vehicle License Fee doomed Davis • VLF on a $10K car was approx $200/year or $2800 present value (forever at 7%)

  27. Welfare • IF V(gas price), welfare loss from taxing gas is standard. Makes no difference that response is to buy more efficient car. • If U(regulation) then welfare is much harder. Consumers don’t face a set of prices that would get them to elect the cars that regulators (and CAFÉ) chose for them.

  28. Kling • Emissions are effluent standards in gms/mile. No trade or averaging. • Some vehichles beat standard so on he whole emissions are better than standard • Can trading do better?

  29. Costs • To sell in CA, manufacturers must tell CARB what parts are used for pollution reduction. • Wang prices these parts to get cost of pollution reduction and that is the estimate of cost used by Kling • Could use ex ante engineering estimates, but these were too low. Or expert opinion. • Wang’s numbers are ex post

  30. Regression • Cost is regressed upon MPG and emissions profile.

  31. Least Cost • The cost functions are for each manufacturer and type of car (little, medium, big). Find min cost of current level of emissions • Minimize cost, holding types of car sold constant. • Allow car size to vary, hold consumer surplus constant. Greene has logit based measures of CS depending on car attributes.

  32. Savings • On order of 10% for full trading.

  33. Can One Emit Less? • Fullerton and West, 2002 • Tax cars for gas depending on type of car • Get very close to taxing NOx SOx etc. • Depends upon emission per mile being a function of car type and maybe age. • Amazing opportunity for fraud.

  34. Parry and Small (2001), welfare-maximizing gasoline taxes. • From a simple general-equilibrium model externalities also vary by mileage, whereas global warmingvaries by fuel use. • United States optimum is $1.01 per gallon, acutual is 37¢/gallon • United Kingdom is $1.34, less than half its current value. • optimum vehicle miles traveled (VMT) tax, 14¢/mile. • VMTs generate most of the external costs of driving, not fuel use.

  35. Scrappage programs • Such scrappage programs have been examined by • Alberini et al. (1995, 1996), who found that the vehicles scrapped tend to be older and in worse • condition than other vehicles in that same age class. Although emissions from these vehicles are • high, their remaining useful life on the road is low. The cost-effectiveness of such policies ranges • from $3,500 to $6,500 per ton of HC removed, which makes them attractive in some contexts • and not others. Dill (2001) provides a summary of the studies on old-car scrap programs.

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