PRICE AND CARBON TAX EFFECTS ON GASOLINE AND DIESEL DEMAND

By

Jean-Thomas Bernard1

Grant Guenther2

andMaral Kichian3

October 23, 2015

1. Economics Department, University of Ottawa, jbernar3@uottawa.ca2. Transport Canada, grant.guenther@tc.gc.ca3. Economics Department and Graduate School of Public and

International Affairs, University of Ottawa, mkichian@uottawa.ca

ORDER OF THE PRESENTATION

o Introductiono The B.C. Carbon Taxo Literature Reviewo Datao Models and Estimation Resultso Conclusion

INTRODUCTIONResearch Objectives:

o Do consumers and firms respond in the same way to carbon taxes ?

o Are the effects of changes in the different components that make up total energy prices the same ? That is, do tax effects differ from pure price effects ?

o Also, do excise taxes have the same effects as carbon taxes ?

We use the data related to the introduction of the B.C. carbon tax in 2008 to test this hypothesis.

THE B.C. CARBON TAX

o Broad Baseo Phase in:

o $10/tonne of CO2 on July 1st, 2008. o $5 added on July 1st every year until 2012 to

reach $30. o This is equivalent to a tax of 6.67¢/litre of

gasoline and 7.68¢/ litre of diesel.o Revenue Neutral.

LITERATURE REVIEW

o Traditional Specification: no difference between oil price and tax effects.

Dahl (2012)Hughes, Knittel and Sperling (2008)

o Price and tax effects on gasoline demand.Davis and Kilian (2011)Li, Linn and Muehlegger (AEJ: EP, 2014)Rivers and Shaufele (JEEM, 2015)Coglianese, Davis, Kilian and Stock (NBER,

2015)

DATAMonthly domestic sales of gasoline in litre Statistics Canada, The Supply and

Disposition of Refined Petroleum Products in Canada, Catalogue no. 45-004-X.

Monthly domestic sales of diesel in litre ibid.

Monthly regular gasoline average final price and total taxes in Vancouver, (¢/litre)

Natural Resources Canada, http://www2.nrcan.gc.ca/eneene/

sources/pripri/prices_bycity_e.cfm

Monthly diesel average final price and total taxes in Vancouver, (¢/litre)

ibid.

C.P.I. index (2007=100.0) Statistics Canada. Table 326-0020 - Consumer Price Index (CPI), 2011 basket, monthly (2002=100).

Real Gross Domestic Product at base price in 2007 $ Quarterly data provided by Conference Board of Canada.

B.C. monthly population Statistics Canada. Table 051-0005 - Estimates of population, Canada, provinces and territories, quarterly (persons).

Monthly Rainfall at Vancouver International Airport in mm http://climate.weather.gc.ca

Real effective exchange rate monthly average, C.P.I. based (2010=100.0)

Bank of Industrial Settlement (BIS).

Jan-97Jul-

97Jan

-98Jul-98Jan

-99Jul-99Jan

-00Jul-00Jan

-01Jul-01Jan

-02Jul-02Jan

-03Jul-03Jan

-04Jul-04Jan

-05Jul-05Jan

-06Jul-06Jan

-07Jul-07Jan

-08Jul-08Jan

-09Jul-09Jan

-10Jul-10Jan

-11Jul-11Jan

-12Jul-12Jan

-1330.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

110.00

120.00

Monthly Gasoline and Diesel Sales (litres per capita )

Gasoline sales Diesel sales

Jan-97Jul-

97Jan

-98Jul-98Jan

-99Jul-99Jan

-00Jul-00Jan

-01Jul-01Jan

-02Jul-02Jan

-03Jul-03Jan

-04Jul-04Jan

-05Jul-05Jan

-06Jul-06Jan

-07Jul-07Jan

-08Jul-08Jan

-09Jul-09Jan

-10Jul-10Jan

-11Jul-11Jan

-12Jul-12Jan

-130.00

20.00

40.00

60.00

80.00

100.00

120.00

Real Price of Regular Gasoline (2007 cents/litre)

Real Price net of carbon & excise tax Real excise tax Real carbon tax

Jan-97Jul-

97Jan

-98Jul-98Jan

-99Jul-99Jan

-00Jul-00Jan

-01Jul-01Jan

-02Jul-02Jan

-03Jul-03Jan

-04Jul-04Jan

-05Jul-05Jan

-06Jul-06Jan

-07Jul-07Jan

-08Jul-08Jan

-09Jul-09Jan

-10Jul-10Jan

-11Jul-11Jan

-12Jul-12Jan

-1325.00

30.00

35.00

40.00

45.00

Real GDP per capita (2007$ in thousand)

MODELS AND ESTIMATION RESULTS

Modelling Concerns (1):

July 2008: Three effects coincide (US recession, seasonality, carbon

tax)July 2009, 2010, 2011, 2012:

Two effects coincide (seasonality, carbon tax)

• In particular, the seasonal effect is very important• Need to make sure it does not mask the carbon tax effect in the

model - We assume the July seasonal effect is the same over the whole

sample

- We regress sales series on monthly dummies over 1997:1-2007:12

- We generate a new series (sales_xjuly) by subtracting the July coefficient from the sales series over 2008:1-2014:12

- Sales_xjuly already incorporates the July effect, over 2nd

subsample

- We use this series as the dependent variable in our models

MODELS AND ESTIMATION RESULTSModelling Concerns (2):

Final Energy Prices include up to four components:

- pure price effects- excise tax effects- carbon tax effects (whenever applicable)- other tax effects (e.g., GST)

• Evidence suggests that price effects (inclusive of excise taxes) are different than carbon tax effects; see Rivers and Schaufele (2015)

• But price effects in these studies include excise taxes !

• Therefore, we separate total energy prices into net prices, excise taxes, carbon taxes

• We allow these three components to have possibly different impacts

MODEL: GASOLINE

+ + +

+ +

- is log of real per capita gasoline sales - is log of real net prices (net of excise and carbon taxes)- is log of real excise taxes- is log of real carbon taxes- is log of real per capita Canadian GDP- are monthly dummies- is the log of rainfall

ESTIMATION RESULTS: GASOLINEVariable Coefficient Std. dev. P-valueNet price -0.057 0.025 0.0231Excise tax -0.614 0.177 0.0006Carbon tax -0.176 0.035 0.0000Canadian GDP 1.266 0.595 0.0347Rainfall -0.003 0.002 0.1906Sales Lag 1 -0.598 0.061 0.0000Sales Lag 2 -0.347 0.060 0.0347

Adjusted 0.80Durbin-Watson 2.12LM serial correlation test (4 lags) P-value 0.1404ARCH(1) test test P-value 0.1191ARCH(4) test test P-value 0.6238

WALD TEST RESULTS: GASOLINENull Hypothesis test P-value

Net Price = Excise Tax 0.0015Net Price = Carbon Tax 0.0056Excise Tax = Carbon Tax 0.0148

For Gasoline:

- Net price effects are significantly different than tax effects

- Excise tax effects are significantly different than carbon tax effects

- All three effects influence gasoline sales

- Excise taxes have the biggest effect, followed by carbon taxes, then by net price changes

MODEL: DIESEL

+ + +

+ + + + +

- is log of real per capita diesel sales - is log of real net prices (net of excise and carbon taxes)- is log of real excise taxes- is log of real carbon taxes- is log of real per capita Canadian GDP- is log of real per capita US industrial production (manufacturing)- are monthly dummies- is a dummy for the recession period (2008Q3; 2009Q1)

ESTIMATION RESULTS: DIESELVariable Coefficient Std. dev. P-valueNet price -0.011 0.055 0.8419Excise tax 0.0354 0.080 0.6567Carbon tax -0.125 0.060 0.0396Carbon tax lead 1

0.125 0.058 0.0322

Canadian GDP 2.282 0.917 0.0138US GDP -2.572 0.643 0.0001US GDP Lag 1 1.434 0.626 0.0227Dummy 1 -0.380 0.058 0.0000Dummy 2 0.354 0.075 0.0000

Adjusted 0.74Durbin-Watson 2.03LM serial correlation test (4 lags) P-value 0.6238ARCH(1) test test P-value 0.6026ARCH(4) test test P-value 0.0916

WALD TEST RESULTS: DIESELNull Hypothesis test P-value

Net Price = Excise Tax N.A.Net Price = Carbon Tax N.A.Excise Tax = Carbon Tax N.A.

For Diesel:

- Net price effects are not significant for diesel sales

- Excise tax effects are not significant for diesel sales

- Only carbon taxes significantly affect diesel sales (at t and t+1)

- However, cumulative effects over the two periods are nil.

CONCLUSION

• Carbon taxes influence consumers (gasoline market) differently than firms (diesel market)

• Within each market, the different components making up the total price have different effects on sales in that market

• Therefore, it is important to calculate emission reductions on the basis of the correct elasticities; i.e. we must account for different price and tax effects.

• B.C. neutrality calculations were done on the basis of total price elasticities ! The observed deficit is likely due to the underestimation of the consumer response to the carbon tax.