Thursday, March 04, 2004

Fuel costs and Kyoto

Leafing through a few things at work, I came across a copy of the Sustainable Transportation Monitor, a small periodical published by the Centre for Sustainable Transportation. (The issue in question, No. 1, March 1998, is available here as a PDF.)

In a section on how Canada can reach its Kyoto targets, the Centre suggests that vehicle usage reduction can be stimulated by increasing fuel taxes (page 12):


"How much would fuel taxes have to be raised to secure the required 15-percent reduction in automobile use? Deciding this depends on knowing the price elasticity of travel demand, i.e., the percentage reduction in vehicle-kilometres that results from a given increase in price. The best estimates of elasticity with respect to motor vehicle fuel are that the short-term elasticity (i.e., within five years) is in the order of 0.3 and the medium-term elasticity (5-15 years) is about 0.7. Thus the average elasticity for the Kyoto commitment period may be about 0.5. This means that a fuel price increase of 30 per cent would be required to achieve a travel reduction of 15 per cent. The Canadian average 1997 gasoline price of close to 60¢/litre (before GST) would have to be increased to about 78¢ (in 1997 dollars). This increase could be achieved by raising the current federal gasoline tax of 10¢/litre to 28¢, or by raising the federal and provincial taxes, now totalling an average of about 27¢/litre, to 45¢." [emphasis in original]

An average gas price of 78 cents per litre? Well, we're not too far off that. Here in the GTA I'd estimate average gas prices in the area of 70 cents, after taking fluctuations into account (even in the past couple of days it's gone from around 63 cents to around 78). That would be a price increase of about 15%, which, according to the elasticity estimates above, would result in a vehicle travel reduction of 7.5%. I'd be surprised if that effect actually has taken place, though; evidence on the roads, in the news, and in my work all indicate otherwise. Arguably that has just as much to do with out-of-control urban expansion, at least in the GTA, but I still think it would be interesting to update the elasticity estimates, since gas prices don't generally seem to be having as much affect on people's travel patterns as previously expected.

The advocacy for raising gas taxes by as much as 18 cents per litre (as a deterrent, rather than as a revenue generator) is also interesting in light of recent discussions on usage of the gas tax. Transit agencies and the Canadian Urban Transit Association, for example, are requesting a portion of the gas tax to be devoted to helping local transit (generally the figure is 2 cents per litre from both the federal and provincial gas taxes), yet progress is slow as governments deal with how they can afford to divert existing tax revenues. I don't think I've heard any politicians discuss raising the combined 4 cents per litre by actually increasing gas taxes by that much, rather than diverting existing tax revenues — I suspect it would probably be political suicide — and so it was a shock to see advocacy for an increase as high as 18 cents. If 4 cents is a problem, how much more so would 18?

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