The Consumer Burden of a Carbon Tax on Gasoline

Gasoline is one of the major fuels consumed in the United States and the main product refined from crude oil. Consumption in 2007 was about 142 billion gallons, an average of about 390 million gallons per day and the equivalent of about 61% of all the energy used for transportation, 44% of all petroleum consumption, and 17% of total U.S. energy consumption.[1] About 47 barrels of gasoline are produced in U.S. refineries from every 100 barrels of oil refined to make numerous petroleum products. While gasoline is produced year-round, extra volumes are made and imported to meet higher demand in the summer. Gasoline is delivered from oil refineries mainly through pipelines to an extensive distribution chain serving about 167,500 retail gasoline stations in the United States.

Most gasoline is used in cars and light trucks. It also fuels boats, recreational vehicles, and farm, construction, and landscaping equipment. A major concern with the use of gasoline today is in the context of climate change. The use of gasoline in transportation results in carbon-dioxide (CO2) emissions which have been increasing at a rapid pace since the 1990s. In 2007, total carbon dioxide emissions stood at 6,022 MMT, an increase of more than 17 percent since 1990. The vast majority of carbon dioxide emissions come from the combustion of fossil fuels such as petroleum, coal and natural gas, with petroleum accounting for nearly 43 percent of all emissions from these energy sources.[2]

The Energy Information Administration further provides a breakdown of energy use by end-use sectors. In 2007, the transportation sector was the largest source of emissions relative to the residential, commercial and industrial sectors, accounting for about 34 percent of all CO2 emissions.[3]

In discussions over how best to address climate change issues, there are essentially two market-based approaches that are being considered, a carbon tax and a cap and trade system. In this paper, we focus on the effect of a carbon tax on gasoline to reduce carbon dioxide emissions, though our results essentially carry through for a cap and trade program as well.[4] A carbon tax is essentially a market-based instrument that creates a cost to emissions by directly taxing the carbon content of fuels. In the case of gasoline, this is essentially a tax on petroleum. . . .

Click here to view the full text of this working paper as an Adobe Acrobat PDF.

Kevin A. Hassett is a senior fellow and the director of economic policy studies at AEI. Aparna Mathur is a research fellow at AEI. Gilbert E. Metcalf is a professor of economics at Tufts University and a research associate at the National Bureau of Economic Research.

Notes

1. The rest is about 24 percent diesel, 8% jet fuel and 2% natural gas.
2. "Emissions of Greenhouse Gases in the United States 2007" (EIA, 2008)
3. "Emissions of Greenhouse Gases in the United States 2007" (EIA, 2008)
4. For our paper on the distributional consequences of cap-and-trade, see Hassett, Mathur and Metcalf (2009), "The Consumer Burden of a Cap-and-Trade Program," AEI Working Paper#144

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About the Author

 

Kevin A.
Hassett
  • Kevin A. Hassett is the State Farm James Q. Wilson Chair in American Politics and Culture at the American Enterprise Institute (AEI). He is also a resident scholar and AEI's director of economic policy studies.



    Before joining AEI, Hassett was a senior economist at the Board of Governors of the Federal Reserve System and an associate professor of economics and finance at Columbia (University) Business School. He served as a policy consultant to the US Department of the Treasury during the George H. W. Bush and Bill Clinton administrations.

    Hassett has also been an economic adviser to presidential candidates since 2000, when he became the chief economic adviser to Senator John McCain during that year's presidential primaries. He served as an economic adviser to the George W. Bush 2004 presidential campaign, a senior economic adviser to the McCain 2008 presidential campaign, and an economic adviser to the Mitt Romney 2012 presidential campaign.

    Hassett is the author or editor of many books, among them "Rethinking Competitiveness" (2012), "Toward Fundamental Tax Reform" (2005), "Bubbleology: The New Science of Stock Market Winners and Losers" (2002), and "Inequality and Tax Policy" (2001). He is also a columnist for National Review and has written for Bloomberg.

    Hassett frequently appears on Bloomberg radio and TV, CNBC, CNN, Fox News Channel, NPR, and "PBS NewsHour," among others. He is also often quoted by, and his opinion pieces have been published in, the Los Angeles Times, The New York Times, The Wall Street Journal, and The Washington Post.

    Hassett has a Ph.D. in economics from the University of Pennsylvania and a B.A. in economics from Swarthmore College.

  • Phone: 202-862-7157
    Email: khassett@aei.org
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    Name: Emma Bennett
    Phone: 202-862-5862
    Email: emma.bennett@aei.org

 

Aparna
Mathur
  • Aparna Mathur is an economist who writes about taxes and wages. She has been a consultant to the World Bank and has taught economics at the University of Maryland. Her work ranges from research on carbon taxes and the impact of state health insurance mandates on small firms to labor market outcomes. Her research on corporate taxation includes the widely discussed coauthored 2006 "Wages and Taxes" paper, which explored the link between corporate taxes and manufacturing wages.
  • Phone: 202-828-6026
    Email: amathur@aei.org
  • Assistant Info

    Name: Hao Fu
    Phone: 202-862-5214
    Email: hao.fu@aei.org

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