Implement Climate Fee on Gasoline (AB 2744 (2008))

Assumptions

• Short-run elasticity of demand for motor vehicle fuel is -0.06. A 10 cent gas tax is applied to a base price of $3 per gallon.
• Legislation specifies that revenues would be used to fund climate protection programs, but the potential impacts of these programs are not included in this analysis.

Analysis

Fees on gasoline can help reduce emissions in two ways. By raising the price of driving, they create an incentive to drive less. The can also generate resources that can be used to fund other strategies for emissions reduction. Legislation introduced in the California Assembly in 2008, Assembly bill 2744, would have given the Metropolitan Transportation Commission the authority to bring such a fee to a vote in the region. This legislation would have reduced driving very slightly regionwide while generating significant revenue for other projects to help reduce CO2 emissions.

Relative Impact
By 2025, the MTC estimates that regional vehicle miles traveled will be nearly 119 million miles per day. This driving will generate 42,000 metric tons of CO2 emissions per day, or 15 million metric tons per year.

What we do now
The State of California taxes the sale of gasoline at 18 cents per gallon. There is no regional gasoline tax.

What we could do
AB 2744, sponsored by Assemblyman Jared Huffman during the 2008 legislative session, focused on raising revenue. It would have authorized MTC to develop a “climate protection program,” subject to the approval of Bay Area voters. To fund the plan, voters would be asked to authorize a fee of 10 cents per gallon of gasoline, phased in at no more than 3 cents per year. The small fee would have reduced driving only a very small amount, but would provide a significant new revenue source for funding other emissions reduction policies. The legislation was defeated in the Assembly Transportation Committee, but may be introduced in a different form in the next session.

Cost
It is estimated that Bay Area motorists will purchase 3.2 billion gallons of gasoline per year in 2025. A 10 cent fee on this amount would generate $320 million per year – a net cost to consumers and a net revenue increase for MTC. AB 2744 specified that these funds would be used to pay for a climate protection program.

Carbon savings potential
The main purpose of the legislation would be to raise revenue for a climate protection program. However, it can be expected that even a small increase in price would have at least some impact on driver behavior. Research suggests that the short-run elasticity of demand for motor vehicle fuel may be approximately -0.06, meaning a 1 percent increase in price will lead to a 0.06 percent decrease in consumption.¹ Given this relationship, we can predict that if the price of gasoline increases from $3 to $3.10, or 3.33 percent, the consumption of gasoline may decrease 0.19 percent. This change would decrease expected annual personal VMT by 79 million, equivalent to a reduction of 28,045 metric tons of CO2.² The fee would generate $11,400 of public revenue and private cost for each ton of CO2 emissions abatement.

Endnotes
¹ Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand Jonathan E. Hughes, Christopher R. Knittel, and Daniel Sperling. www.econ.ucdavis.edu/faculty/knittel/papers/gas_demand_083006.pdf
² This projected CO2 reduction is based on the fuel economy of today’s fleet.If fuel economy standards improve, the same CO2 effect may occur without as dramatic a reduction in VMT.