Carbon taxes and the affordability of gasoline

One of the options on the table as policymakers grapple with climate disruption is a carbon tax. Many economists favor such an approach, which would motivate businesses and consumers to make choices that progressively lower the net emissions of carbon dioxide (CO2) and other greenhouse gases that cause global warming. But how would Americans feel about a policy that, among other effects, will raise the price of gasoline?

The U-M Energy Survey routinely asks consumers how much they feel they can afford to pay before their costs, for both home energy and gasoline, become so high that they would have to make changes in their daily lives. The resulting answers about consumers’ thresholds for “pain at the pump” enable us to assess how a carbon tax would affect American consumers’ feelings about the affordability of gasoline.

This report describes the findings, focusing on the carbon tax level of $40 per ton of CO2 that has been proposed by the Climate Leadership Council. The analysis also examines the effect of lower and higher carbon taxes, of $10 and $100 per ton, respectively, as well as how such taxes would affect different groups of consumers by income.

It turns out that with a $40 per ton carbon tax — which translates to an added 36¢ per gallon at the pump, gasoline would still be considered affordable by over 90% of Americans. That finding is based on survey responses relative to an average base gasoline price of $2.80 per gallon, which such a carbon tax would bump up to $3.16 per gallon.

Over the nearly four years of U-M Energy Survey data analyzed to date, the gasoline price that consumers say they would find unaffordable has generally been more than $5 per gallon. So that leaves a good bit of leeway between recent prices and the price levels likely to result from low to moderate levels of a carbon tax.

Looking more closely at the data, however, reveals how views on fuel affordability vary by household income. A $40 per ton carbon tax would push 14% of low-income consumers into the zone where they feel that they would need to make changes in how they travel. However, such a tax would just put 7% of middle-income and only 4% of high-income consumers into a situation where, according to their survey responses, they would feel that gasoline becomes costly enough for them to change how they get around.

For further details, download our full report on Carbon Taxes and the Affordability of Gasoline