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

 

A carbon tax would not cause too much grief at the gas pump

ANN ARBOR — A new report from the University of Michigan Energy Survey offers insight into how American consumers would react to a carbon tax. A tax of $40 per ton of carbon — which adds 36¢ per gallon to the price of gasoline — still leaves more than 90% of U.S. consumers inside their comfort zones for fuel prices and travel choices. But the report, based on asking consumers how much they feel they can afford to pay for fuel, also finds that much greater pressure would be felt by consumers in the lower third of the distribution by household income.

Launched in fall 2013 when fuel prices were much higher than they are now, the U-M Energy Survey polls a nationally representative sample of Americans about their views on the affordability, reliability and environmental impact of energy. These energy-related questions are appended four times a year to the University of Michigan Surveys of Consumers, the in-depth telephone interviews that are the source of the well-known Index of Consumer Sentiment.

Interviewers ask consumers how much the price of gasoline would have to rise before it would cause them to change how they get around. Researchers compare those responses to actual gasoline prices and to consumers’ self-reported incomes as also tallied by the surveys.

“On average, consumers said that gasoline would have to be over $5.00 per gallon before they would consider it unaffordable,” says John DeCicco, the survey director and a research professor at the University of Michigan Energy Institute. “So there is a good bit of leeway for a carbon tax to be added before most Americans would experience serious pain at the pump.”

Earlier this year, a group of Republican elders and business leaders formed the Climate Leadership Council to advance a carbon tax, which would place a levy on energy sources in proportion to how much carbon dioxide (CO2) they emit, as a conservative solution to global warming. Their proposal calls for taxing carbon at $40 per ton while rebating revenues back to consumers through dividends and reducing the regulations imposed on business.

Relative to a base level of $2.80 per gallon, that would push the pump price up to $3.16 per gallon. The number of Americans who would then find fuel to be unaffordable would rise from 2% to 7.5%, still keeping over 90% of consumers below their thresholds for pain at the pump.

“However, these average findings mask significant differences in consumer views,” DeCicco points out. “We found a wide range of answers to our question about the price of gasoline.”

The new report takes a close look at the responses of consumers from across the spectrum. Some consumers already feel that gasoline is unaffordable at $2.80 per gallon, the average price over the nearly four years since the survey was launched. On the other hand, every survey sample found some consumers who replied that gasoline would have to exceed $10, $20 and even in some cases over $50 per gallon before it would prod them to make significant changes in how they get around.

Because consumers’ views of affordability depend on their income, the U-M analysis grouped survey respondents into thirds (terciles) — low, middle and high — according to self-reported income.

“A carbon tax of $40 per ton would push 14% of low-income consumers to where they feel they would have to significantly change their travel choices,” DeCicco noted. “In contrast, 7% of middle-income and only 4% of high-income consumers would find themselves in that situation.”

The study also examined lower and higher taxes of $10 and $100 per ton of carbon, implying 9¢ and 89¢ more per gallon, respectively. The $10 tax would have little effect. But at $100 per ton — a level that some economists say is needed to deeply cut carbon — 21% of low-income consumers would feel that gasoline is unaffordable.

Many carbon tax proposals, including the one from the Climate Leadership Council, include dividends for consumers. But policymakers can find many ways to use new tax revenues. The survey findings highlight how targeting rebates for low-income households would help the Americans who most feel that higher pump prices will impact their daily lives.

Regarding the unique approach taken by the U-M Energy Survey, “We assess each individual’s personal feelings about the price of fuel based on their own needs and experience,” DeCicco explains. “Moreover, we do so independently of the reason for a price change, so that we avoid pushing  people’s buttons, so to speak, by framing the survey in terms of taxes, climate action or other potentially volatile policy issues.”

For more on these findings, see https://www.umenergysurvey.com/carbon-tax-how-much-too-much/ and download the full report, “Carbon Taxes and the Affordability of Gasoline,” at http://www.umenergysurvey.com/assets/C-taxG-aff_12Sep2017.pdf

The Energy Survey is a quarterly rider on the University of Michigan Surveys of Consumers, which can be accessed at http://www.sca.isr.umich.edu/. For more information about the participating research units, visit the websites for the Energy Institute at http://energy.umich.edu/ and for the Institute for Social Research at http://home.isr.umich.edu/.

Contact:

Amy Mast, Energy Institute communications director, at amymast@umich.edu, 734-615-5678

John M. DeCicco, Ph.D., U-M Energy Survey director, at DeCicco@umich.edu, 734-764-6757

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Download this press release in PDF format here

A carbon tax: how much would be too much?

Even in a debate as heated as the one over global warming, recent proposals by some Republican elders offer hope that cooler heads might one day prevail. They propose a conservative way to address climate risk: harnessing market forces with a carbon tax while refunding dividends to consumers. If such an approach is in the cards, what would it mean for consumers, particularly for buying gasoline without too much pain at the pump?

The University of Michigan Energy Survey asks consumers how much they can afford to pay for energy before the cost becomes so high that they would have to significantly change their lifestyle. The responses are the basis for the affordability indices we publish seasonally, one for home energy and the other for gasoline. Although we don’t ask explicitly about a carbon tax, our data equip us to estimate how many consumers would be pushed outside their comfort zones by a tax of a given magnitude.

Photos of James A. Baker III, Bill McKibben, George P. Shultz and Laurene Powell Jobs

Supporters of a carbon tax include (clockwise from upper right): Bill McKibben, George Shultz, Laurene Powell Jobs and James Baker.

The Climate Leadership Council — whose headliners include former GOP cabinet members James A. Baker III, George P. Shultz and Henry M. Paulson, Jr. — has floated a proposal to tax carbon dioxide (CO2) at $40 per ton. A carbon tax of that level translates to an added 36¢ per gallon at the pump.

Motor fuel is less expensive now than it was three years ago; the national average spanning the period of higher prices through the most recent data is $2.80 per gallon. A $40 per ton carbon tax would bump the price to $3.16 per gallon. Based on our survey responses, that price would still be considered affordable by more than 90% of Americans. It is well below the $5.00 per gallon level typical of the average response to our survey question, which asks:

At what price per gallon would gasoline get so high that it becomes unaffordable to you (and your family)? 

If prompted, our interviewers clarify that “By unaffordable, we mean that you (and your family) would be forced to make significant changes in the way you get around.”

A price of $3.16 per gallon is still 40¢ lower the $3.56 per gallon national average over the year before the large price drop that occurred in the second half of 2014. Economic recovery was then well underway. New car sales — a key indicator of how Americans react to fuel prices — had recovered from their recession slump and where already shifting back toward more fuel consumptive SUVs and other light trucks.

The chart below shows the average survey response in comparison to the national average price of gasoline. Over the nearly four years of data analyzed to date, the average price considered unaffordable has been generally over $5.00 per gallon. Although it trended down as pump prices fell, the price that consumers consider unaffordable has not fallen as much as the price of gasoline itself. So the gap between actual gasoline prices and the average threshold for pain at the pump is quite large. 

In other words, there is a good bit of leeway for a higher gasoline price before most Americans would be seriously pinched. But this good news (at least for carbon tax proponents) is not the whole story. Even at today’s prices, about 2% of consumers already feel constrained. More would feel pinched if a carbon tax were added to existing fuel taxes, and the number of consumers affected depends on household income.

The effect of varying levels of a carbon tax on different income groups is shown in the next chart. In addition to a $40 per ton tax, we examined a lower carbon tax of $10 per ton, which would add 9¢ to the price of a gallon of gasoline, and a high tax of $100 per ton, which would add 89¢ per gallon. All cases are relative to a base gasoline price of $2.80 per gallon.

This analysis grouped consumers into three categories (terciles) according to their self-reported household income. Even without a carbon tax added, 4.5% of low-income consumers feel that, at $2.80 per gallon, gasoline is costly enough that it affects their travel behavior. With a $40 per ton carbon tax, the number of low-income consumers who would feel serious pain at the pump jumps to 14%. That fraction compares to the 7% of middle-income consumers and 4% of high-income consumers that an additional 36¢ per gallon would push outside their comfort zones.

Naturally, these effects vary according to the carbon tax level. As seen in the chart, a $10 per gallon carbon tax does not appreciably change the number of consumers affected in any income group. Ten dollars per ton is similar to the price effect of some current carbon caps, for example. But the number of consumers who would find fuel unaffordable goes up quite a lot for the $100 per ton carbon tax, a level that some economists believe is needed to deeply reduce CO2 emissions in the long run.

Other surveys have found that support for a carbon tax depends on how the proceeds are used. Support rises if tax revenues are rebated back to consumers (as proposed by the Climate Leadership Council, among others). Our data underscore how such an approach would be most helpful for consumers who are less well off, a consideration for policymakers to keep in mind if they want to ease the burden of a carbon tax on those Americans who would be most affected.

For further details on the analysis behind these findings, download our full report on Carbon Taxes and the Affordability of Gasoline.

 

In their latest views on energy affordability, consumers gain a spring in their step

After starting 2017 on a low note in their views about the affordability of energy, U.S. consumers were feeling better about the situation by spring. The affordability indices for both gasoline and home energy increased from January to April. Derived from the University of Michigan’s quarterly Energy Survey, each affordability index is scaled so that a value of 100 reflects a consumer belief that energy costs would have to double (that is, go up by 100 percent) before really crimping their household lifestyle.

As of the latest data, taken during the month of April, the gasoline affordability index showed a slight increase to 105. The home energy affordability index rose significantly, reaching 148, its highest level since the U-M Energy Survey began in October 2013, as shown in the chart below. 

These gains occurred even though there was no significant change in the Index of Consumer Sentiment, which has remained quite stable since the beginning of the year. That measure of U.S. consumers’ general feelings about the state of the economy is reported monthly by the U-M Surveys of Consumers, to which the Energy Survey is a quarterly add-on.

As seen in the chart, the latest home energy affordability index surpasses all previous quarters by nearly 10 points. April 2017 also marks the first quarter for which the home energy index changed more than the gasoline index. Typically, the home energy index varies over a narrower range (38 points between its lowest and highest recorded values to date) than the gasoline index (which has seen a range of 101 points, due to the volatility of gasoline prices).

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Consumers were not as pleased with pump prices this winter as they were last winter

Credit: Andrew Philips, Postmedia Network

January 2017 marks the fourth year of the U-M Energy Survey. In previous years, consumers felt that gasoline was more affordable in January than at other times of the year. But this winter was different: the gasoline affordability index dropped 17 points to 94, the lowest score since July 2015. The decline is only partly explained by gasoline prices themselves, which did see an atypical increase in January this year. In each of the prior three years, gasoline prices fell by an average of $0.50 per gallon from October to January. This time however, the price at the pump actually increased by 9 cents per gallon. Consumers expecting a seasonal reprieve never saw one.

The latest index results also mark the ninth double-digit swing in ten quarters. Despite this volatility in the index, which tracks how consumers feel about affordability, the dollar-level responses to our survey question about “What would the price of gasoline have to reach before it became unaffordable to you?” have not changed much. In other words, the ups and downs of the index can be attribute mostly to the changes in gasoline prices, not changes in consumer views about the dollar threshold for serious pain at the pump.

In contrast to the story for gasoline, the home energy affordability index remains a model of consistency. The January 2017 value increased by a modest 3 points to 119, just below its average since October 2013 of 124. As seen in the chart below, this measure of how affordable consumers think their home energy bills are has rarely deviated from this average, now based on 14 quarters of U-M Energy Survey data.

Note that the error bars are much wider for home energy than they are for gasoline, which reflects how consumer responses about the affordability of home energy are much more variable than they are for gasoline. We suspect that this statistical “squishiness” of views on home energy costs may have something to do with consumers not having as clear an idea of what they pay for home energy as they do for the price of gasoline. The latter is, after all, highly visible and something most Americans get to look at weekly, which is about how often motorists have to fill their tanks. In contrast, home energy is billed monthly. Also, more and more consumers are on an auto-pay plan, and so may not have a very precise recollection of their electric and other home energy bills when we ask about them during the survey.

Energy affordability evens out in 2016

For the first time since the start of our quarterly Energy Survey, home energy and gasoline have run neck-and-neck in terms of affordability for an entire year. That is to say, 2016 saw no statistically significant difference between the two indices, a situation never before observed for four consecutive quarters. Though customers recently feel similarly about the costs of gasoline and home energy within each quarter, the affordability scores for both have dropped significantly since peaking in January. The gasoline affordability index, which seems to vary seasonally, dropped 41 points from January to July. The index for home energy dropped only half as much, by just under 21 points.

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Concerns about energy’s impact on the environment continue to edge out concerns about affordability

With three years and counting of data, a clear trend has emerged: consumers are more concerned about how energy impacts the environment than they about whether it is sufficiently affordable and reliable. The extent to which consumers worry about reliability — that is, whether their lights stay on and the fuels they need are readily available — has consistently lagged their concerns about energy costs and environmental impacts.

Over the first four quarterly samples starting with the launch of the U-M Energy Survey in October 2013, the difference between the levels of concern about the environment and about affordability was not statistically significant, even though the average for the environment was nominally higher than that for affordability. However, the significance of the gap grew as additional data came in. By the second year, we were able to report that the environment had pulled ahead of affordability as Americans’ top energy-related concern. As seen in the chart below, based on data over the first three years of the survey, concern about affordability has lessened a bit in 2016 while concern about the environment has remained strong in spite of some transient ups and downs.   

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On the seasonal trend of gasoline affordability

Over the course of each year we’ve conducted the Energy Survey to date, consumers find gasoline to be most affordable in the winter, when our January sample is taken. These responses — plotted in the chart below — show how consumers feel that gasoline is less affordable at other times of the year, as reflected in notably lower affordability index values derived from the spring (April), summer (July) and fall (October) quarterly samples. For reference, an affordability index of 100 means that the fuel price would have to double (i.e., rise by 100 percent) before consumers would consider it unaffordable. (See this overview of how the affordability index is calculated.) 

As of the most recent survey data we analyzed in July 2016, the gasoline affordability index was 104. That’s down nearly fifty points from what it had been in January when it reached a value of 152, which was the highest level of perceived motor fuel affordability since the U-M Energy Survey began in October 2013. Over the first five quarters of the survey, the gasoline affordability index was well below 100, reflecting the fact that gasoline prices had been much higher than they have been more recently.

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Energy affordability trended down in first half of year

The beginning of 2016 found American consumers feeling that energy was more affordable that it had ever been since we began our systematic quarterly surveys on the topic three years ago.

As seen in the chart below, the perceived affordability of gasoline reached an all time high of 152 in January. That means that pump prices would have to rise by a factor of 2.5 before they really began to pinch the pocketbooks of the average American consumer. That month, the national average retail gasoline price was $2.06 per gallon, the lowest it had been since prices briefly plummeted in late 2008 into early 2009 during the economic meltdown.

Since then, gasoline prices have risen a bit, reaching an average of $2.41 per gallon in June and July, by when the gasoline affordability index had dropped to 104. Nevertheless, that’s still more affordable than it had been through fall 2014. Over the first year of the Energy Survey, which was launched in October 2013, U.S. pump prices averaged $3.54 per gallon, and during that period, consumers felt that gasoline was only about half as affordable as home energy.

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