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.

 

What source of energy do Americans think affects the environment the most?

One of the questions we ask during the Energy Survey is about what source of energy Americans think affects the environment the most. This question is the third in a sequence that probes views on the environmental dimensions of energy (see our questionnaire here).

We first ask each respondent how much he or she believes that energy affects the environment. Based on the latest data, 77 percent of Americans say that they think energy affects the environment at least at fair amount, in contrast to 20 percent who say it affects the environment only a little and 3 percent who don’t believe energy use affects the environment at all.

We next ask about the aspect of the environment that they think is most affected by energy use. Based on their answer to that question, we then ask the respondents what source of energy they think is most responsible. This question is posed in a completely open-ended fashion; the university’s professional telephone interviewers do not recite a list of energy sources from which to choose or otherwise prompt a respondent for an answer. The results are shown in the following chart, which tracks consumer responses over the first three years of the U-M Energy Survey. The most frequent answer is some form of petroleum, reflecting responses of petroleum, oil or a petroleum product such as gasoline. Although the number of respondents who fingered petroleum varied over the three years of quarterly samples shown, no clear trend is apparent. On average, 36 percent of consumers said that some form of petroleum was the source of energy that affected the environment the most.

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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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Environment pulls ahead of affordability as Americans’ top energy-related concern

In our very first survey, taken in October 2013, we were surprised to find that consumers were at least as worried about the impact of energy on the environment as they were about its affordability. The number of respondents who said that they were concerned either “a great deal” or “a fair amount” about the environmental impact of energy was 60 (±5) percent. At the same time, the number who expressed the same levels of concern about the affordability of energy was 55 (±5) percent.

Although ecology edged out the wallet numerically, the difference was not statistically significant in our initial sample of 500 U.S. households. For that reason, we reported an essentially equal level of consumer anxiety about these two energy-related concerns, a finding that was noteworthy in and of itself.

As time went on and each new quarterly U-M Energy Survey was taken, the environmental concern retained its edge. And now, with five quarterly samples and a total of 2,500 consumer interviews, concern about the environment clearly beats concern about affordability, 60 (±2) percent to 55 (±2) percent.Continue Reading

When it comes to energy’s environmental impact, Southerners think differently

ANN ARBOR — Southerners are less likely than Americans in other parts of the country to believe that energy affects the environment by at least a fair amount, according to the latest findings of the University of Michigan Energy Survey.

A joint effort of the U-M Energy Institute and Institute for Social Research, the quarterly survey gauges consumer perceptions and beliefs about key energy-related concerns including affordability, reliability and impact on the environment.

When asked if energy affects the environment, “not at all,” “a little,” “a fair amount” or “a lot,” 69 percent of Southerners chose the latter two answers. The choices of “a fair amount” or “a lot” were given by 77 percent of consumers in the Midwest, 79 percent in the West and 82 percent in the Northeast.

Southerners do not differ significantly from other regions in their responses to the survey’s other questions concerning reliability or affordability and, on average, they pay about the same amount for home energy as the nation as a whole (Westerners pay the least).

“Although their perception of energy’s impact on the environment is a bit less than the national average, the fraction of Southerners who believe that energy affects the environment by at least a fair amount still exceeds two-thirds,” said survey director John DeCicco, a research professor at the U-M Energy Institute.

Nationwide, three-fourths of Americans believe that energy affects the environment either a fair amount or a lot, a finding that has held up over the three rounds of U-M Energy Survey data analyzed to date.

Other results from data collected through the latest energy survey include:

  • Consumers worry much less about the reliability of energy than they do about its affordability and impact on the environment.
  • Consumers consistently say that they worry about the impact of energy on the environment at least as much as they worry about affordability.
  • On average, Americans believe that gasoline would become unaffordable if it hit roughly $5.89 per gallon, a level about 70 percent higher than the U.S. average gasoline price of $3.44 per gallon for the months the survey was taken.
  • Consumers, on average, believe that a monthly home energy bill of roughly $400 would be unaffordable for their households, a level about 110 percent higher than (a bit more than double) the average self-reported energy bill of $190 per month.
  • Consumers appear to be notably more sensitive to increases in the price of gasoline than they are to increases in home energy bills.

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The U-M Energy Survey is administered four times a year through a set of questions added quarterly to the Thomson Reuters/University of Michigan Surveys of Consumers, conducted by ISR since 1946. Energy data will be made available through public archives generally less than a year after each new sample is analyzed.

University of Michigan Energy Institute
The demand for economically and environmentally sound energy solutions is urgent and global. The Energy Institute builds on the University of Michigan’s strong energy research heritage at the heart of the nation’s automotive and manufacturing industries to develop and integrate science, technology and policy solutions to pressing energy challenges.

Institute for Social Research
Established in 1949, the University of Michigan’s Institute for Social Research is the world’s largest academic social science survey and research organization, and a world leader in developing and applying social science methodology, and in educating researchers and students from around the world.

Thomson Reuters/University of Michigan Surveys of Consumers
Based on telephone interviews with 500 U.S. households conducted every month, the U-M Surveys of Consumers is a rotating panel survey based on a nationally representative sample that gives each household in the coterminous U.S. an equal probability of being selected.

Contact: Amy Mast, 734-615-5678, amymast@umich.edu

Consumers worry about energy’s impact on environment regardless of income

ANN ARBOR — No matter what their income bracket, American consumers all express an equal degree of “personal worry” about the impact of energy use on the environment, according to the newest findings of the University of Michigan Energy Survey. A joint effort of the U-M Energy Institute and Institute for Social Research, the quarterly survey gauges consumer perceptions and beliefs about key energy-related concerns including affordability, reliability and impact on the environment.

During one portion of the survey, respondents were asked how much they personally worry about three factors: energy reliability, affordability and environmental impact. Responses were sorted into three self-reported income brackets. Researchers found that respondents in the lowest of the three income brackets worried about reliability and affordability of energy more than those in the top- and middle-income thirds. However, the percentage of respondents who reported worrying a “great deal” or a “fair amount” about energy’s environmental impact held steady across the income brackets, averaging close to 60%.

Data were collected in January 2014 while parts of the country were experiencing frigid weather and regional increases in energy prices. Nevertheless, consumers consistently expressed at least as much concern for the energy’s environmental impact as they did for its affordability.

“The fact that US consumers care as much about the environmental impact of energy as they do about its affordability was a surprise finding from our first round of data, collected last October,” said John DeCicco, U-M Energy Institute research professor and survey director. The second round of U-M Energy Survey data shows that this result was no seasonal anomaly. “In fact,” notes DeCicco, “the January data strengthen the statistical significance of American consumers’ uniformly high degree of concern about the environment even in relation to core issues such as energy costs.”

The U-M Energy Survey also probed consumers’ expectations about their energy bills and the cost levels that would find to be unaffordable. Although average self-reported home energy bills rose from October to January (as expected based on the weather), the level that would be considered unaffordable did not change significantly, averaging out to roughly $420 per month.

How much consumers felt that their bills would have to increase before becoming unaffordable was found to vary by income bracket. If energy bills doubled (a 100% increase), they would be seen as unaffordable by the lower third of households according to income bracket. Consumers in the middle-income bracket view a 130% increase as unaffordable. However, energy bills would have to roughly triple (a 200% increase) before being seen as unaffordable to consumers in the top third of self-reported household income.

Compared to home energy bills, “consumers express much less tolerance for gasoline price hikes,” notes DeCicco. As might be expected, the gasoline price that consumers would see as unaffordable varies by income. But on average, an 84% increase, to roughly $5.90 per gallon, would push consumers to where they felt they’d have to make significant changes in their vehicle use or how they travel. That’s in comparison to the roughly 145% increase in home energy bills that would be seen as unaffordable to consumers on average.

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The U-M Energy Survey is administered four times a year through a set of questions added quarterly to the Thomson Reuters/University of Michigan Surveys of Consumers, conducted by ISR since 1946. Energy data will be made available through public archives generally less than a year after each new sample is analyzed.

University of Michigan Energy Institute
The demand for economically and environmentally sound energy solutions is urgent and global. The Energy Institute builds on the University of Michigan’s strong energy research heritage at the heart of the nation’s automotive and manufacturing industries to develop and integrate science, technology and policy solutions to pressing energy challenges.

Institute for Social Research
Established in 1949, the University of Michigan’s Institute for Social Research is the world’s largest academic social science survey and research organization, and a world leader in developing and applying social science methodology, and in educating researchers and students from around the world.

Thomson Reuters/University of Michigan Surveys of Consumers
Based on telephone interviews with 500 U.S. households conducted every month, the U-M Surveys of Consumers is a rotating panel survey based on a nationally representative sample that gives each household in the coterminous U.S. an equal probability of being selected.

Contact: Amy Mast, 734-615-5678, amymast@umich.edu

Consumers top worry: How energy pollutes

Latest University of Michigan Energy Survey finds that more people worry about the environmental effects of energy than how much it costs

Consumers worry about how much their energy use hurts the environment even more than they fret about how much the cost of energy hurts their wallets, according to the latest University of Michigan Energy Survey. This finding was as much a surprise to the researchers who conducts the survey as it is to experts who believe that the environment always loses out when pitted against price in the eyes of consumers.

The 18-question January 2014 survey echoed findings from U-M’s initial energy survey, conducted in October 2013. Taken together, the two polls find that 58 percent of consumers say they have a great deal or fair amount of concern about how energy affects the environment, while a combined 53 percent say they hold that degree of concern about being able to pay for energy.Continue Reading