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.

 

Consumers’ perceived affordability of gasoline rises with income, but not by as much as one might think

Results from the U-M Energy Survey give us unique insights into how consumers feel about the affordability of motor fuel, which is a major concern for many Americans. The overall gasoline affordability index — which we update quarterly in Energy Survey Indices sidebar on our home page — reflects the average view of all consumers nationwide. It blends together the responses of our diverse, nationally representative sample, averaging over their socioeconomic backgrounds as well as gender, race, age and geographic location. 

Naturally, we expect consumers’ incomes to affect how affordable they perceive energy to be. This is true in general, with higher income consumers reporting higher levels of affordability. However, we also find that the perceived affordability of gasoline does not rise as much as one might think given the large spread in household income across the population. 

The chart below shows how the affordability of gasoline varies according to the five income quintiles, where each quintile represents 20% of the population. It plots the gasoline affordability index by quintile of self-reported household income over the 11 quarters of Energy Survey data gathered to date. The patterns through time are similar to the overall trends in the affordability index as previously reported. All consumers felt that motor fuel became much more affordable after gasoline prices fell in late 2014. Perceived affordability peaked this past January, when pump prices had fallen to a national average of $2.09 per gallon. Continue Reading

Consumers feel that gasoline is a bit less affordable than they said it was last winter

The affordability index for gasoline fell by 23 points from its mid-winter value of 152, which was based on the University of Michigan Energy Survey taken in January 2016. Although by April pump prices only went up 13 cents, to $2.19 per gallon, that was enough to push the gasoline affordability index down to 129. Back in January, when the U.S. average retail price of gasoline dipped to $2.09 per gallon, American consumers  felt that gasoline was more affordable than any time since our quarterly surveys started in October 2013.
pump-prices_2-19_06nov2016
Our affordability index is based on comparing the energy costs that consumers say they would find to be unaffordable to the actual costs — in this case, the average gasoline price — they experience when each quarterly survey is taken. As explained in our Overview of how the indices are calculated, an affordability index of 100 means that consumers believe energy prices would have to double (i.e., see a 100% increase) before they were considered unaffordable. In this context, “unaffordable” means that the energy cost has become so high that consumers feel they would need to change their day-to-day activities in some way. When consumers report that the price they find unaffordable is the same as what they currently pay, then the affordability index is zero.

Continue Reading

How affordable is our energy? Here’s what consumers say as of January 2016

The January 2016 University of Michigan Energy Survey finds a record high in how consumers perceive the affordability of gasoline. 

Over the past six months, consumers’ beliefs about the maximum price of gasoline that they feel they can afford has been on the rise.  The latest quarter of energy survey data — gathered from polling conducted in January 2016 — reveals a 40 point jump in the gasoline affordability index, from 112 in October to 152 in January.  On average across the United States, consumers paid $2.41 per gasoline for gallon.  Averaged across all demographic groups, Americans believe that gasoline would become unaffordable if it reached $5.48 per gallon.

Aff-indices-thru-Jan2016

A year ago, the January 2015 energy survey pegged the gasoline affordability index at 138, which was a new high at the time and reflected a large gain in consumer comfort about pump prices compared to the previous two years.  After dipping again over the remainder of 2015, the January 2016 data sets the new high at 152. Now, consumers believe that gasoline would still be affordable if its price increased by a factor of 2.5, corresponding to the 152% increase represented by the affordability index. (Background on how the the index is calculated from the survey data is given in our Affordability Indices Overview report.)

For home energy,  the affordability index of 137 in January 2016 remained similar to that of the previous quarters.  On average, survey respondents said that they paid $159 per month for their home energy. They told us that a monthly energy bill of $356 would be unaffordable. In other words, even if its cost were to slightly more than double, most Americans would still find home energy to be affordable in terms of their current lifestyle.

See our latest energy affordability report for more details.

Americans feeling much better about the price at the pump

The latest University of Michigan Energy Survey finds a 27 point increase in the gasoline affordability index; home energy affordability remains similar to what it was in the previous quarter. 

Last quarter, in July 2015, consumers believed that a doubling in the per-gallon price of gasoline would not quite be affordable. However, based on polling conducted during October 2015, the energy survey’s latest data reveal that consumers now feel that motor fuel is much more affordable. The gasoline affordability index jumped by 27 points, from a value of 85 in July 2015 to 112 as of October. Federal data show that nationwide, consumers paid an average of $2.41 per gallon in October. When we asked consumers how high the price would have to get before they thought it was unaffordable, the average response was $5.44 per gallon. The resulting affordability index of 112 indicates that, as of October, consumers believe that the price of gasoline would still be affordable even if it were to double.

Aff-indices-thru-Oct2015

Although the gasoline affordability index increased from the last quarter to the present, 112 was still significantly below its high of 138 in January 2015.

Consumers’ views of home energy affordability in October are similar to what they were over the previous eight quarters. In October, the home energy affordability index was 122, indicating survey participants believe more than a doubling in monthly costs would still be considered affordable.  In other words, consumers paid an average of $170 per month for their home energy needs and believed $342 per month would be their max affordability.

According to the latest energy survey data, Americans find gasoline and home energy to be similarly affordable, as seen in how the two trend lines nearly touch as of this past October.

See the Affordability Indices Overview for background on how each index is calculated.

Introducing the Energy Affordability Index

The University of Michigan Energy Survey has developed a new way to measure how affordable Americans think energy is. Based on responses to questions that elicit consumers’ individual feelings about what they pay for home energy and gasoline, we compute an index that reflects how high an energy expense would have to rise before their household would find it unaffordable. In this context, “unaffordable” doesn’t mean that the consumer could not afford to buy gasoline at all, for example. Rather, it means that the price has gotten so high that the consumer believes they would have to make changes in their lives (drive less, for example) because of the cost.

We modeled the energy affordability index on the widely reported index of consumer sentiment generated by the University of Michigan Surveys of Consumers (“SCA”). The energy survey is conducted as a quarterly rider on that long-running monthly survey. Adopting the methods used by the SCA, the energy survey probes consumers’ personal cost thresholds by asking respondents how their high energy expenses would have to go to become difficult to bear. This psychological rather than economic approach provides a clear picture of what consumers really feel about the issue at any given point in time.

An affordability index of zero indicates that consumers already feel that the given energy expense is unaffordable. An index value of 100 indicates that consumers believe the cost of energy would have to double before they would view it as unaffordable.

This initial report on the energy affordability indices is based on two years of quarterly survey data, comprised of eight samples starting in October 2013 and gathered every three months through July 2015.

Over this two-year period, the average affordability index for home energy was 125, indicating the Americans on average believed they they could afford more than a doubling in their home energy costs. Gasoline, however, is viewed as significantly less affordable than home energy. The average affordability index for gasoline over the past two years was 80, meaning consumers on average would find motor fuel to be unaffordable at a price notably short of twice what they’ve been paying.

The home energy affordability index was fairly stable over this period. That’s in contrast to the situation for gasoline, where the affordability index increased as the price fell in the second half of 2014 and early 2015 before rising again this past summer.

For more about these new results on on energy affordability, download the report:
How Much of an Increase in Home Energy and Gasoline Costs Do People Think They Can Afford?

For further details on the method, see Energy Affordability Indices: An Overview.

Americans again feeling a bit more pain at the pump

Findings based on data from 8 Quarterly Samples, Oct 2013 – July 2015

How affordable is gasoline? Consumers’ answers to that question naturally change as the price of gasoline goes up or down. And being tied to world oil prices, gasoline has the most volatile price among the forms of household energy.

To measure how consumers feel about the affordability of energy, we ask them how much higher its price would have to be before they consider it unaffordable. For gasoline, that means that the price at the pump becomes so expensive that consumers feel they would have to make changes in their household activities.

Aff-index-G-thru-Jul2015

Figure 1. Average gasoline price that U.S. consumers say they would consider unaffordable compared to the national average retail gasoline price, quarterly data Oct 2013 – July 2015

Figure 1 compares responses to that question to the average price of gasoline when each quarterly energy survey was performed. The price considered unaffordable declined over the past year, but notably much less than pump prices dropped. Averaged across all incomes, the gasoline affordability index jumps from 61 over the first five quarters of data to a mean of 138 in January 2015. It then declined as gasoline prices rose in the following months.

Consumers of different income levels have a different sense of how much they can afford to spend before a given expense seriously dents their budgets. The sensitivity of the affordability index to household income can be seen in Figure 2, which plots it according to income tercile.

Aff-index-G-by-income-thru-Jul2015

Figure 2. Gasoline affordability index by income tercile, Oct 2013 – July 2015

Consumers in the top income tercile stand out; their average gasoline affordability index of 99 indicates that the pump price would have to essentially double before they found it to be unaffordable. In contrast, the gasoline affordability index values of 75 and 67 for middle and lower income consumers, respectively, show that pump prices would not have to go up nearly as much before those households felt crimped by the cost.