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 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