What’s the best way to reduce fuel consumption?



What’s the best way to reduce fuel consumption?

por RyanCaleb » 16 Nov 2017, 06:58

To reduce CO2 emissions governments often opt for car taxes that are based on fuel efficiency, measured in liters per 100km (or miles per gallon). Proponents of an upfront car tax argue that it would be more effective than a fuel tax paid at the pump because of an investment inefficiency – consumers may be short sighted, failing to take future fuel taxes into account when choosing a new vehicle. Put differently, an upfront car tax can immediately influence the decision to purchase a car with high fuel efficiency, whereas a fuel tax requires that consumers take into account future fuel costs.
There is a long awareness of this problem, at least since the work of Hausman (1979) who found that consumers undervalue the future energy costs for air conditioners. For the US car market, Busse et al. (2012) find more or less correct valuation, but Allcott and Wozny (2014) find moderate undervaluation of future fuel cost savings. Based on this evidence there is a risk that fuel taxes only have a small impact on the purchase decision. At the same time, fuel taxes have a limited impact on the car usage decision; see for example Hughes et al. (2014) for evidence that mileage is quite inelastic.
In a recent paper we contribute to the debate on the effectiveness of car taxes versus fuel taxes (Grigolon et al. 2014). We stress the crucial importance of accounting for consumer heterogeneity in annual mileage. Mileage heterogeneity implies an important advantage of fuel taxes over car taxes: fuel taxes better target the right consumers, those with a high mileage, to purchase the most fuel efficient cars. This targeting effect makes fuel taxes more effective in reducing total fuel consumption than car taxes, even when consumers are moderately short sighted and mileage is perfectly inelastic.


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