How Elastic?

Having just returned from my second visit in two months to the state with the highest gasoline prices in the lower 48, I am frustrated that a vital dimension is missing from the national debate about gasoline prices. For all of the renewed focus on raising the corporate average fuel economy (CAFE) of the new vehicle fleet, most of us still seem to behave as if the only influence we had on fuel economy was in our choice of a new vehicle, every 4-7 years. In fact, Americans make billions of choices every day that affect both their personal expenses and our aggregate fuel demand. If $3.50 gasoline isn't enough to force us to rethink jack-rabbit starts and 75 mph highway speeds, then what price would it take to actually reduce gasoline consumption year after year for decades?

The Energy Information Agency put out some analysis last week suggesting that the public has reacted to higher prices to some degree. As prices have climbed this spring, the seasonally-adjusted growth in gasoline demand has apparently fallen from well over 2%, but it's still over 1%. So it took a 40% increase in prices from January to May to reduce demand by 1%. While high prices--whether from the market or from taxes--send the right long-term signal to encourage conservation and smarter vehicle technology, at least in the short term they may not deliver the persistent changes in consumption that will be necessary to reverse the trends on our oil imports and greenhouse gas emissions from transportation.

That ought to be of more than academic interest to legislators contemplating some form of carbon tax and/or emissions cap-and-trade. The relatively inelastic demand for gasoline is the Achilles heel of these policies, when applied to the transportation sector. If consumers don't respond by consuming less fossil fuels, carbon taxes will be fruitless for the environment and a dead weight on the economy. In order to be effective, a carbon tax would have to be delivered with a strong message about altering our mindsets on personal transportation. For the 95% of us who won't buy a new car this year, that means changing when and how we drive, rather than waiting for expensive new technology to deliver a car we like with the fuel economy we could have had if we had simply chosen a smaller/lighter/less powerful conventional car in the first place.

As long as Americans persist in seeing high gas prices driven by conspiracy, rather than supply and demand, we will feel divorced from the responsibility for our own actions in this area, and consumption and emissions will continue to grow. Witch hunts on "gouging" only reinforce that dysfunction. If consumers won't claim the effective 15-cent or so per gallon price cut that a little restraint on acceleration and top speed can provide on their next fill-up, they may just shrug off the 30-50 cents per gallon of carbon externality that various Senators are proposing to add to their gas bill. Where would that leave the levers of energy and climate change policy?