1. P RICE AND C ARBON T AX E FFECTS ON G ASOLINE AND D IESEL D EMAND By Jean-Thomas Bernard 1 Grant Guenther 2 and Maral Kichian 3 October 23, 2015 1. Economics Department, University of Ottawa, jbernar3@uottawa.ca 2. Transport Canada, grant.guenther@tc.gc.ca 3. Economics Department and Graduate School of Public and International Affairs, University of Ottawa, mkichian@uottawa.ca

2. O RDER OF THE PRESENTATION o Introduction o The B.C. Carbon Tax o Literature Review o Data o Models and Estimation Results o Conclusion

3. I NTRODUCTION Research Objectives: o Do consumers and firms respond in the same way to carbon taxes ? o Are the effects of changes in the different components that make up total energy prices the same ? That is, do tax effects differ from pure price effects ? o Also, do excise taxes have the same effects as carbon taxes ? We use the data related to the introduction of the B.C. carbon tax in 2008 to test this hypothesis.

4. T HE B.C. C ARBON T AX o Broad Base o Phase in: o $10/tonne of CO 2 on July 1 st, 2008. o $5 added on July 1 st every year until 2012 to reach $30. o This is equivalent to a tax of 6.67¢/litre of gasoline and 7.68¢/ litre of diesel. o Revenue Neutral.

6. L ITERATURE R EVIEW o Traditional Specification: no difference between oil price and tax effects. Dahl (2012) Hughes, Knittel and Sperling (2008) o Price and tax effects on gasoline demand. Davis and Kilian (2011) Li, Linn and Muehlegger (AEJ: EP, 2014) Rivers and Shaufele (JEEM, 2015) Coglianese, Davis, Kilian and Stock (NBER, 2015)

7. D ATA

11. M ODELS AND E STIMATION RESULTS Modelling Concerns (1): July 2008: Three effects coincide (US recession, seasonality, carbon tax) July 2009, 2010, 2011, 2012: Two effects coincide (seasonality, carbon tax) In particular, the seasonal effect is very important Need to make sure it does not mask the carbon tax effect in the model -We assume the July seasonal effect is the same over the whole sample -We regress sales series on monthly dummies over 1997:1-2007:12 -We generate a new series (sales_xjuly) by subtracting the July coefficient from the sales series over 2008:1-2014:12 -Sales_xjuly already incorporates the July effect, over 2 nd subsample -We use this series as the dependent variable in our models

12. M ODELS AND E STIMATION RESULTS Modelling Concerns (2): Final Energy Prices include up to four components: - pure price effects - excise tax effects - carbon tax effects (whenever applicable) - other tax effects (e.g., GST) Evidence suggests that price effects (inclusive of excise taxes) are different than carbon tax effects; see Rivers and Schaufele (2015) But price effects in these studies include excise taxes ! Therefore, we separate total energy prices into net prices, excise taxes, carbon taxes We allow these three components to have possibly different impacts

13. M ODEL : G ASOLINE

14. E STIMATION RESULTS : G ASOLINE VariableCoefficientStd. dev.P-value Net price-0.0570.0250.0231 Excise tax-0.6140.1770.0006 Carbon tax-0.1760.0350.0000 Canadian GDP1.2660.5950.0347 Rainfall-0.0030.0020.1906 Sales Lag 1-0.5980.0610.0000 Sales Lag 2-0.3470.0600.0347 0.80 Durbin-Watson2.12 0.1404 0.1191 0.6238

15. W ALD TEST RESULTS : G ASOLINE Null Hypothesis Net Price = Excise Tax0.0015 Net Price = Carbon Tax0.0056 Excise Tax = Carbon Tax0.0148 For Gasoline: -Net price effects are significantly different than tax effects -Excise tax effects are significantly different than carbon tax effects -All three effects influence gasoline sales -Excise taxes have the biggest effect, followed by carbon taxes, then by net price changes

16. M ODEL : DIESEL

17. E STIMATION RESULTS : DIESEL VariableCoefficientStd. dev.P-value Net price-0.0110.0550.8419 Excise tax0.03540.0800.6567 Carbon tax-0.1250.0600.0396 Carbon tax lead 10.1250.0580.0322 Canadian GDP2.2820.9170.0138 US GDP-2.5720.6430.0001 US GDP Lag 11.4340.6260.0227 Dummy 1-0.3800.0580.0000 Dummy 20.3540.0750.0000 0.74 Durbin-Watson2.03 0.6238 0.6026 0.0916

18. W ALD TEST RESULTS : DIESEL Null Hypothesis Net Price = Excise TaxN.A. Net Price = Carbon TaxN.A. Excise Tax = Carbon TaxN.A. For Diesel: -Net price effects are not significant for diesel sales -Excise tax effects are not significant for diesel sales -Only carbon taxes significantly affect diesel sales (at t and t+1 ) -However, cumulative effects over the two periods are nil.

19. CONCLUSION Carbon taxes influence consumers (gasoline market) differently than firms (diesel market) Within each market, the different components making up the total price have different effects on sales in that market Therefore, it is important to calculate emission reductions on the basis of the correct elasticities; i.e. we must account for different price and tax effects. B.C. neutrality calculations were done on the basis of total price elasticities ! The observed deficit is likely due to the underestimation of the consumer response to the carbon tax.