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Integrating Sector-Wide Reforms for Mitigation
widely and depend on the functional form used, the estimation technique, the period of estimation, and the country. The literature indicates that the price elasticity of automobile fuel demand would range from –0.03 to –0.4 in the short run and –0.6 to –1.1 in the long run (Chamon and others 2008; Hughes and others 2008; World Bank 2010). Highly volatile prices affect fuel consumption, as they did during the oil crises in the late 1980s (figure 3.23). Although price elasticity was surprisingly low in the United States in the early 2000s (Hughes and others 2008), it has increased since 2005 (Park and Zhao 2010). Expecting fuel prices to remain high, consumers have begun to change their behavior. Low price elasticity may result from a strong “rebound effect,” in which as fuel economy improves and the cost of driving declines, people drive more. This can partly offset fuel reductions associated with higher prices. One study estimated the short-run rebound effects at 4.5 percent and the long-run effects at percent (Small and van Dender 2007); another reported even larger 22.2 rebound effects of 58 percent (Frondel and others 2008). Behavioral inertia also helps keep price elasticity low; it takes time to change people’s preferences and perceptions. Price elasticity has been particularly low in the United States, where fuel prices historically have been low (Hughes and others 2008). There about half the passenger cars are sport-utility vehicles (SUVs), pick-up trucks, or four-wheel-drives, whereas in Europe nearly percent of passenger cars are four- or two-door sedans (OECD 2002a). 90 Figure 3.23 Fuel Taxation (Percentage of Retail Gasoline Price), 1970–2009 140
120
Dollars per barrel
100 80 60 40 20
Source: http://tonto.eia.doe.gov/country/timeline/oil_chronology.cfm.
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Month/year Inflation adjustment price
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