Fuel Price Increases and the Timing of Changes in Household Driving Decisions

Using the oil price increase of 1979 as a natural experiment and several event study specifications, this paper finds evidence that the oil spike induced significant decreases in carbon emissions on both the intensive (miles driven) and extensive (auto fuel efficiency) margins. Further, it appears that substitution on the intensive margin occurred instantaneously whereas extensive margin substitution occurred with a significant lag. Given the timing of the changes, the results appear robust to the implementation of Corporate Average Fuel Economy (CAFE) standards over the same time period. These findings have important implications for estimating demand elasticities for durable goods with respect to energy prices and the price elasticity of fuels themselves. ∗Assistant Professor, Department of Economics, University of Tennessee †Assistant Professor, Department of Economics, University of Tennessee. ‡Thanks to David Greene, Stephen Holland, Luiz Lima, Michael Price, Georg Schaur, Michael Springborn, L. Choon Wang, Sarah West, AERE conference, Camp Resources and Colorado Workshop participants for helpful discussion. Two anonymous referees provided valuable feedback that greatly improved this paper. Thanks to Julie Butler for excellent research assistantship. Corresponding author is Jacob LaRiviere: [email protected]. Any errors are our own.