Reducing Petroleum Consumption from Transportation

The United States consumed more petroleum-based liquid fuel per capita than any other OECDhigh-income country—30 percent more than the second-highest country (Canada) and 40 percent more than the third-highest (Luxemburg). This paper examines the main channels through which reductions in U.S. oil consumption might take place: (a) increased fuel economy of existing vehicles, (b) increased use of non-petroleum-based low-carbon fuels, (c) alternatives to the internal combustion engine, and (d) reduced vehicles miles travelled. I then discuss how the policies for reducing petroleum consumption used in the US compare with the standard economics prescription for using a Pigouvian tax to deal with externalities. Taking into account that energy taxes are a political hot button in the United States, and also considering some evidence that consumers may not correctly value fuel economy, I offer some thoughts about the margins on which policy aimed at reducing petroleum consumption might usefully proceed. ∗I benefited from discussions with Hunt Allcott, Severin Borenstein, Joseph Doyle, Stephen Holland, Jonathan Hughes, Kenneth Gillingham, Donald MacKenzie, Joan Ogden, and Victor Stango. William Barton Rogers Professor of Energy Economics, Sloan School of Management, Massachusetts Institute of Technology and National Bureau of Economic Research. Email: [email protected].