PWP-010 Price Incentives for Fuel Switching: Did Price Differences Slow the Phase-Out of Leaded Gasoline?

In the U.S., the regulatory approach to automobile fuel choices has consisted almost exclusively of mandated changes in autos and fuel availability. This contrasts with Europe, where di®erential taxes and fees have been used to encourage the use of unleaded gasoline and diesel fuel. I use data for 48 states from 1980 to 1989 to estimate the e®ect of price di®erences between leaded and unleaded gasoline on the rate at which leaded gasoline was abandoned. My estimates imply that a ̄ve cent additional tax on leaded gasoline may have caused a two-year acceleration in its phaseout and a ten cent tax may have caused leaded gasoline to virtually disappear by 1987, when it was still more than 20% of the gasoline supply. I am grateful to Andrea Shepard, Anne Gr¿n and Matthew White for helpful comments. James Woods, Kathryn Myronuk, and Michael Schwarz provided excellent research assistance. Financial support from the University of California Energy Institute in gratefully acknowledged. Any errors that remain are my sole responsibility. * Department of Economics, University of California at Davis, Davis, CA 95616, 916-7523033, email: [email protected], and National Bureau of Economic Research. Air pollution from automobile exhaust and refueling remains a primary focus of environmental regulators and activists. To curb pollution, many alternative automobile fuels have been suggested, ranging from methanol, ethanol, MTBE, and other gasoline additives to electricity. Under most regulatory scenarios, the traditional gasoline products will be allowed to coexist with new fuels during a transition period. Exactly how that transition will take place and how long it will take will depend on the new fuels that regulators choose and the regulatory approach to imposing the fuel switch. The regulatory approach to automobile fuel choices in the U.S. has consisted almost exclusively of mandated changes in autos and fuel availability. Currently, the additive MTBE is required for all gasoline sold in certain metropolitan areas during the winter months. In the mid-1970s, when the U.S. decided to phase out leaded gasoline, it did so essentially by requiring that all new cars built after 1975 use only unleaded fuel and by mandating that all gas stations sell unleaded gasoline. This administrative approach contrasts with the various European policies towards automobile fuels. The Europeans, who have very high gasoline taxes to begin with, have attempted to encouraged the phase-out of leaded gasoline by imposing higher taxes on gasoline with lead and lower taxes on automobiles that use unleaded gasoline. The European e®orts, which began much later than the U.S., have had mixed results. The most e®ective programs, in Germany and the Scandanavian countries have achieved approximately the same progress in lead phase-out that the U.S. had in the same number of years after the programs began. In southern Europe, however, there has been very little movement away from leaded gasoline. While the European experience makes clear that implementing automobile fuel policies through a price mechanism may not be the comprehensive solution, it also highlights the potential e®ects of price incentives on the fuel switching process. In the U.S., these e®ects have been largely ignored at the regulatory level. No tax policy was implemented to encourage the switch from leaded to unleaded gasoline. As a result di®erences in production