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Fuel standards

Following the Obama reforms, Australian states and commonwealth governments are today considering introducing compulsory fuel standards on Australian cars to reduce greenhouse gas emissions.   

‘Bounce back’ effects  partially nullify the effects of such reforms – with more fuel efficient cars drivers will tend to drive a bit further since it costs them less –  although several authors now believe such effects are very small. Thus strengthened fuel standards will reduce fuel use.

Such regulations are costly relative to the cost of simply targetting carbon emissions directly via a carbon trading scheme and this, indeed, is the difficulty of not having such as scheme.  Governments will increasingly need to resort to such ad hoc moves such as fuel standards schemes if emissions are to be cut.

At $10 per ton CO2 – the current planned introductory carbon charge – the implied CO2 cost of a litre of fuel is about 2.5 cents.  The effects of fuel proices on the demand for automotive fuels in Australia are highly price inelastic – recent estimates put the long-run price elasticity around -0.2.  Thus charging 2.5 cents extra for petrol will have a very low effect on petrol demands and therefore almost no effect on emissions.

As it stands too the effects of carbon charging will be discounted from the current excise on fuels of 38 cents per litre.  Mr Rudd does not want to see ‘working families’ crippled by having to pay an extra 2.5 cents per litre for their petrol.

With current approachs to setting carbon charges a ‘second best’ approach is indeed to apply restrictions on industry and consumers to reduce carbon-based fuel use.  A hefty carbon tax would be more efficient but fuel standard reforms probably also have a role.

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