ECONOMIC ANALYSIS: Policies go only so far in driving interest in new fuels

Keywords Environment

After a year or so of writing this column, I’ve learned at least two things.

First, if you write about taxes or environmental policy, you are going to be busy reading angry e-mails.

Second, almost none of those angry e-mails are from folks who have actually i n c o nve n i e n c e d themselves to perform research on tax or environmental policy.

Even though I know these two things, I cannot resist writing about environmental policy and taxes for this week’s column.

A few years ago, I was heavily into environmental policy research. It was all pretty technical economics work, the kind with

upside-down Greek letters and second

derivatives. It really puts a toddler to sleep at bedtime.

Among the things produced by these efforts was an economic analysis of a carbon-capture program called Futuregen and estimates of the cost of regulating mountaintop mining. All fun stuff designed to rob an economist of his friends on both sides of any issue.

Nestled in all that research was an evaluation of the relative contribution of prices, income, taxes and public policy on the adoption of alternative fuel vehicles in each state. This was really interesting work because states had enacted very different policies and levied very different tax rates. During the period examined, gas prices also fluctuated a great deal (but not quite as

much as we’ve seen in recent years).

What I found was pretty straightforward: Adoption of alternative-fuel vehicles was influenced a wee bit by gas taxes. The higher the state’s gas taxes, the higher the adoption rate.

I also found that the more urban and richer the population, the higher the rate of vehicle adoption in each state. Again, no mystery here, since I was looking at pre-2005 data when fuel costs weren’t too bad but the cost of vehicles was pretty high.

I also found that state and federal tax incentives played a very small role in adoption rates of alternative-fuel vehicles. That’s a problem because it suggests that even the relatively generous tax incentives were having a very mild effect on ownership of these autos.

Here’s the big insight of the paper: What mattered most was the price of fuels, not other policies. High alternative-fuel costs kept ownership down, while high gas costs propelled the adoption of alternative-fueled vehicles.

Today, this doesn’t seem like a particularly clever insight (there goes my Nobel Prize nomination). New-car buyers struggle to find alternative-fuel vehicles on lots, and gas prices are clearly to blame for the quick buy-up. What the research does tell us is that public policy has limitations. All the policy efforts to induce consumers to buy the fuel-efficient vehicles had less influence than a big jump in the price of a gallon of gas.

Hicks is director of the Bureau of Business Research at Ball State University. His column appears weekly. He can be reached at

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