Both the price of petrol and diesel have skyrocketed due to the current energy crisis and their consumption has fallen as a result
Gasoline and diesel are the main causes of urban pollution in Spain, causing serious harm to human health. They are also responsible for a large part of our contribution to climate change.
Both the price of petrol and diesel have skyrocketed due to the current energy crisis and their consumption has fallen as a result. But the trend has changed and costs are currently falling. While this news is positive for our wallets, it’s not so much for the environment.
Gasoline and diesel are fossil fuels, the main sources of CO₂ emissions that cause climate change. In addition, fossil fuels emit many other pollutants with very harmful effects, especially for human health.
The European Environment Agency attributes more than 400,000 premature deaths per year in the EU to air pollution. These deaths are about 9 million worldwide.
In Spain, traffic is the main source of urban pollution. Therefore, it is also the leading cause of such premature deaths. Air pollution in particular causes more than 24,000 premature deaths in Spain every year.
The relationship between the demand for a good and its price is the price elasticity of demand. For most goods this elasticity is negative. That is, when price increases, we expect consumption to decrease and vice versa.
In the case of fuels, calculating this elasticity is quite complicated since the demand is indirect from the use of vehicles. In addition, there are other factors that influence the demand for fuel, such as consumer income or the composition of the vehicle fleet. The latter factor is in turn influenced by the price of fuel, which can encourage current cars to be replaced by electric ones or consume less fuel per kilometre.
The effect of fuel prices on the fleet is medium and long term. So, in the short run, elasticity is relatively rigid. That is, the increase in prices does not lead to major decreases in demand, as many people find it difficult to reduce their consumption.
In the long run, however, the elasticity is much higher. The reason is that the price increase may cause the above-mentioned changes in the fleet. You can also have other steps taken to reduce or eliminate dependence on cars.
Studies confirm that the price elasticity of petrol and diesel is low in the short term, but clearly higher in the long term. They also show that the greatest effect occurs when the price increase exceeds its all-time high. Conversely, the effects are not significant if the increases are below the maximum.
Moreover, the effect of income growth on demand is much greater than that of prices. The income effect occurs because the “richer” we are, the more we consume. Consequently, the effect of higher income tends to cancel out the effect of price increases.
We can calculate the evolution of consumption using the statistics of the first nine months of 2022. So let’s compare 2022 with the same period of 2019 (last “normal” year). The result is that the average consumption of gasoline has increased by 95%. Diesel A has been reduced by an average of 5%.
These calculations indicate an increase in the registration of petrol cars and a decrease in that of diesel cars. But it should be borne in mind that diesel fuel is consumed much more, and its energy capacity is much greater than that of gasoline. Taking this into account, the result is a decline in global automotive fuel consumption.
However, the decrease in consumption is much lower in percentage terms than the increase in prices. This is what we should expect given the low short-term price elasticity. Including the government-approved discount of 20 cents per liter, the comparison between the month with the highest average prices in 2022 (June) and the average of 2019 yields the following results:
– A 47% increase in gasoline prices.
– A 51% increase in diesel prices.
So it seems that the rise in fuel prices has contributed to a global reduction in car use. We should have expected this to be the case as price increases have surpassed all-time highs. Drivers may have reduced unnecessary trips, replaced private vehicles with public transport, car sharing, etc.
On the other hand, the decision on which vehicles to buy is also influenced by the price increase. High prices and especially the perception that they will remain high in the future make electric vehicles more attractive. However, this is an effect that will only be fully observable in the medium and long term.
The market can function well if consumers and producers take into account all the benefits and costs of their actions. However, nobody considers pollution if they don’t pay for the damage it causes. As a result, prices are lower than they should be. More polluting goods such as petrol and diesel are also being consumed than they should be.
That’s why we need fuel prices that include all their costs. Markets usually only take into account the costs of production, transport, marketing, etc. These costs are increased by taxes: VAT and the Special Tax on Hydrocarbons.
What else should prices take into account? First of all, the enormous damage that petrol and diesel cause to human health. Secondly, the economic costs of this damage (health costs, absenteeism, etc.). Third, its contribution to climate change. And all other costs that the market does not take into account.
Current taxes may seem high in Spain. Before the crisis, they represented about half the price of petrol and diesel. However, it is estimated that these taxes are only equal to about half of all costs that the markets ignore.
Unfortunately, it is not enough to inform people about the social damage caused by their consumption of petrol or diesel. The only effective way to account for these damages is to pay them. And the only way to do this is through taxes, as an additional cost on top of market prices.
So the conclusions of the economy are clear if we want to achieve our environmental and climate goals. Now that petrol and diesel prices are falling again, we must first abolish subsidies on petrol and diesel. Second, we must not allow fuel prices to fall too low.
The reduction in the energy costs of our imports is great news. But it wouldn’t be so positive if the price of petrol and diesel plummeted, if it did. The fall in prices should be at least partially offset by taxes. It would be especially commendable that there would finally be a CO2 tax in Spain, as in many other countries.
This article was published in ‘The Conversation’.
Source: La Verdad
I’m Ben Stock, a journalist and author at Today Times Live. I specialize in economic news and have been working in the news industry for over five years. My experience spans from local journalism to international business reporting. In my career I’ve had the opportunity to interview some of the world’s leading economists and financial experts, giving me an insight into global trends that is unique among journalists.
