How do fuel use and emissions respond to price changes

Transport fuel use responds negatively to price increases (in both the short and the long run), and positively to population and income increases, according to this report, which describes the differing effects across the various transport modes. In the short run, car fuel use declines about 1.5 per cent with a 10 per cent increase in the petrol price. This rises to about a 4 per cent decline when long-run demand and technology adjustments are made. As the average age of the car fleet is about 10 years, the long run stretches to 15 years and beyond. It is possible that the long-run responsiveness to radically higher fuel prices could even be greater, given threshold effects on consumer choices and technological development. International studies have suggested a response to significantly higher fuel prices of up to —0.7, combining demand and supply side (technology) changes (see References). Truck fuel use is more price-inelastic over the long term than car fuel use. Freight costs comprise 5 to 10 per cent of final goods costs and even at current (June 2008) freight rates, fuel use accounts for only about 30 per cent of freight rates. There is also a very low elasticity of substitution between long distance road and intercapital rail. Trucking fuel use (and activity) also increases more strongly with economic and income growth than does car fuel use. Bulk rail fuel use (most of rail freight) has a growth trend driven largely by commodity export increases and is thereby closely linked to world economic growth. It has a very low response to changes in its fuel costs, as these are built into export prices very rapidly. Aviation fuel use, like road freight and light commercial vehicle use, is considerably faster growing than car fuel use, as aviation travel responds strongly to rising incomes and economic growth. Nevertheless, for domestic aviation fuel use, a 10 per cent increase in aviation turbine fuel prices could be expected to result in a 2 per cent decline in passenger travel. International aviation fuel use is more fuel price elastic, reflecting the more ‘discretionary’ character of some tourism, business and family reunion travel; a 10 per cent increase in aviation turbine fuel could potentially result in a 6 per cent decline in passenger numbers.