Gas Prices 102: Policy Solutions

Gasoline is not only important to our transportation systems, but to the economy as a whole: the price of gasoline influences the prices of other important commodities such as food. Rising gasoline prices frequently and uniquely result in public outcry (as compared to when other goods and services face price increases), demanding action by policymakers to help households bear the burden of high gasoline prices. But what options are available? What has worked in the past? And, perhaps, what hasn’t?

This explainer builds off Gas Prices 101, a September 2022 explainer which describes the factors that affect gasoline prices and how consumers react to price changes. This explainer will focus primarily on policy options available to decisionmakers to reduce the pain at the pump.

When gas prices are high, there is pressure on decisionmakers to implement policies that address these high prices and the burdens they impose on households. However, some policies that decisionmakers have pursued in the past, such as the ones outlined below, have had unintended consequences that illustrate the complexity of making sound policy decisions.

Supply Increases

In 2022, the Biden administration announced policies to increase the US gasoline supply to combat high energy prices. Among these policies were releases from the Strategic Petroleum Reserve and the leasing of new public lands for drilling. While increasing supply can decrease gasoline prices, it also runs counter to the need to address pollution from driving and the effects on climate change.

Gas Tax Holidays

In early 2022, one of the most popular state policies to address rising gasoline prices was the implementation of short-term gasoline tax holidays. While cutting gasoline taxes makes the price at the pump cheaper for consumers, it places burdens on state governments who forgo the revenue brought in by gasoline taxes. For example, Maryland’s month-long gas-tax suspension cost the state $100 million in lost tax revenue—money that could have contributed funding to infrastructure or other critical priorities.

Additionally, a gas tax holiday affects all households equally and removes the incentives for households to drive less or, particularly for higher-income households, to buy more fuel-efficient vehicles (thereby indirectly contributing to pollution and climate change). Despite the goal of addressing the burden of rising gasoline prices, gas tax holidays do not change the fact that lower income households will continue to pay more (as a percentage of their income) for transportation.

Price Caps

When OPEC cut off oil to the United States and its allies in the 1970s, leading to a reduction in gasoline supply, the United States tried to keep prices from rising by implementing price caps. In a market without price caps, a reduction in gasoline supply increases its price, which in turn reduces the demand for gasoline. However, with the price cap implemented in the 1970s, demand did not change even as supply dwindled, leading to gasoline shortages and long lines at gas stations.

The experience in the 1970s shows that price caps keep the price low for those who can acquire gasoline but also have unintended consequences in terms of creating a shortage of energy. Shortages can also lead to black markets that favor the wealthy and connected, with the vulnerable and disadvantaged most at risk of losing access to energy.

Another form of a price cap has also been discussed in the United States to address the rise in gasoline prices under the guise of addressing price gouging. Though anti-price gouging legislation sounds like it would protect consumers, it is effectively a price cap. This is because it would limit the ability of gasoline suppliers to raise prices when there are supply disruptions, thus keeping demand high and resulting in many of the same unintended consequences of the gasoline price caps in the 1970s.

Fortunately, solutions do exist that can help reduce the economic strain associated with high gasoline prices without causing distortions or problems such as those listed in the prior section. Workable options include both a short-run solution that can reduce burdens immediately, as well as long-run solutions, which may take more time to reduce the burden but could have long-lasting impacts.

Short-Run Solutions

One solution that can provide relief today from the burden of higher gasoline prices, without creating inefficiencies or market distortions, is to send fixed refunds or rebates to households. If these refunds or rebates are not tied to gasoline consumption, they create positive incentives to reduce gasoline consumption while still providing households with relief.

This type of solution was implemented in California during the summer of 2022, when average gasoline prices spiked to $6.44/gallon in the state. Specifically, the state government began sending checks ranging from $200 to $1,050 to lower-income households; the amounts depended on income and other non-driving related factors (such as number of dependents). These payments did not depend on driving behavior, yet provided relief from the burdens brought about by high gasoline prices and inflation.

The gasoline relief payments California households received were based on a small amount of household-level information. However, our own research demonstrates that rebates can be better targeted to reduce inequities associated with gasoline price burdens In our research example, we focused on burdens caused by gasoline tax increases, though the results also apply to market-based gasoline price increases. by also considering household location. Location is significantly linked with gasoline burdens, as rural households and those without access to public transportation are less able to respond to gasoline price increases than households living in more urban and connected areas. We proposed a gasoline tax rebate in which households in the same county with the same income receive the same rebate, phasing out the rebates for those households with incomes above $100,000. By providing flat payments based on both income and location, we found that the inequities across income caused by gasoline price increases would almost entirely be eliminated.

Long-Run Solutions

Vehicle Efficiency Standards

One long-run solution to reduce the burden of higher gasoline prices is to strengthen vehicle efficiency standards (which regulate the average efficiency of new vehicles), thus ensuring that new vehicles will require less gasoline to travel the same distance. Federal corporate average fuel economy (CAFE) standards, which determine the average efficiency within a vehicle manufacturer’s fleet, have been increasing steadily over the years. In April 2022, the Department of Transportation updated its CAFE standards for model years 2024 to 2026, requiring an average of 49 miles per gallon. Increasing efficiency reduces the amount of gasoline that households will need to purchase to fuel their vehicles. In turn, households spend less on gasoline and are less affected by higher gasoline prices. It is important to note that research suggests, however, that this benefit is tempered by a (small) increase in driving (known as a rebound effect) due to the reduction in the price per mile from the increases in fuel efficiency.

Electric Vehicles

Another solution to reducing the burden associated with high gasoline prices is to incentivize the adoption of electric vehicles (EVs). Because these vehicles do not use gasoline, households who drive EVs no longer have to worry about high gasoline prices. As more households buy EVs, the demand for gasoline drops, and once EV adoption hits a certain level, this can also put downward pressure on gasoline prices and reduce the burden for other households.

The federal government recently passed three major laws (the Infrastructure Investment and Jobs Act, the Inflation Reduction Act, and the CHIPS and Science Act) that provide billions of dollars in funding for EV purchases, charging station investments, and EV battery manufacturing. The existing CAFE standards also provide credits to manufacturers for selling EVs—essentially making it easier for a manufacturer to reach its required fleet efficiency by producing EVs, which further incentivizes EV production.

Another way to decrease the total demand for oil and gasoline is to provide incentives for the adoption of electric medium- and heavy-duty vehicles (trucks and other large vehicles). Electrifying this sector of transportation could have large impacts on total US oil and gasoline demand, as transport trucks, buses, and other large vehicles consume a substantial amount of diesel (which is also refined from oil) due to low average fuel efficiency and high vehicle miles traveled. However, these vehicles are more difficult to electrify given much higher purchase prices relative to diesel trucks, as well as other operational and logistical constraints.

Given the nascent nature of electric vehicle adoption, more research is needed to understand how much of the transportation fleet must be converted to electric to decrease average gasoline prices.

Urban Planning Changes

More broadly, urban planning can be adjusted to help reduce the dependence on gasoline. For example, access to public transportation provides an alternative means to car travel, thereby reducing the demand for gasoline. Our own research has demonstrated that access to public transportation increases the gasoline price responsiveness of households. Smart urban planning, such as mixed-use housing, abundant protected bike lanes, and high-density housing can also help to reduce people’s reliance on gasoline. These changes, however, will take time to implement before we can observe these behavioral changes.

Though reducing gasoline demand insulates households from the effects of high gasoline prices, there are some consequences to this change.

As demand for gasoline drops, so do gasoline tax revenues. Because governments use these revenues for infrastructure improvements, particularly for road infrastructure, a decreasing tax base can result in less money available for road and bridge improvements. Given the United States’ aging infrastructure, this revenue loss can create significant fiscal challenges.

Fortunately, there are ways to address these revenue shortfalls. For example, state governments can implement alternative types of taxes, such as increased registration fees or taxes on EV/hybrid vehicles, or taxes on vehicle miles traveled rather than gasoline. A vehicle-miles-traveled (VMT) tax has the benefit of being indifferent to vehicle type; furthermore, there is emerging evidence that VMT taxes are progressive and do not differentially impact Black and Hispanic households. However, challenges remain in establishing an accurate and equitable approach to implementing and collecting such a tax.

Another unintended consequence of the proposed policies above has to do with the shift toward EVs. Specifically, as more households drive EVs, the demand for electricity will consequently rise. An increase in electricity demand requires investments in local electricity distribution infrastructure, electric transmission lines, and electricity-generating plants to allow supply to keep up with demand. With the increase in EV adoption, it will also be important to consider the sources of electricity. If increased electricity demand is met through increases in the use of natural gas or coal, it will have the unintended consequence of increasing emissions and contributing to climate change.

Whether the price of electricity will increase or decrease with greater adoption of EVs, and at what percentage of adoption these changes will occur, is still an open question for research. One way to keep electricity prices low even as the demand for electricity rises with more EVs on the road is by encouraging managed charging—charging during hours of the day when there are lower constraints on the electric system. By shifting charging to times when the distribution and transmission grids are relatively underused, drivers can take advantage of the grids' excess capacity, limiting the need for electric utilities to expand their generation or transmission. This type of managed charging will be exceedingly important in the context of medium- and heavy-duty electric vehicle adoption, given the large size of their batteries and massive energy demands they can place on the system.