Drive less, drive better, or both? Behavioral adjustments to fuel price changes in Germany

The demand for motor fuel should decline when its price rises, but how exactly does that happen? Do people drive less, do they drive more carefully to conserve fuel, or do they do both? To answer these questions, we use data from the German Mobility Panel from 2004 to 2019, taking advantage of the fluctuations in motor fuel prices over time and across locales to see how they affect Vehicle Kilometers Traveled (VKT) and on-road fuel economy (expressed in kilometers per liter) for gasoline and diesel cars. Our reduced-form regressions show that while the VKTs driven by gasoline cars decrease when the price of gasoline rises, there is virtually no response among diesel cars. Likewise, the on-road fuel economy is largely unresponsive to fuel price changes, irrespective of the fuel type. Since the price elasticity of fuel consumption is the difference between the price elasticity of VKT and the price elasticity of the fuel economy, our results suggest that the fuel economy might be the “weakest link” of price-based policies that seek to address environmental externalities.