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Are fuel taxes redundant when an emission tax is introduced for life-cycle emissions?

Author

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  • Ino, Hiroaki
  • Matsumura, Toshihiro

Abstract

This study examines the optimal combination of emission and fuel taxes for reducing greenhouse gas emissions in a monopoly market. Greenhouse gases are emitted during both production and consumption stages (life-cycle emissions). We present a case in which a government should impose an additional strictly positive fuel tax, even when an optimal emission tax is introduced: the case of a producer selecting fuel efficiency endogenously. Remarkably, the unit cost of fuel should be larger than the marginal social cost of fuel. The results imply that a government may maintain fuel taxes even after introducing an effective emission tax and be able to construct a socially desirable tax structure by using existing taxes.

Suggested Citation

  • Ino, Hiroaki & Matsumura, Toshihiro, 2024. "Are fuel taxes redundant when an emission tax is introduced for life-cycle emissions?," Economics Letters, Elsevier, vol. 241(C).
    • Handle: RePEc:eee:ecolet:v:241:y:2024:i:c:s0165176524003264
    DOI: 10.1016/j.econlet.2024.111842
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    Keywords

    Fuel tax; Emission tax; Optimal taxation; Carbon pricing; Vehicle industry; Fuel efficiency;
    All these keywords.

    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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