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

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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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    1. Fullerton, Don & West, Sarah E., 2002. "Can Taxes on Cars and on Gasoline Mimic an Unavailable Tax on Emissions?," Journal of Environmental Economics and Management, Elsevier, vol. 43(1), pages 135-157, January.
    2. Barnett, A H, 1980. "The Pigouvian Tax Rule under Monopoly," American Economic Review, American Economic Association, vol. 70(5), pages 1037-1041, December.
    3. Ino, Hiroaki & Matsumura, Toshihiro, 2021. "Promoting green or restricting gray? An analysis of green portfolio standards," Economics Letters, Elsevier, vol. 198(C).
    4. Meredith Fowlie & Mar Reguant & Stephen P. Ryan, 2016. "Market-Based Emissions Regulation and Industry Dynamics," Journal of Political Economy, University of Chicago Press, vol. 124(1), pages 249-302.
    5. Ino, Hiroaki & Matsumura, Toshihiro, 2021. "Optimality of emission pricing policies based on emission intensity targets under imperfect competition," Energy Economics, Elsevier, vol. 98(C).
    6. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
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    More about this item

    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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