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Fuel consumption dynamics in Europe: Tax reform implications for air pollution and carbon emissions

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  • Zimmer, Anne
  • Koch, Nicolas

Abstract

This paper estimates the potential of fuel tax reforms to curb harmful air pollutants and carbon emissions from road transport in Europe. We provide robust estimates for the responsiveness of fuel consumption to changes in prices, which constitute a key determinant for emissions pathways in response to policy interventions. We show that accounting for the manifest shift to diesel in the European vehicle fleet, as well as slow consumption adjustments over time yield strong evidence that petrol and diesel demand are more price elastic already in the short run than previous studies suggest. In particular, we present evidence that diesel demand in Europe tends to be more price elastic than petrol demand, when instrumenting prices with excise taxes to account for endogeneity. Inspired by recent fuel tax reform proposals, we then show that both (i) a repeal of the preferential tax treatment for diesel and (ii) an introduction of a carbon content-based tax, could avoid considerable amounts of health damaging air pollutant exhaust while at the same time contributing substantially to achieving the EU climate policy goals for 2020. In many countries, abandoning the diesel tax advantage has nearly as strong an effect as a 50€/tCO2 tax on fuel. Both reforms have significant revenue potential.

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  • Zimmer, Anne & Koch, Nicolas, 2017. "Fuel consumption dynamics in Europe: Tax reform implications for air pollution and carbon emissions," Transportation Research Part A: Policy and Practice, Elsevier, vol. 106(C), pages 22-50.
  • Handle: RePEc:eee:transa:v:106:y:2017:i:c:p:22-50
    DOI: 10.1016/j.tra.2017.08.006
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    More about this item

    Keywords

    Fuel price elasticity; Diesel; Gasoline; Climate policy; Air pollution; Dynamic panel;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • R48 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government Pricing and Policy
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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