Fuel taxes, driving, and CO2 emissions: Quasi-experimental evidence

This paper studies the efects of a signifcant fuel tax increase on driving and therefore CO2 emissions. Fuel taxes are a major policy tool to reduce road transport emissions. Despite the prevalence of fuel taxes, credible causal evidence of the efect of fuel taxes on driving and emissions is limited, and the reasons why existing estimates vary remain unexplored. Our research directly addresses these gaps in the literature by exploiting exogenous variation provided by Finland’s 2012 energy tax reform. The reform increased the tax on diesel by almost 12 euro cents per litre, while the tax on gasoline was increased by less than 3 euro cents per litre. The reform allows us to utilize a quasi-experimental setting and compare the vehicle kilometers traveled by diesel-and gasoline-powered cars to identify the impacts of fuel taxes. We employ a large representative data set of about 0.7 million cars, which contains car odometer readings from mandatory car inspections starting from 2008. Our estimates indicate a clear reduction in vehicle kilometers traveled by diesel cars due to reform-induced increases in diesel prices. In our heterogeneity analysis we observe that a large part of the response originates from car owners that reside in urban rather than rural environments.