Rationalizing Transport Fuels Pricing Policies and Effects on Global Fuel Consumption, Emissions, Government Revenues and Welfare

Today, a confluence of factors, such as growing concerns about associated consumption externalities and socioeconomic pressures, is building the momentum towards reducing fossil fuel consumption for road transport and rationalizing prices to reflect direct, indirect and externality costs. While limited country specific work has been done, considering optimal transport fuel prices, (e.g. Parry 2012), we have found no attempts to do so with the breadth and scope of our analysis. Thus in this paper, we make three main contributions. First, we survey policies aimed at reducing transport fuel consumption. Out of these policies, we chose fiscal instruments for our extensive quantitative analysis carried out in a supply and demand framework for 123 countries. Second, we quantify the rationalized cost of transport fuels to reflect the direct costs (production), indirect costs (road maintenance), and negative externalities (climate change, local pollutants, traffic accidents and congestion). Finally, we measure the change in demand, environmental emissions, government revenues and welfare induced by successively phasing in our three cost categories. By rationalizing prices, we estimate that total demand for gasoline could be reduced by 8.5 percent and that of diesel by 5.7 percent. This would lead to not only reduction in associated negative externalities, but also generate an estimated $400 billion in revenues to governments.