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Carbon Tax Saliency: The Case of B.C. Diesel Demand

Author

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  • Jean-Thomas Bernard

    () (Department of Economics, University of Ottawa, Ottawa, ON)

  • Maral Kichian

    () (Graduate School of Public and International Affairs, University of Ottawa, Ottawa, ON)

Abstract

In 2008, the government of the province of British Columbia broke new ground in North America by introducing a revenue-neutral carbon tax on fossil fuels. The initial rate was set at $10/ton of CO2 which was then increased annually by $5 increments to reach $30/ton in 2012. We focus on monthly diesel use which is mostly related to commercial activities. Our objective is to measure user reaction to the new tax. Exploiting the sample time series properties, we study the long run reaction via a cointegration equation, linking diesel use, its total price, and income, and the short run reaction using an error correction model (ECM). Carbon tax saliency is interpreted as a short run phenomenon that shows up in the dynamic adjustment of the ECM. We find that the long run total price elasticity estimate of diesel demand is -0.52 and that the short run tax saliency effect is statistically significant. However, the total reaction is small relative to Canada’s commitment to decrease GHG emissions by 30% in 2030 relative to 2005 levels.

Suggested Citation

  • Jean-Thomas Bernard & Maral Kichian, 2017. "Carbon Tax Saliency: The Case of B.C. Diesel Demand," Working Papers 1718E, University of Ottawa, Department of Economics.
  • Handle: RePEc:ott:wpaper:1718e
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    References listed on IDEAS

    as
    1. Lucas W. Davis & Lutz Kilian, 2011. "Estimating the effect of a gasoline tax on carbon emissions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(7), pages 1187-1214, November.
    2. Dahl, Carol A., 2012. "Measuring global gasoline and diesel price and income elasticities," Energy Policy, Elsevier, vol. 41(C), pages 2-13.
    3. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and Taxation: Theory and Evidence," American Economic Review, American Economic Association, vol. 99(4), pages 1145-1177, September.
    4. Barla, Philippe & Gilbert-Gonthier, Mathieu & Kuelah, Jean-René Tagne, 2014. "The demand for road diesel in Canada," Energy Economics, Elsevier, vol. 43(C), pages 316-322.
    5. Murray, Brian & Rivers, Nicholas, 2015. "British Columbia’s revenue-neutral carbon tax: A review of the latest “grand experiment” in environmental policy," Energy Policy, Elsevier, vol. 86(C), pages 674-683.
    6. repec:aen:journl:ej39-5-filis is not listed on IDEAS
    7. Stavros Degiannakis, George Filis, and Vipin Arora, 2018. "Oil Prices and Stock Markets: A Review of the Theory and Empirical Evidence," The Energy Journal, International Association for Energy Economics, vol. 0(Number 5).
    8. John T. Cuddington and Leila Dagher, 2015. "Estimating Short and Long-Run Demand Elasticities: A Primer with Energy-Sector Applications," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    diesel demand; carbon tax; tax saliency.;

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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