The Endogeneity of OECD Gasoline Taxes: Evidence from Pair-Wise, Heterogeneous Panel Long-Run Causality Tests

Abstract

Despite the current interest in using fuel taxes as an instrument for climate policy, there has been little study of current automotive fuel tax regimes. We expand on two earlier cross-sectional studies on why fuel taxes differ across countries by using OECD panel data and employing heterogeneous panel cointegration and long-run panel Granger-causality techniques. We confirm some of those earlier studies’ conclusions. Further, we find that governments that rely on consumption-based taxes for revenues will have higher gasoline tax rates (than governments that rely on income and wealth/property-based taxes). But more significantly, we determine that higher gasoline demand among consumers “causes” democratic governments to set lower gasoline taxes — a finding with important implications for today’s climate/energy policy debate.

Keywords: determinants of OECD gasoline taxes, gasoline tax/price endogeneity, long-run panel Granger-causality, cross-sectional dependence, panel heterogeneity

JEL Classification: C23, H20, R40, R48