Fuel Consumption Dynamics in Europe - Implications of Fuel Tax Reforms for Air Pollution and Carbon Emissions from Road Transport

54 Pages Posted: 30 Aug 2016

See all articles by Anne Zimmer

Anne Zimmer

Potsdam-Institut für Klimafolgenforschung (PIK)

Nicolas Koch

Mercator Research Institute on Global Commons and Climate Change (MCC); University of Hamburg

Date Written: August 28, 2016

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 hitherto restricted dynamics of the fuel consumption response 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.

Keywords: Fuel Price Elasticity, Diesel, Gasoline, Climate Policy, Air Pollution, Dynamic Panel

JEL Classification: H23, R48, Q41, Q48, Q53, Q54

Suggested Citation

Zimmer, Anne and Koch, Nicolas, Fuel Consumption Dynamics in Europe - Implications of Fuel Tax Reforms for Air Pollution and Carbon Emissions from Road Transport (August 28, 2016). Available at SSRN: https://ssrn.com/abstract=2813534 or http://dx.doi.org/10.2139/ssrn.2813534

Anne Zimmer (Contact Author)

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

Telegrafenberg 31
Potsdam, Brandenburg 14473
Germany

Nicolas Koch

Mercator Research Institute on Global Commons and Climate Change (MCC) ( email )

Torgauer Straße 12-15
Berlin, 10829
Germany

University of Hamburg ( email )

Von-Melle-Park 9
Hamburg, 20146
Germany

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