Fuel consumption dynamics in Europe: Tax reform implications for air pollution and carbon emissions. (December 2017)

• Record Type: Journal Article
• Authors: Zimmer, Anne; Koch, Nicolas
• Is Part Of: Transportation research. Volume 106(2017)
• Page Start: 22
• Page End: 50
• Publication Date: 2017-12
• Subjects: Fuel price elasticity -- Diesel -- Gasoline -- Climate policy -- Air pollution -- Dynamic panel; H23 -- R48 -- Q41 -- Q48 -- Q53 -- Q54; AB Arellano-Bond -- ADL autoregressive distributed lag -- CO2 carbon dioxide -- EC European Commission -- ECM error correction model -- ESD effort sharing decision -- FE fixed effects -- GHG greenhouse gases -- GMM generalized method of moments -- IV instrument variable -- LRM long run multiplier -- LSDV least squares dummy variable -- LSDVc bias corrected least squares dummy variable -- NOx nitrogen oxides -- OLS ordinary least squares -- PAM partial adjustment model -- PM particulate matter -- PM2.5 particulate matter with an aerodynamic diameter of up to 2.5 µm -- SCC social cost of carbon -- WP white paper; Transportation -- Research -- Periodicals; 388.011
• DOI: 10.1016/j.tra.2017.08.006
• Languages: English
• ISSNs: 0965-8564

Abstract

Highlights: Fuel price elasticities in Europe accounting for dieselization, endogeneity, dynamics. Fuel demand is more price elastic in the short run than previous studies suggest. Diesel seems more price elastic than petrol especially in the short run. End of diesel tax break can have as strong an effect on CO2, NOx & PM as 50€ CO2 tax. Fuel tax reforms can contribute substantially to achieving EU climate targets. 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 slow consumption adjustments 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.