Political Economy Obstacles to Fuel Taxation

TLDR

Fuel demand is elastic, making taxation an effective climate tool, yet in low‑price, high‑demand countries political pressure and consumption dynamics render raising gasoline taxes difficult. This study analyzes the determinants of gasoline taxation to illuminate the obstacles to raising fuel taxes. The study finds that higher government debt is associated with higher gasoline tax rates.

Abstract

Many studies have shown that fuel demand is quite elastic and that the best way to reduce fuel use (to tackle climate issues) is by taxing fuel. Yet it seems almost impossible to do so, particularly in those countries with low prices and high demand. The purpose of this paper is to cast light on the difficulties of raising gasoline taxes by analyzing the determinants of gasoline taxation. We believe that one of the reasons for the difficulties is that political pressure influences the political decisions regarding taxation of gasoline consumption. Not only do low taxes and thus low prices encourage high consumption, but high levels of consumption also lead to considerable pressure against raising the taxes. Our findings also point to the significance of other factors such as government debt (a higher debt leads to a higher gasoline tax rate).