Distributional effects of taxing transport fuel Thomas Sterner a,b,n a Department of Economics, Go ¨teborg University, Sweden b University Fellow, RFF, Sweden article info Article history: Received 10 December 2009 Accepted 3 March 2010 Available online 31 March 2010 JEL Classifications: Q48 Q52 Q53 Keywords: Fuel Tax Regressivity Distribution abstract This paper 1 takes as its starting point the observation that fuel prices – and thus taxes – are important for good management of climate change and other environmental problems. To economists this should be no surprise yet it seems that the role of fuel taxation as an instrument of climate policy has not been fully appreciated. It is however one of the few policy instruments that, since several decades, has actually reduced fuel consumption appreciably. Thanks to taxation (mainly in Europe and Japan), carbon emissions are considerably lower than they would have been otherwise. In future where carbon emissions are to be cut drastically, this instrument will be crucial. There is however much opposition to the instrument. This opposition uses various arguments, for instance that fuel taxes hurt the poor since they are strongly regressive. We however find that the choice of country and methodology turns out to be of great consequence. We study seven European countries—France, Germany, United Kingdom, Italy, Serbia, Spain and Sweden and do find some evidence of regressivity but the evidence is very weak. It does not apply when lifetime income is used and it does not apply to the poorest country in the group. The best one-line summary is probably that the tax is approximately proportional. & 2010 Elsevier Ltd. All rights reserved. 1. Introduction The scale of decoupling between carbon emissions and economic activity needed in the next decades is of unusual magnitude. If we are to continue economic growth in Europe even at a moderate rate of say 3–4% this means increasing incomes between 4 and 7 times in the next fifty years when carbon emissions have to be cut by roughly 75%. This means that emission intensities have to be cut by about 95% in all sectors. It is difficult to see this achieved merely by behavioral changes or by technological changes on their own. Presumably we will need some combination. Definitely we will need higher prices for all fossil fuels to drive both behavioral and technical changes. One of the most efficient instruments to reduce emissions is high taxes on fossil fuels such as gasoline and diesel. In Europe, these taxes are higher than in the US, which has considerably contributed to lower emissions of greenhouse gases and even on the atmospheric concentrations of carbon dioxide (Sterner, 2007). Fuel taxes might not originally have been designed for environ- mental purposes but their effect is surely environmental. 2 People discuss whether or not there are any sufficiently powerful economic instruments available but fail to see the available evidence: The experience of fuel taxes in Europe, Japan and a few other countries is in fact a full-scale demonstration of how powerful economic instruments can be. There is, however, a strong opposition against raising fuel taxes and an often heard argument is that they are strongly regressive. This may have originated from early studies in the US during the 80s and 90s (Poterba, 1991). More recent research shows however that regressivity can by no means be taken for granted. The choice of methodology has proven to be of great consequence for the distributional outcome and one might therefore wonder if results vary significantly between countries. In this paper, we study seven European countries—France, Germany, United Kingdom, Italy, Serbia, Spain and Sweden. Section 2 discusses the effects of fuel taxation contrasting the experience in Europe and Japan with that in other industrialized countries like the US, in Section 3 we discuss how to analyze effects on income distribution, Section 4 presents the data and Contents lists available at ScienceDirect journal homepage: www.elsevier.com/locate/enpol Energy Policy 0301-4215/$ - see front matter & 2010 Elsevier Ltd. All rights reserved. doi:10.1016/j.enpol.2010.03.012 n Correspondence address: Department of Economics, Go ¨ teborg University, Sweden. Tel.: + 46 31 786 1377; fax: + 46 31 786 1326. E-mail address: Thomas.sterner@economics.gu.se 1 Thanks for excellent research assistance for this paper to Emmanuel Carlsson. Valuable comments from Francisco Alpizar, Ashokankur Datta and an anonymous referee are gratefully acknowledged as is financial support from the Swedish International Development Cooperation Agency (Sida) to the Environ- mental Economics Unit at the University of Gothenburg. 2 The stated motives for gasoline taxes vary considerably. In some countries they are just a convenient tax base. In others they contribute to road building & maintenance plus health effects. These vary geographically and Parry and Small (2005) question their level for such purposes. Historically, climate externalities have played a small role (if any) in motivating gasoline taxes – but the taxes play a big role in reducing emissions of climate gases. Energy Policy 41 (2012) 75–83