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Political Economy Obstacles to Fuel Taxation

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).

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Petroleum – Policy and Regulation

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Causality, gasoline consumption, political economy, policy instruments, taxation

DOI: 10.5547/ISSN0195-6574-EJ-Vol25-No3-1

Published in Volume 25, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.