Raising fuel taxes could significantly reduce emissions of greenhouse gases and other pollution from the transportation sector. One of the prime arguments against raising fuel taxes is the perception that they are regressive—that they are more costly to the poor and other socioeconomic groups. But recent research suggests the opposite, particularly for developing countries.
The world happens almost to have a natural experiment in this area because fuel taxation policy differs considerably across countries, allowing us to study the effects of this instrument. Fuel tax rates vary widely, from a mere 19 cents per liter in the United States to $1.19 per liter, the average for Western European countries (for more detail, see Table 1). Elsewhere, such as in Japan and Australia, rates fall in the intermediate range. There are two notable trends: taxes within Western European countries have been converging over the last 20 years, whereas the spread between Western Europe and other countries has been increasing over time (since 2005, the average in this table for West European countries went up by 35 percent while the other countries’ average rose by less than 20 percent).
A particularly interesting comparison can be made between the United States and Europe. The very low fuel taxes in the United States compared even to the lowest tax rates in Europe are related to higher fuel use—although the relationship is mainly apparent in the very long run. The average-per-capita consumption of gasoline in the United States is more than four times higher than in the United Kingdom or several other European countries. Such data suggest that if the European Union had followed a similar tax policy to that in the United States, aggregate carbon emissions would have been substantially higher.
One of the main reasons for resistance to fuel taxes appears to be the popular belief in many, many countries is that fuel taxes hurt the poor. However, my studies with colleagues (see Further Reading) have found neutral or very weak regressive results in richer countries and quite strong progressive evidence in the developing countries, such as China, India, Ethiopia, Indonesian, Ghana, Nairobi, Mali, and several more. The intuition is not surprising; in most developing countries, the very poorest households cannot afford to own a car at all. Fuels have more of a “luxury” character and hence fuel taxes are more progressive. On the other hand, fuel taxes also increase the cost of public transportation (and other goods). Because the poor typically use public transportation more intensively, this effect might mitigate the progressivity of fuel taxes, but we have found that the net effect is still progressive in practically all developing countries.
The United States is one of the very few exceptions to some of these trends. This is at least partly explained by the lack of public transport and the high general income level, which implies that even the poor have cars. Moreover, to the extent that the domestic fuel tax is regressive, it could very easily be made progressive by a suitable use of the tax proceeds, through either lump-sum repayments or environmental fiscal reform so that tax revenues are used to lower some other, more regressive tax.
RFF
