Policy diffusion and the interdependent fuel taxes

Abstract

Fossil fuels remain undertaxed worldwide despite the accelerating threat of climate change. While subscribing to the existing literature on that domestic politics matters, I contend that policy diffusion is yet another mechanism here: risk-averse policy makers carefully follow their counterparts abroad, so incrementalism in taxing fossil fuels is self-perpetuating transnationally. Using data from 29 OECD countries, 1990–2019, various spatial econometric analyses lend support to my argument: the excise tax on gasoline in one country positively correlates to that in other countries, with this interdependence being more pronounced between geographic or linguistic “neighbors” and trade or political partners. Substantively, a gasoline tax cut by one unit in a single country could spread over 60% of its negative effect elsewhere. This Letter concludes with its contribution to the literature, possible avenues for future research, as well as important policy implications.