Decarbonising transport: Can we rely on fuel taxes?

Abstract

Although not without criticism, carbon pricing has been identified as a key instrument to support the energy transition process, as it can convey the signal of the actual cost of carbon in relative prices. However, when price and tax elasticities are considered separately, the international literature has shown that energy demand may be more sensitive to changes in tax rates. We estimate gasoline and diesel demand elasticities for Italian households using a dynamic model on a custom-built pseudo-panel. Our results confirm that household demand for transport fuels is more sensitive to the tax component than to the oil price, controlling for income level, age and cohort effects. These results have important implications for the potential effectiveness of transport fuel taxation in setting the decarbonisation pathway: a lower tax rate is required to achieve the target than that assumed on the basis of gross price elasticities.