Traffic jam photo by epsos on flickr.

Shrinking petrol tax fuelling gas guzzlers

26 February 2013

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Paul Burke is a Fellow in the Arndt-Corden Department of Economics. His research interests include economic growth and development, energy economics, environmental and natural resource economics, Asia-Pacific economies and empirical political economy. He teaches Microeconomic Analysis and Policy (IDEC8016) and Environmental Economics (IDEC 8053) at Crawford School.

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A decade-old decision to remove automatic indexation of petrol excise duty is contributing to Australia’s continuing reliance on gas guzzlers and helping to put the brakes on the take-up of fuel efficient vehicles, according to new Crawford School research.

Dr Paul Burke and Dr Shuhei Nishitateno studied petrol prices for 132 countries over the period 1995-2008 to find out what role pump price was playing in the take-up of fuel-efficient vehicles. The researchers found that a 10 per cent increase in the pump price of petrol on average results in a reduction in petrol use of around three per cent, as well as a two per cent increase in the fuel efficiency of new vehicles.

“This research adds to the large body of evidence confirming a simple point: people respond to incentives,” said Dr Burke. “Higher petrol prices provide an incentive to conserve petrol. Part of this happens via vehicle choice. If petrol is expensive, consumers are less likely to opt for a gas guzzler.

“Petrol consumption is ‘price inelastic’. This means that higher prices reduce consumption, although the response isn’t as big as it is for some other goods.”

Although Australians often feel hip-pocket pain at the pump, Australia’s petrol price is at about the middle of the pack internationally. The pump price is lower than in Europe or Japan, but higher than in the United States and many oil-rich countries. New vehicles sold in Australia continue to rate relatively poorly in terms of average fuel economy – a situation that could begin to be addressed if we faced the higher petrol taxes in place in most developed countries.

“We estimate that an increase in petrol tax to the level in the United Kingdom would result in an improvement in the fuel economy of new vehicles in Australia of around seven per cent,” Dr Burke said. “We’re not calling for such a large increase, but it’s interesting to consider how our vehicle choices would change if we moved in this direction. Our fuel economy would still be behind European countries, but not as far.”

He added that the tax applied to petrol in Australia is instead shrinking.

“Australia’s petrol excise duty is no longer linked to inflation, meaning that the excise is falling in magnitude in real terms. A return to automatic indexation of the petrol excise would help achieve reductions in emissions from the sector, as well as stimulate a transition to a more energy-efficient fleet. The revenue could be used to fund transport infrastructure and other priorities, or to reduce other taxes,” Dr Burke said.

“Additionally, Australia’s carbon pricing scheme essentially exempts the road transport sector. Australia’s carbon price should ideally be as broad as possible to encourage least-cost emissions reductions across the whole economy. This means fully covering transport.”

The study also revealed that countries that subsidise petrol prices at the pump, such as Indonesia, were falling behind in the transition to fuel-efficient vehicles.

“Countries that subsidise petrol for consumers are encouraging inefficient use of a scarce and valuable resource,” he said.

“In Indonesia, more than 10 per cent of government revenue goes to subsidising fuel. This comes at a high cost, and exacerbates Jakarta’s famous traffic jams. The Indonesian Government’s goal of transitioning to fuel-efficient vehicles would be greatly assisted by a move to more internationally-normal petrol prices.”

The research, Gasoline prices, gasoline consumption, and new-vehicle fuel economy: Evidence for a large sample of countries is published in Energy Economics

The paper and data can be accessed from Paul Burke’s website:

Paul is also on Twitter - @PaulBurke_econo

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