## Automatic Fuel Pricing Mechanisms with Price Smoothing: Design, Implementation, and Fiscal Implications

_Technical Notes and Manuals, January 24, 2013_

## Source details

**Canonical URL:** [Automatic Fuel Pricing Mechanisms with Price Smoothing: Design, Implementation, and Fiscal Implications](https://www.imf.org/en/publications/tnm/issues/2016/12/31/automatic-fuel-pricing-mechanisms-with-price-smoothing-design-implementation-and-fiscal-40273)

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## Bibliographic details
- Authors: David Coady, Javier Arze del Granado, Anita Tuladhar
- Published: January 24, 2013
- Series: Technical Notes and Manuals
- DOI: https://doi.org/10.5089/9781475566949.005

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### Summary and key findings
- Many developing and emerging countries do not fully pass-through increases in international fuel prices to domestic retail prices, with adverse consequences for fuel tax revenues and tax volatility.
- The adoption of an automatic fuel pricing mechanism can help to address incomplete pass-through.
- Incorporating a price smoothing mechanism can ensure pass-through over the medium term while avoiding sharp increases (and decreases) in domestic prices.
- This Technical Note addresses:
  - (i) the design of an automatic fuel pricing mechanism;
  - (ii) the incorporation of domestic price smoothing and resulting tradeoffs;
  - (iii) the transition from ad hoc pricing adjustments to an automatic mechanism; and
  - (iv) policies to support this transition and the maintenance of an automatic mechanism.
- A standardized template for simulating and evaluating the implications of alternative pricing mechanisms for price and fiscal volatility is available on request.

### Design of an automatic fuel pricing mechanism
- Objective: improve responsiveness of domestic retail prices to international fuel price movements to protect fuel tax revenues and reduce tax volatility.
- Emphasis on formalizing pricing rules to replace ad hoc pricing adjustments.

### Price smoothing and tradeoffs
- Price smoothing can:
  - Ensure pass-through over the medium term;
  - Avoid sharp increases in domestic prices;
  - Also avoid sharp decreases in domestic prices.
- Tradeoffs: smoothing reduces short-term volatility in retail prices but may delay full transmission of international price changes to domestic consumers and fiscal accounts.

### Transition from ad hoc adjustments to automatic mechanisms
- Transition considerations include timing, communication, and institutional arrangements to move from discretionary pricing to rule-based automatic adjustments.
- The Note addresses practical steps for implementing the transition.

### Policies to support implementation and maintenance
- Policies to support:
  - Institutional ownership and clear responsibilities;
  - Transparency and communication of the pricing rule;
  - Complementary fiscal measures to manage revenue implications during transition and in steady-state operation.

### Analytical tools and availability
- A standardized template for simulating and evaluating alternative pricing mechanisms’ implications for price and fiscal volatility is available on request.

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## Content in this bundle

- **Technical Notes and Manuals 12/03 — Boxes 1–3**
  - [Technical Notes and Manuals 12/03 — Boxes 1–3 (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2012/_tnm1203.pdf.md){rel="alternate" type="text/markdown"}
  - [Technical Notes and Manuals 12/03 — Boxes 1–3 (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2012/_tnm1203.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/tnm/issues/2016/12/31/automatic-fuel-pricing-mechanisms-with-price-smoothing-design-implementation-and-fiscal-40273_