International Fuel Tax Assessment: An Application to Chile

IMF Working Papers, July 1, 2011

Source details

Gasoline and diesel fuel are heavily taxed in many developed and some emerging and developing countries.
Outside of the United States and Europe, there has been little attempt to quantify the external costs of vehicle use, leaving policymakers without guidance on whether prevailing tax rates are economically efficient.
The paper develops a general approach for estimating motor vehicle externalities, and hence corrective taxes on gasoline and diesel, by pooling local data with extrapolations from U.S. evidence.
The analysis is illustrated for the case of Chile, though the approach could be applied to other countries.

General approach: estimate motor vehicle externalities to derive corrective gasoline and diesel taxes.
Data strategy: pool local data with extrapolations from U.S. evidence.
Key technical terms preserved from the source: externalities, corrective taxes, fuel economy elasticity, fuel economy increase, gasoline elasticity, gasoline price elasticity, diesel tax, truck damage estimate, truck externality, vehicle fuel economy improvement, welfare gains, optimal tax.

The analysis is illustrated for the case of Chile.
The methodology and results for Chile serve as an example of how the general approach can be applied to other countries.

Policymakers in countries outside the United States and Europe often lack quantified estimates of vehicle externalities.
Pooling local data with U.S. evidence can produce actionable estimates of external costs and corrective taxes on gasoline and diesel.
Estimating motor vehicle externalities enables assessment of whether prevailing fuel tax rates are economically efficient.
The paper connects estimates of externalities to policy-relevant outcomes such as optimal tax levels and potential welfare gains.