Working Paper: NBER ID: w20460
Authors: Randy Chugh; Maureen L. Cropper
Abstract: We estimate a model of vehicle choice and kilometers driven to analyze the long-run impacts of fuel conservation policies in the Indian car market. We simulate the effects of petrol and diesel fuel taxes and a diesel car tax, taking into account their interactions with the pre-existing petrol fuel tax and car sales taxes. At levels sufficient to reduce total fuel consumption by 7%, the increased diesel and petrol fuel taxes both yield deadweight losses (net of externalities) of about 4 (2010) Rs./L. However, at levels sufficient to reduce total fuel consumption by 2%, the increased petrol fuel tax results in a deadweight loss per liter of fuel conserved that is greater than that caused by the diesel fuel tax. This reflects both the high pre-existing tax on petrol fuel and the high own-price elasticities of fuel demand in India. A tax on diesel cars that results in the same diesel market share as the large diesel fuel tax actually has a negative deadweight loss per liter of fuel conserved. The welfare effects of all three policy instruments are positive, once the external benefits of reducing fuel consumption are added to the excess burden of taxation.
Keywords: fuel conservation; dual-fuel car market; India; welfare effects; taxation
JEL Codes: L9; Q48; R48
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increasing diesel and petrol fuel taxes (H29) | Deadweight losses of approximately 4 Rs per liter of fuel conserved (H21) |
| Petrol tax (H29) | Deadweight loss per liter conserved exceeds that from diesel tax (H21) |
| Tax on diesel cars (H29) | Negative deadweight loss per liter conserved (H21) |
| 5% increase in diesel fuel price (Q31) | 7.9% reduction in diesel consumption (Q41) |
| Improvements in fuel economy (O49) | Increased fuel consumption due to higher driving distances (R41) |