Direction Générale du Trésor
et de la Politique Économique
IMPACT OF TAXES ON THE GLOBAL
OIL MARKET
Xavier PAYET
Working paper
October 2005
IMPACT OF TAXES ON THE GLOBAL OIL MARKET
Xavier PAYET
Working paper
October 2005
This working paper does not reflect the position of Direction Générale du Trésor
et de la Politique Economique but only the author's view.
The diffusion aims at encouraging discussion and comment.
MINISTERE DE L’ECONOMIE
DES FINANCES ET DE L’INDUSTRIE
Direction Générale du Trésor et de la Politique Economique
139, rue de Bercy - 75572 - PARIS Cedex 12
Table of contents
Abstract
3
Introduction
5
I-
Characteristics of the global oil market
5
I.1 -
Oil production and refining
5
I.1.a I.1.b I.1.c I.1.d -
5
6
6
6
I.2 -
II -
III -
Main oil producers
Oil reserves
OPEC and spare capacity
Oil supply price elasticity
Oil consumption
6
I.2.a I.2.b I.2.c I.2.d I.2.e -
6
7
8
10
10
Main oil consumers
Oil usage
Oil refining
Oil consumption price elasticity
The components of gasoline price
Impact of taxes on oil on public welfare
11
II.1 -
Consumers
11
II.2 -
Producers
11
II.3 -
Government
12
II.4 -
Global welfare
12
II.5 -
The terms of trade and lost welfare
12
II.6 -
Theoretical impact of tax increase
13
II.7 -
Other effects not taken into account in our model
14
Model structure
15
III.1 -
The global oil market equilibrium model
15
III.1.a III.1.b III.1.c -
15
16
16
III.2 -
Oil consumption model
Oil production model
Equilibrium oil price
Calibration and stylized facts
16
III.2.a III.2.b III.2.c III.2.d -
16
16
16
17
Elasticities (production and consumption)
Relevant production and consumption figures
Current oil price and tax levels
Accounting for negative externalities
IV -
Main results
18
IV.1 -
Base case
18
IV.2 -
Individual tax increases
18
IV.3 -
All European OECD countries
19
IV.4 -
G7 countries and European OECD countries
20
IV.5 -
Impact of a tax increase on all petroleum products
21
IV.6 -
Impact on crude oil and gasoline prices of the different tax increase scenarios
21
Conclusion
22
Appendix
23
Bibliography
29
Abstract
The objective of this paper is to investigate the consequences on tax increases on gasoline (and diesel), on
G7 countries’ welfare. The first three chapters describe the structure of the global oil market as well as our
approach to estimate welfare changes and a model determining an equilibrium price for crude oil.
Tax increases in G7 countries have mainly 4 effects on welfare:
• They force consumers to reduce their consumption of petroleum products, which has a negative impact
on their welfare;
• Lower demand induces a reduction in ex-tax petroleum prices (i.e. crude oil price), which diminishes
producer’s welfare;
• However, lower oil consumption means (in the medium-term at least) less miles driven, and therefore
lowers the external cost induced by on-road traffic;
• Finally, tax increases usually mean higher revenues for the government.
Part of the reduction of G7 oil consumption is offset by a higher non-G7 demand due to lower crude oil
price. Nevertheless, global oil demand is reduced by tax hikes.
Quantitative estimates provide two main results (see table 1):
• Within a wide range of parameters, all countries increase their own national welfare when they levy
higher taxes on gasoline, even if the other countries don’t. This is also true for G7 oil producers (US) or
exporters (UK and Canada). The larger part of this increase stems from a reduction of the environmental
cost associated with on-road traffic.
• Most G7 countries would gain even more if they were to agree on a common tax increase. This
additional gain would come from a reduction in oil price which is larger than in the case of individual tax
hikes.
Simultaneous tax increases provide additional welfare gains to most G7 countries, while G7 oil exporters
would still benefit, but less than in the case of an individual tax increase. France, Germany, Italy and Japan
would increase their welfare gains by as much as 30%, while the US would increase it by 2.4%.
Table 1: Welfare gain from a $0.05 tax increase on gasoline (and diesel)
Total welfare variation including
All figures
externalities
in US$
billions per
year
Individual
France
Germany
Italy
UK
Japan
Canada
USA
1.00
1.15
0.93
0.66
2.69
0.81
18.66
All G7
countries
1.29
1.57
1.23
0.60
3.45
0.69
19.11
Additional gain from
cooperation
0.29
0.42
0.30
-0.05
0.76
-0.12
0.46
29%
37%
33%
-8%
28%
-14%
2%
Source: DGTPE calculations
Keyworks : oil, taxes, international economics, oil market
JEL classification : Q43 ; E62 ; F ; L1
3
Introduction
The objective of this paper is to provide a simple and robust model describing the long-term (3 to 10 years)
impact of tax increases on gasoline on social welfare. This model will be used to evaluate the possible gains
in social welfare induced by tax increases on gasoline in G7 countries.
Our main conclusion is that G7 countries would significantly profit from a higher tax level on gasoline. This
paper will evaluate the additional welfare gain a simultaneous tax increase in all G7 countries would bring to
each individual country.
In the first chapter of this paper, we describe the global supply of oil and demand for petroleum. In the
second and third, we describe our approach to social welfare, to the global oil market and give details on our
choice of parameters. In the last chapter, we give detailed results of our simulations.
I - Characteristics of the global oil market
I.1 - Oil production and refining
I.1.a - Main oil producers
Many countries around the world produce oil, however, the Middle East is by far the largest oil-producing
region with around 30% of global output, followed by Europe-Eurasia with 22% and North America with
18%. In 2003, on average, 77m barrels of oil were produced each day.
A group of oil producing countries form a cartel called the Organization of Petroleum Exporting Countries
(OPEC), which controls 40% of global oil output. This cartel is dominated by Saudi Arabia, whose
production represents 13% of the world annual supply.
Other major oil producing countries include the Russian Federation (number 2 with 11%), the United States
(number 3 with 9%), Iran and Mexico (5% each).
Chart 1.1 World oil production in 2003
World oil production in 2003
(M barrels per day)
100%
80
60
30.4
46.4
Other
Other
Kuwait
Canada
UAE
Norway
Venezuela
40
Iran
Total =
76.8
China
Mexico
USA
20
0
Saudi Arabia
OPEC
FSU
Non-OPEC
Source: BP 2004 Statistical review of world energy
5
I.1.b - Oil reserves
Over the long-run, this market structure is unlikely to remain the same, because some producers have much
larger proven reserves than others. Indeed, Saudi Arabia is going to significantly increase its share of the
global oil production, as its reserves represent 23% of all known reserves. Moreover, OPEC’ share is also
bound to increase, as the combined reserves of its members amount to 77% of the total.
Chart 1.2 World oil reserves in 2003
Proved Reserves (Billion barrels)
100%
80
60
882.0
20
0
Total =
1,147.7
Other
Venezuela
Kuwait
Other
UAE
Iraq
40
265.7
Iran
Mexico
Canada
China
USA
Saudi Arabia
Russian
Federation
OPEC
Non-OPEC
Source: BP 2004 Statistical review of world energy
I.1.c - OPEC and spare capacity
The role of OPEC and Saudi Arabia certainly appears to be very important when one looks at current
production levels or at proven reserves, but it is even more the case when one looks at spare capacity. In fact,
most of non-OPEC production capacities are exploited by private companies, which have no interest in
holding idle capacities. On the other hand, OPEC countries produce according to a quota fixed by the cartel.
The spare capacity allows OPEC countries to regulate the price of oil within a band. This mechanism has two
objectives: to prevent over-production and downward price pressure, and to prevent prices from soaring,
which would encourage consumers to seek alternative sources of energy.
I.1.d - Oil supply price elasticity
Non-OPEC oil supply price elasticity is difficult to estimate, and is constrained by data limitations for
regions outside the US. One could also expect a higher price responsiveness to price decreases given the
sunk cost of developed oil wells. OPEC supply price elasticity essentially depends on the cartel’s price
strategy. In both cases, price elasticity of supply is positive.
I.2 - Oil consumption
I.2.a - Main oil consumers
The US and Europe account for around 45% of world oil consumption, however, they only produce around
15% of the total. Hence, there is a very large global oil trading activity. Annual oil trading amounts to
$500bn in 2003. Oil is the single largest global product market. Developed economies use oil much more
intensively than the developing ones. For instance, oil consumption in North America equals almost 9 liters
per capita per day, while it is around 5 liters in other western Europe and 0.5 in Africa. The extreme oil
intensity in the US and Canada can partly be explained by the importance of the transport sector and the
dependence on private vehicles to travel relatively long distances.
Regionally, North America is the largest oil consuming region followed by Asia and Europe.
6
Chart 1.3 Per capita per day oil consumption in 2002
Oil consumption per capita (2002)
Litres of oil per capita
10
9.0
8
6
4
4.8
Consumption
per capita
2.2
2
2.0
0.5
0
North America
Western Europe
Eastern
Europe &
Former U.S.S.R.
Africa
World Total
Source: International Energy Annual, Energy Information Agency
Chart 1.4 Oil consumption per region in 2002
World oil consumption in 2002
(m barrels per day)
100%
Africa
78.2
Middle East
Central and South America
80
Eastern Europe and FSU
Western Europe
60
40
20
0
Asia and Oceania
North America
Oil consumption
Source: International Energy Annual, Energy Information Agency
I.2.b - Oil usage
The United States and Canada use oil more for transportation than for heat and power, but the opposite
pattern holds for most of the rest of the world. Hence, the demand for oil in the Northern hemisphere is 3 to 4
million barrels per day higher in winter than in summer.
7
Chart 1.5 Oil consumption per sector in the US
Oil demand
by sector in 2002
Residential
and commercial
100%
Electric Generation
80
Industrial
60
40
Transportation
20
0
US
Source: Annual Energy Review, Energy Information Agency
Ground transportation is the single largest application of oil products in the US. Depending on the country,
ground transportation accounts for 40 to 60% of total oil consumption.
I.2.c - Oil refining
Different applications require different products. Hence, crude oil has to be refined in order to suit the
requirements of final users. While refining began as a simple distillation, refiners must now use more
sophisticated additional processes and equipment in order to produce the mix of products that the various
uses demand.
The 4 most commonly used oil products are:
• Gasoline, which is mostly used for passenger cars.
• Distillate fuel oil, which is used mainly for transportation in diesel-fueled vehicles, but also for home
heating, industrial and electric power generation.
• Jet fuel as its name implies, is mainly used by planes.
• Residual fuel oil is used for power generation and to propel large vessels.
Chart 1.6 Crude oil distillation
Source: Oil market basics, Energy Information Agency
8
The distillation process uses heat to separate crude oil into different components recovered at different
temperatures. The lighter products (liquid petroleum gases, naphtha and so-called “straight-run gasoline”)
are recovered at the lowest temperature. Middle distillates (jet fuel, kerosene, heating oil and diesel fuel)
come next. Finally, the heaviest products (residuum and residual fuel oil) are recovered at high temperatures.
However, the initial product-mix obtained from a simple distillation rarely matches demand mix. Hence,
further processing is required, in order to transform heavy products into lighter ones.
Moreover, the physical characteristics and the product yield from distillation of crude oil differ from one
field to the other. Hence, crude oil is graded according to its density and sulfur content. Less dense and socalled lighter products, which have a higher share of high-valued products trade at a higher price than denser
grades. Oil price differentials reflect the relative ease of refining.
Chart 1.7 Yield from simple distillation of different crude blends
Product yield from simple distillation
LPG
100%
Naphtha
80
Kerosene
Distillate
60
Heavy gas oil
40
Residuum
20
0
Arab Light
WTI
Bonny Light
Source: Energy Intelligence Group, Int'l Crude Oil Market Handbook
Refining is concentrated in oil consuming countries, as it is cheaper to move crude oil than to move final
products.
Chart 1.8 Oil consumption per product
Oil consumption per product
100%
Other
80
Jet
LPG
60
40
Diesel
20
Gasoline
0
Germany
France
United
States
United
Kingdom
China
Japan
World Total
Source: Oil Market Report, International Energy Agency
9
I.2.d - Oil consumption price elasticity
Oil demand depends on 4 main elements:
• Economic activity
• Oil intensity of the economy
• Mix of oil consuming activities
• Oil price
This paper will focus on the last factor, as it mainly deals with the implications of higher taxes on the global
oil market. However, it has to be said that the price of oil affects the other 3 elements mentioned above.
Indeed, higher oil prices may have a negative impact on the overall activity, they may prompt more efficient
uses of oil products and induce a shift in the consumption pattern. Temporary price hikes may also
encourage investment in more efficient equipment, which will permanently reduce the amount of oil
consumed.
Price elasticity of demand also depends on the time horizon that is considered. On the short-run, most
activities have to cope with higher prices. Consumers simply pay more for the same amount of oil. However,
over the longer term, oil consumers find alternatives to oil, either for heating or energy production. They
may also invest more in oil-saving technologies and use alternative forms of transportation.
Estimates of oil price elasticity of consumption tend to differ significantly from one study to the other.
Depending on the countries considered, on the estimation period and on the method used, long-run elasticity
of gasoline demand to its price ranges from -2.3 to 0(1). For the US, estimates range from -0.3 to -1. OECD
price elasticity of demand over the long-run is estimated to be between -0.2 and -0.4, while non-OECD
demand is about one-third as responsive to price changes.
I.2.e - The components of gasoline price
Oil products and especially those used for transportation purposes tend to be heavily taxed. Indeed, in many
countries, taxes account for the largest part of the retail price.
In the US and on a pre-tax basis, crude oil makes up for the larger part of petroleum product prices. Other
elements of the pre-tax price include refining, transportation and distribution margins.
Chart 1.9 The components of gasoline retail price
Components of gasoline retail price
100%
80
60
Taxes
Transport
and
distribution
40
20
Crude oil
0
France
Refining
margin
UK
US
Source: Ministère de l’industrie (DGEMP), DGTPE calculations.
(1) Dahl, Sternetr and Franzen, « Gasoline tax policy, carbon emissions and the global environment », Journal of transport economics and policy,
may 1992.
10
II - Impact of taxes on oil on public welfare
Implications of oil consumption for key parties
The purpose of this paper is to review the implications of taxes on oil products on public welfare. Four main
stakeholders (consumers, producers, Government and the environment) are impacted by shifts in taxation
levels. In the following chapter, we will use the following notations:
Qi Quantity of oil consumed for period i;
Pi Ex-tax price of oil for period i;
Ti Taxes per unit of consumption for period i;
C * Externalities generated by the consumption of one unit of oil.
For the sake of simplicity, we consider only one kind of product, we assume that the ex-tax price is equal to
the selling price of producers, and that the country we consider has no domestic oil production. The actual
calculation taking both domestic and foreign oil production into account as well as differences between
transportation and non-transportation related demand, is detailed in appendix.
II.1 - Consumers
Consumers are assumed to have a decreasing demand function depending on oil price, and a constant price
elasticity. Hence, for any given after-tax price ( Pi + Ti ), consumers have a welfare(2) corresponding to the
shaded area on the following graph.
Price
P2+T2
Consumer
surplus
P1+T1
P
T2
T1
E0
P1
P2
D
Q2
Q1
Volume
When taxes increase from T1 to T2 , consumer welfare varies according to the following formula(3).
∆W =
Q1 + Q2
(( P1 + T1 ) − ( P2 + T2 ) )
2
II.2 - Producers
Producers are considered to have an increasing supply function depending on oil price. Hence, for any given
ex-tax price ( Pi ), producers have a surplus over their marginal cost corresponding to the shaded area on the
graph below.
(2) Defined as the difference between the maximum price they would be willing to pay, and the actual price.
(3) This formula is valid for small variations around the equilibrium.
11
Price
P2+T2
P1+T1
P
T2
T1
P1
P2
E0
Producer surplus
D
Q2
Q1
Volume
When taxes increase from T1 to T2 , producers’ welfare varies according to the following formula(4).
∆R =
Q1 + Q 2
⋅ ( P2 − P1 )
2
II.3 - Government
Government has a direct interest in oil consumption because it generates tax revenues. These revenues can
then be used to cut other taxes. However, we first consider these revenues as accruing to the Government,
even though they are likely to be retroceded to consumers over time. The variation of tax revenues for the
government can be calculated with the following formula.
∆Φ = T2 Q2 − T1 Q1
II.4 - Global welfare
Global welfare is harmed in many ways by the consumption of oil. Deaths by road accidents, wasted time
due to road congestion, deterioration of infrastructures, pollution, noise and global warming are the main
externalities generated by oil consumption. As domestic effects are much larger than global ones (global
warming), no distinction is made in our calculations. For the sake of simplicity, we consider that external
costs are directly proportional(5) to oil consumption (C* per unit). Hence, the variation of external costs are
given by the following formula.
∆E = (Q2 − Q1 ) ⋅ C *
II.5 - The terms of trade and lost welfare
Alternatively, welfare changes can be calculated in one step, on a domestic basis as explained below.
Tax increases reduce the world’s global welfare, when external costs are not taken into account. However,
they also tend to affect the welfare distribution between stakeholders. The purpose of this section is to
identify welfare lost by the consuming country and foreign producer’s welfare “captured” by the tax
increase.
Producer’s welfare captured is equal to the ex-price differential before and after the tax increase times the oil
quantity consumed after the tax increase (shaded area on the following graph).
(4) This formula is valid for small variations around the equilibrium
(5) This means that we do not take possible consumer behavior changes such as the adoption of more fuel-efficient vehicles into account.
12
Price
P2+T2
P1+T1
P
T2
T1
P1
P2
E0
"captured" surplus
D
Q2
Volume
Q1
Captured producer’s welfare is given by the following formula:
∆R C = Q2 ⋅ ( P1 − P2 )
However, some of the domestic welfare as well as tax revenues corresponding to the shaded area are lost.
Price
P2+T2
P1+T1
T2
P
lost
surplus
T1
P1
P2
E0
D
Q2
Q1
Volume
This loss is given by the following formula.
 T + ( P2 + T2 ) − P1 
∆D = (Q2 − Q1 ) ⋅  1

2


II.6 - Theoretical impact of tax increase
From the above considerations, it appears that tax increases are detrimental to consumers and producers, but
benefit to Government and to the environment (or global welfare). However, tax increases may enhance
domestic social welfare once future tax cuts and pollution reductions are taken into account.
The following graph summarizes the expected gains (blue) and losses (red) from tax increases.
13
Price
P2+T2
P1+T1
P
T2
T1
E0
P1
P2
D
Q2
Q1
External
cost
Volume
C*
External
cost
Q2
Q1
The overall impact of tax increases on social welfare is given by the following formula.
∆S = ∆W + ∆Φ − ∆E
∆S =
Q1 + Q2
(( P1 + T1 ) − ( P2 + T2 ) ) + T2 Q2 − T1 Q1 + (Q1 − Q2 ) ⋅ C *
2
Alternatively, one can use the domestic/foreign welfare variation formula.
∆S = ∆R C + ∆D − ∆E
 T + ( P2 + T2 ) − P1 
∆S = Q2 ⋅ ( P1 − P2 ) + (Q2 − Q1 ) ⋅  1
 + (Q1 − Q2 ) ⋅ C *
2


II.7 - Other effects not taken into account in our model
Our approach does not take all of the effects of a tax increase into account. Indeed, the reduction in oil
consumption may be partly offset by a consumer adoption of more fuel-efficient vehicles. Other potential
effects of tax increases include a possible reduction in the cost of public funds (if Government uses the
additional tax revenues to reduce other more distorsive taxes) and also variations in exchange and interest
rates as trade patterns change.
14
III - Model structure
III.1 - The global oil market equilibrium model
The model we consider in our paper is relevant for small tax variations around the current equilibrium, where
demand and supply functions can be assumed to be symmetric(6). We separate the world into two groups:
OECD Europe countries, Japan, the US and Canada (referred to as G7 countries in the following) whose
characteristics are well documented, and the rest of the world. Some countries are modeled individually
(France, Germany, Italy, Spain, United Kingdom, Japan, Canada, United States), while other European
OECD countries and the rest of the world are treated as two blocks. The model is designed so as to provide
an estimate of the impact of tax hikes on the global oil market.
In the current chapter, we will use the following notations:
PC Global price of crude oil;
Pi XT Ex-tax price of motor gasoline/diesel(7) in country i;
Ti Taxes on motor gasoline/diesel in country i;
DiT , DiNT Transport and non-transport related demand of oil products in country i;
S i Oil supply in country i;
DROW and S ROW demand and supply of oil in the rest of the world (assumed to be non-transport related);
α ,α ' , β Price elasticity of transportation and non-transportation related demand and of supply respectively;
ai , a ROW , bi , bROW , pi are constants.
III.1.a - Oil consumption model
In our model, we make a distinction between the price of crude oil ( PC ), the ex-tax price of gasoline ( Pi XT )
and the price of gasoline including taxes ( Pi XT + Ti ). Ex-tax gasoline prices are assumed to be proportional
to the price of crude oil.
Pi XT = pi PC
Oil demand is assumed to be a decreasing function of the retail price with a constant elasticity. For G7
countries, demand is split between transport related demand (i.e. gasoline and diesel) and non-transport
related consumption (i.e. other oil products). While demand for non-transport oil is assumed to depend solely
on the global oil price (i.e. taxes are assumed to be constant), demand for transport oil depends on the actual
retail price (including taxes).
For the rest of the world demand is assumed to be a decreasing function of the global oil price with a
constant elasticity. Consumption is not split between transport and non-transport related.
Price elasticity of demand is assumed to be constant across countries, but differs depending on the final use.
The model relies on the following equations:
The transport and non-transport related demand in country i.
DiT = a iT ( Pi XT + Ti )α
and
DiNT = a iNT ( PC )α '
And in the rest of the world:
DROW = a ROW ( PC )α '
Global oil demand can be written:
D = ∑ (aiT ( Pi XT + Ti )α + aiNT ( PC )α ' ) + a ROW ( PC )α '
i
Our model is “static” as it does not take output, nor technological change into account.
(6) In the long-run, retail price increases push customers to adopt more fuel-efficient vehicles, and oil producers find it difficult to cut production
when prices drop (because of the sunk cost of developed oil fields).
(7) The weighted average price for diesel and motor gasoline.
15
III.1.b - Oil production model
The supply function is assumed to be an increasing function of the global oil price with a constant elasticity.
Production is calculated on an individual basis for G7 countries and aggregated for the rest of the world. No
distinction is made between transport and non-transport related oil production, as this is mainly a refining
issue. However, the model does not make any assumptions on OPEC’s behavior.
The production equation for country i is:
S i = bi ( PC ) β
And for the rest of the world:
S ROW = bROW ( PC ) β
Hence, global oil supply can be written:


S =  ∑ bi + bROW ( PC ) β
 i

III.1.c - Equilibrium oil price
The equilibrium on the global oil market is reached when supply matches demand. This can be written:


S =  ∑ bi + bROW ( PC ) β = ∑ (aiT ( Pi XT + Ti )α + aiNT ( PC )α ' ) + a ROW ( PC )α ' = D
i
 i

This equation is then solved numerically for PC .
III.2 - Calibration and stylized facts
The aim of this section is to present the detailed features of our model, and to discuss the choices of
parameters. In order to assess the robustness of our results, main parameters will be subject to sensitivity
tests within a wide range around the base case.
III.2.a - Elasticities (production and consumption)
We mentioned earlier that price elasticities of both supply and demand are difficult to estimate. As we are
primarily concerned with long-term (3 to 10 years) effects of tax increases, we use so-called long-term price
elasticities, even though the horizon is rarely defined in econometric studies.
We chose “consensual” estimates and carried some sensitivity tests. In-line with findings in academic
empirical research(8), we assumed that long-term price elasticity of demand was -0.3 for transportation
related demand ( α ), and twice as large (-0.6) for non-transportation related demand ( α ' ) in all countries.
Long-term price elasticity of supply is assumed to be around 0.2.
For the sake of robustness, we set the elasticities equal across all countries. Some studies show differences in
price elasticities of demand between countries, but they rarely agree on the relative(9) price-sensitivities.
III.2.b - Relevant production and consumption figures
We take the International Energy Agency (IEA) data for motor gasoline and gasoil consumption as proxies
for transportation-related demand. Our simulations are based on 2003 IEA figures for demand and
production. A table detailing these parameters is provided in appendix.
III.2.c - Current oil price and tax levels
The impact of a given tax increase (5 cents for instance) on oil consumption and production depends on the
initial price of crude oil, as well as on the initial tax level. We will fix prices and taxes at a level that
prevailed before the spectacular oil price increase of 2004. In order to simplify calculations, all prices are
given in US dollar terms.
(8) See for example Gately (2003), Sterner, Dahl and Franzen (1992).
(9) For instance, some studies argue that demand in France is more price-sensitive than in the US, while other studies tend to prove the contrary.
Compare for instances the results of Cooper (2003) and Sterner, Dahl and Franzen (1992)
16
Retail prices of gasoline and diesel correspond to the monthly average of December 2003. For each country
for which detailed consumption statistics are available, a weighted average of gasoline and diesel retail
prices in dollars is computed (both ex-tax and tax including). For Spain, and European OECD countries for
which detailed statistics are not available, prices of transportation related products are taken as the weighted
average of the prices of the better documented countries. The reference crude oil price is the December 2003
average of dated WTI(10) ($30).
III.2.d - Accounting for negative externalities
Driving generates negative externalities, namely :
• deterioration of road infrastructures
• air and noise pollution
• deaths and injuries due to accidents
• lost time due to congestions
• global warming.
Some of these externalities are relatively easy to calculate (maintenance of road infrastructures for instance),
while others rely on subjective judgments (price of a human life, effects of noise pollution) or are subject to
scientific uncertainty (global warming). Some are monetary costs (medical costs not covered by insurance),
while other are non-monetary (time lost in congestion).
Moreover, many of these externalities are proportional to the number of miles driven but not to the
consumption of gasoline. Some of these costs also depend on the type of area in which these miles are driven
(city or countryside), as well as on the type of vehicle use (passenger car or truck), and on local factors
(wages, productivity,…).
Bearing in mind these limitations, we rely on estimates of the externalities induced by the consumption of
one liter of gasoline by the US Department of Transport (DOT) (adjusted for global warming) for the US
(see table 3.1) and on DGTPE analysis for France. Both figures are weighted averages of external costs of
both countryside and city traffic. We then assume that the US figure of $0.80 per liter is also valid for
Canada (which has similar driving patterns), and that the French figure of €1.8 ($2.1) per liter is valid for
European countries and Japan. The higher figure for France can partly be explained by a higher mileage per
liter of gasoline, as well as relatively denser cities.
Table 3.1 External cost of on-road traffic in the US ($ billion per year)
Congestion
Road accidents
Air pollution
Noise pollution
Global warming*
62
340
40
4
45
Total
491
Source : Addendum to the 1997 Federal Highway Cost
Allocation Study, US DOT, 2000 –
*: DGTPE calculation for global warming
However, considering externalities as a flat rate on oil consumption is imperfect because some external
effects like congestion depend on the square of the number of kilometers driven. Moreover, in the long-run,
as technology changes and engines become more efficient, more kilometers are driven for a given amount of
gasoline.
Finally, sensitivity tests carried out on the level of external costs show that, even if they were significantly
lower (three to 10 times), our results would qualitatively continue to hold.
(10) Price of a future contract on a barrel West Texas Intermediate (benchmark oil blend in the US).
17
IV - Main results
IV.1 - Base case
In the base case, consumption, production, prices and taxes are those which prevailed at the end of 2003. The
reference tax increase is set at US$0.05 per liter of gasoline (or diesel). The implications of the following tax
increase scenarios are investigated in the following section:
• Only one OECD country increases its taxes on gasoline
• All European OECD countries increase their taxes on gasoline
• The US, Canada, Japan and all European OECD countries increase their taxes simultaneously.
The impact of these tax increases on social welfare will be detailed by country and by component.
Alternative model specifications (larger or smaller tax increases, higher or lower price elasticities, lower
externalities, higher starting price of crude oil) will also be investigated.
The ultimate objective is to estimate the potential gains from individual or simultaneous tax increases for
each G7 country.
All key parameters are given in appendix.
IV.2 - Individual tax increases
In this first scenario, we assess the impact of individual tax increases on social welfare. The impact on each
stakeholder (Government, the environment, consumers, producers) is detailed, as well as the likely oil price
decrease.
Individually, every country gains from tax increases, including net oil exporters like Canada end the United
Kingdom. However, most of the gains come from the reduction of external costs, because individually,
consumers other than the US are too small to significantly influence the price of oil. On the other hand, a 5
cents increase in gasoline taxes in the US could induce a 0.9% price decrease over the long-run. This
explains why, in the US, the welfare variation excluding externalities is much closer (proportionally) to zero
than in other countries.
The table below also shows that even if the external cost of gasoline consumption was significantly lower
(up to 3 times for most countries, and up to 10 times for the US), all countries would still gain from a tax
increase. Sensitivity tests described in appendix show that these results continue to hold qualitatively (i.e.
individual tax increases induce welfare gains) within a wide range of parameters.
Table 4.1: Impact of individual tax increases (base case)
All figures in
Tax
US$ billions increase
unless stated (in US$
otherwise per liter)
France
Germany
Italy
UK
Japan
Canada
USA
0.05
0.05
0.05
0.05
0.05
0.05
0.05
Consumer
welfare
variation
∆W
-2.64
-3.51
-2.56
-2.30
-4.91
-2.59
-34.54
Source: DGTPE calculations
18
Producer
welfare
variation
∆R
0
0
0
0
0
-0.02
-0.74
Tax
revenues
variation
− ∆E
Total welfare
variation
including
externalities
Oil price
decrease
(%)
Oil
consumption
variation (%)
1.57
1.90
1.43
1.18
3.43
1.15
20.34
1.00
1.15
0.93
0.66
2.69
0.81
18.66
0.0%
0.0%
0.0%
0.0%
-0.1%
0.0%
-0.9%
-0.6%
-0.5%
-0.6%
-0.5%
-0.5%
-1.2%
-2.1%
Externalities
variation
∆Φ
Total welfare
variation
without
externalities
2.08
2.75
2.06
1.79
4.17
2.26
33.59
-0.57
-0.75
-0.50
-0.52
-0.74
-0.35
-1.68
∆S
The table 4.2 shows that the US’s tax decisions can have a strong impact on other G7 countries. Indeed, if we
consider the welfare variations induced by a $0.05 tax increase on gasoline in the US only in other countries,
it appears that all oil importers benefit from these tax increases via lower import prices. However, the drop in
crude oil price has a negative impact on exporters’ welfare, and it increases the external costs associated with
the driving activity in all countries.
US tax hikes also induce higher oil consumption in the rest of the world. This additional consumption could
increase the external costs associated to on-road traffic and other petroleum uses. However, due to a lack of
available data, only an indicative figure is provided.
Table 4.2: Impact of a US tax increase on other countries (base case)
All figures in US$
billions unless stated
otherwise
France
Germany
Italy
Spain
UK
Other OECD Europe
Total OECD Europe
Japan
Canada
USA
ROW
World total
Tax increase
(in US$ per
liter)
0
0
0
0
0
0
0
0
0
0.05
0
Consumer
welfare
variation
Producer
welfare
variation
0.24
0.35
0.26
0.19
0.21
0.59
1.85
0.72
0.24
-34.54
3.44
-28.29
0
0
0
0
-0.21
-0.38
-0.60
0
-0.28
-0.73
-5.75
-7.37
∆W
∆R
Tax revenues Total welfare Externalities
variation
variation
variation
without
∆Φ
− ∆E
externalities
0.03
0.04
0.03
0.02
0.03
0.06
0.21
0.06
0.02
33.59
**
33.88
0.27
0.39
0.30
0.21
0.03
0.26
1.47
0.78
-0.02
-1.68
-2.31
-1.77
-0.08
-0.11
-0.10
-0.08
-0.07
-0.16
-0.60
-0.27
-0.06
20.34
-11.9*
7.55*
Total welfare
variation
including
externalities
∆S
0.19
0.28
0.20
0.13
-0.04
0.10
0.87
0.51
-0.08
18.66
-14.18*
5.78*
*: For the ROW, we assumed that 50% of total oil consumption was transportation-related, and that externalities were at the same
level as in Europe. These assumptions certainly overestimate the external costs in the ROW, but they show that taking the ROW into
account would probably not reverse our conclusions.
**: We neglected tax revenues on petroleum products in the ROW.
Source: DGTPE calculations
IV.3 - All European OECD countries
We now investigate the consequences of simultaneous tax increases in European OECD countries. As shown
in Table 4.3, European countries are only slightly better off by jointly increasing their taxes than by acting
alone. A $0.05 tax increase on gasoline would only knock 0.15% off the global oil price. Hence, European
countries would not significantly increase their welfare by acting in coordination.
The same sensitivity tests on elasticities, on the starting level of oil price and on the level of externalities as
those mentioned in the previous section were carried out. They confirm that the results of this section remain
qualitatively true within a broad range of parameters.
19
Table 4.3: Impact of simultaneous tax increases in Europe (base case)
All figures in US$
billions unless stated
otherwise
Tax increase
(in US$ per
liter)
Total welfare
Consumer
Total gain
Producer welfare Tax revenues Total welfare Gain from Externalities variation
welfare
from
variation
including
variation
variation
variation
collective
variation
without
externalities collective
action
∆R
∆Φ
− ∆E
action
externalities
∆W
∆S
France
0.05
-2.61
0
2.08
-0.53
0.04
1.56
1.03
0.03
Germany
0.05
-3.46
0
2.76
-0.70
0.06
1.89
1.19
0.04
Italy
0.05
-2.52
0
2.06
-0.46
0.04
1.41
0.96
0.03
Spain
0.05
-1.74
0
1.46
-0.29
0.03
1.25
0.96
0.02
UK
0.05
-2.27
-0.04
1.79
-0.52
0.00
1.17
0.65
-0.01
Other OECD Europe
0.05
-4.78
-0.07
3.85
-1.00
0.03
2.71
1.71
0.01
Total OECD Europe
0.05
-17.38
-0.10
14.00
-3.49
0.21
9.98
6.49
0.13
0
0.13
0
0.01
0.14
n.a.
-0.05
0.09
n.a.
Japan
Canada
0
0.04
-0.05
0.00
-0.00
n.a.
-0.01
-0.01
n.a.
USA
0
0.43
-0.13
0.03
0.33
n.a.
-0.19
0.13
n.a.
ROW
0
World total
0.60
-1.00
**
-0.40
n.a.
-2.0*
-2.45*
n.a.
-16.19
-1.28
14.04
-3.43
n.a.
7.68*
4.25*
n.a.
*: For the ROW, we assumed that 50% of total oil consumption was transportation-related, and that externalities were at the same
level as in Europe. These assumptions certainly overestimate the external costs in the ROW, but they show that taking the ROW into
account would probably not reverse our conclusions.
**: We neglected tax revenues on petroleum products in the ROW.
Source: DGTPE calculations
IV.4 - G7 countries and European OECD countries
In this section, we look at the consequences of tax increases in all “G7” countries (in the general sense, as it
also includes all European OECD countries) and compare those with the results of individual tax increases.
As shown in Table 4.4, all oil importing countries benefit from this joint tax increase, while the effect on
“G7” oil exporters is almost neutral. Moreover, the joint increase of gasoline taxes by $0.05 knocks 1.1% off
the global oil price.
Table 4.4: Impact of simultaneous tax increases in “G7” countries (base case)
Total welfare
Total gain
Tax Total welfare
Tax Consumer Producer
Externalities variation
Gain
from
All figures in US$
from
increase welfare welfare revenues variation
including
variation
billions unless
collective
(in US$ variation variation variation
without
collective
stated otherwise
− ∆E externalities
action
per liter)
∆W
∆R
∆Φ externalities
action
∆S
France
0.05
-2.34
0
2.11
-0.22
0.34
1.47
1.24
0.25
Germany
0.05
-3.07
Italy
0.05
-2.23
0
2.81
-0.26
0.49
1.77
1.51
0.36
0
2.10
-0.13
0.38
1.31
1.18
Spain
0.05
0.26
-1.53
0
1.48
-0.05
n.a.
1.16
1.11
n.a.
UK
Other OECD Europe
0.05
-2.03
-0.28
1.82
-0.49
0.03
1.10
0.61
-0.05
0.05
-4.13
-0.49
3.91
-0.71
n.a.
2.54
1.83
n.a.
Total OECD Europe
0.05
-15.33
-0.77
14.24
-1.86
n.a.
9.34
7.49
n.a.
Japan
0.05
-4.03
0.
4.24
0.22
0.96
3.12
3.34
0.65
Canada
0.05
-2.29
-0.36
2.28
-0.37
-0.03
1.08
0.71
-0.10
USA
0.05
-33.84
-0.95
33.65
-1.14
0.54
20.06
18.92
0.26
ROW
0
4.44
-7.42
**
-2.98
n.a.
-15.3*
-18.32*
n.a.
-51.05
-9.50
54.41
-6.14
n.a.
18.27*
12.13*
n.a.
World total
*: For the ROW, we assumed that 50% of total oil consumption was transportation-related, and that externalities were at the same
level as in Europe. These assumptions certainly overestimate the external costs in the ROW, but they show that taking the ROW into
account would probably not reverse our conclusions.
**: We neglected tax revenues on petroleum products in the ROW.
Source: DGTPE calculations
20
The above simulation shows that a simultaneous tax increase by all “G7” countries would be possible, as
most countries would significantly gain in comparison with individual tax increases. Oil exporters would still
benefit from tax increases, but slightly less than if they were acting alone. France, Germany, Italy and Japan
would increase their welfare gains by as much as 30%, while the US would increase it by 2.4%.
IV.5 - Impact of a tax increase on all petroleum products
This section investigates the consequences of tax increases on all petroleum products. Taxes on motor
gasoline (and diesel) would allow a reduction of the external cost of driving, while taxes on non-gasoline
products would partly internalize the effects of oil consumption on global warming (between $4.5 and $12
per barrel depending on the estimate(11)). Hence, we consider a $0.05 tax increase per liter on gasoline as in
the previous sections, and a $0.8(12) tax increase per barrel of other products.
Table 4.5 shows that all oil importing countries significantly gain from a tax increase, even when external
costs are not taken into account. Moreover, all “G7” countries benefit from the tax increases, once
externalities are accounted for. The result of this joint effort is a 1.7% drop in the global oil price.
Table 4.5: Impact of simultaneous tax increases in “G7” countries on all petroleum products
Total welfare
Consumer Producer
Tax Total welfare
Tax
Externalities variation
All figures in US$ billions increase welfare welfare revenues variation
including
variation
unless stated otherwise (in US$ variation variation variation
without
externalities
−
∆
E
per liter)
∆W
∆R
∆Φ externalities
∆S
France
Germany
Italy
Spain
UK
Other OECD Europe
Total OECD Europe
Japan
Canada
USA
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
-2.18
-2.84
-2.05
-1.40
-1.89
-3.75
-14.12
-3.56
-2.14
-32.26
0
0
0
0
-0
-0.74
-1.16
0
-0.55
-1.43
2.45
3.28
2.39
1.74
2.10
4.86
16.82
5.31
2.61
35.65
0.27
0.44
0.34
0.33
-0.21
0.37
1.54
1.75
-0.07
1.96
1.41
1.70
1.25
1.11
1.06
2.44
8.97
2.95
1.04
19.42
1.69
2.14
1.58
1.45
0.84
2.80
10.51
4.71
0.97
21.37
Source: DGTPE calculations
IV.6 - Impact on crude oil and gasoline prices of the different tax increase scenarios
Table 4.6 sums up the consequences of tax increases on both retail gasoline prices and crude oil price with
the base case parameters. It clearly appears that the decisions of the US regarding their tax levels have a
much larger impact on prices than those of European countries.
(11) The high figure stems from the « rapport Boiteux », which values carbon at 100$ per metric ton, while the low one is derived from the quoted
price of carbon emissions on the carbon market, according to PointCarbon.
(12) Current taxes on low sulphur fuel oil for industry range from $2 to $9 per barrel. Hence, $0.8 per barrel would represent a 9 to 40% tax increase
on industrial fuel oil, while $0.05 per liter represents a 5 to 50% tax increase on gasoline, depending on the country.
21
Table 4.6: Impact of joint tax increases on petroleum product prices
$c5 per liter on gasoline
Crude oil price (starting
at $30)
% change
Gasoline retail price
change(13) including
taxes (in $c)
$c5 per liter on gasoline and
0.8$ per barrel on other
products
"G7"
US
Europe
"G7"
US
Europe
29.7
-1.1%
29.7
-0.9%
30.0
-0.1%
29.5
-1.7%
29.7
-1.1%
29.9
-0.4%
4.4
4.8
5
4.4
4.7
4.9
Source: DGTPE calculations
Conclusion
According to our results, and within a wide range of parameters, all “G7” countries, could increase their
social welfare by levying higher taxes on gasoline (and diesel). The largest share of this gain would stem
from a reduction in the total external cost of driving.
Our work also shows that simultaneous tax increases in all G7 countries would bring additional welfare gains
to most countries, and would positively contribute to social welfare in all countries.
The work described in this paper could be refined by taking international trade effects into account. As
higher taxes imply lower oil imports, tax increases should improve the trade balance of importing countries.
However, as oil exporters tend to import goods from oil consuming countries, the overall effect remains
unclear.
A more sophisticated model could also take technological adjustments into account, as higher gasoline prices
induce a transition to more fuel-efficient vehicles. It could also include a possible OPEC response to tax
increases in oil importing countries.
(13) Average for countries which increase their taxes.
22
Appendix
Sensitivity test
In this appendix, we investigate the robustness of the results presented in chapter 4 section 2 on individual
tax increases. As shown below, these results continue to hold within a wide range of parameters.
Table S.1 illustrates the impact of tax increases in France and in the US if we assume that price elasticities
are 3 times larger than in the base case. As expected, consumer welfare is roughly the same as in the base
case (they mainly depend on the magnitude of the tax increase), while tax revenues and externalities are
much more sensitive to volume changes. Total welfare variation mainly reflects a stronger demand response.
Table S.1: Impact of individual tax increases (larger elasticities)
All figures in
Tax
US$ billions increase
unless stated (in US$
otherwise
per liter)
France
USA
0.05
0.05
Consumer
welfare
variation
∆W
-2.61
-33.46
Producer
welfare
variation
∆R
0
-0.71
Tax
revenues
variation
∆Φ
0.91
25.94
Total
Externalities
welfare
variation
variation
without
− ∆E
externalities
-1.70
-8.23
4.64
59.08
Total welfare
variation
Oil
Oil price
including
consumption
externalities decrease (%) variation (%)
∆S
2.94
50.84
0%
-0.8%
-1.8%
-6.0%
Transportation-related demand price elasticity : -0.9 ; non-transportation related demand price elasticity : -1.8 ; price elasticity of
supply: -0.6.
Source: DGTPE calculations
On the other hand, if we assume that all price elasticities are 3 times lower than in the base case (Table S.2),
the US benefit from tax increases, even when externalities are not taken into account. However, gains are
much smaller than in the base case, mainly because the consumption of gasoline (and external costs) remains
stable. With this set of assumptions, tax revenues increase much more than in the base case, while
externalities remain at a high level. This can be thought of as an estimation of the short-term impact of tax
increases, with both supply and demand being much more rigid than in the long-run.
Table S.2: Impact of individual tax increases (smaller elasticities)
All figures in
Tax
US$ billions increase
unless stated (in US$
otherwise
per liter)
France
USA
0.05
0.05
Consumer
welfare
variation
∆W
-2.66
-34.91
Producer
welfare
variation
∆R
0
-0.74
Tax
Total welfare Externalities
revenues
variation
variation
variation
without
− ∆E
∆Φ externalities
2.47
36.25
-0.19
0.60
0.52
6.85
Total welfare
variation
Oil
Oil price
including
consumption
externalities decrease (%) variation (%)
∆S
0.34
7.45
0%
-0.9%
-0.2%
-0.7%
Transportation-related demand price elasticity : -0.1 ; non-transportation related demand price elasticity : -0.2 ; price elasticity of
supply: -0.066.
Source: DGTPE calculations
If we now look at relative price elasticities of supply and demand, by assuming that demand is 3 times less
elastic than in the base case, and supply 3 times more elastic (Table S.3), tax increases still appear to be
profitable, but accordingly, by a much smaller amount. The fact that different supply elasticities do not make
a significant difference for France stem from the country’s small share of global oil consumption and
therefore insignificant impact on the global oil price.
23
Table S.3: Impact of individual tax increases (smaller demand elasticities, larger supply elasticity)
All figures in
Tax
US$ billions increase
unless stated (in US$
otherwise
per liter)
France
USA
0.05
0.05
Consumer
welfare
variation
Producer
welfare
variation
-2.66
-36.65
0
-0.22
∆W
∆R
Tax
Total welfare Externalities
revenues
variation
variation
variation
without
− ∆E
∆Φ externalities
2.47
36.21
-0.19
-0.66
0.53
7.09
Total welfare
variation
Oil
Oil price
including
consumption
externalities decrease (%) variation (%)
∆S
0.33
6.43
0%
-0.3%
-0.2%
-0.8%
Transportation-related demand price elasticity : -0.1 ; non-transportation related demand price elasticity : -0.2 ; price elasticity of
supply: -0.6.
Source: DGTPE calculations
Initial oil price (whether $30 as in the base case or $50) does not seem to affect the welfare variation
significantly. Moreover, welfare variations are almost exactly proportional to the considered tax increase.
For instance, a $0.01 tax increase implies a welfare variation 5 times smaller than a $0.05 increase (base
case).
24
Key parameters
All parameters in this section correspond to the base case.
Table A1
Country
France
Germany
Italy
Spain
UK
Other OECD Europe
Total OECD Europe
Japan
Canada
USA
Total oil
consumption
Non-gasoline
consumption
Motor gasoline
consumption
DiT + DiNT
DiNT
DiT
(m barrels per (m barrels per
day)
day)
2.05
1.13
2.81
1.59
1.84
0.95
1.49
0.88
1.72
0.92
4.93
3.24
14.85
8.71
5.39
3.67
2.04
1.13
19.65
6.69
ROW
36.47
36.47
World
78.40
56.67
Crude Oil
Ex-tax
production Retail Price
price Taxes
Si
(m barrels per
day)
0.92
1.22
0.89
0.62
0.80
1.69
6.14
1.72
0.91
12.96
21.73
(m barrels
per day)
Pi XT + Ti P XT
i
(US$)
1.07
1.17
1.14
0.89
1.25
1.13
1.12
0.91
0.52
0.39
2.28
4.06
6.34
3
7.82
(US$)
0.30
0.33
0.39
0.36
0.32
0.33
0.34
0.44
0.30
0.28
Ti
(US$)
0.77
0.84
0.74
0.53
0.93
0.80
0.79
0.47
0.21
0.11
Crude oil price
(WTI)
PC
(US$)
30
30
30
30
30
30
30
30
30
30
61.24
30
78.40
30
Table A2
Country
Motor
elasticity
Non-motor
elasticity
Non motor
constant
Motor
constant
α'
a iNT
a iT
France
Germany
Italy
Spain
UK
Other OECD Europe
Total OECD Europe
Japan
Canada
USA
-0.3
-0.3
-0.3
-0.3
-0.3
-0.3
-0.3
-0.3
-0.3
-0.3
-0.6
-0.6
-0.6
-0.6
-0.6
-0.6
-0.6
-0.6
-0.6
-0.6
8.70
12.27
7.30
6.73
7.11
24.90
67.02
28.24
8.71
51.47
0.94
1.28
0.93
0.60
0.85
1.76
6.35
1.67
0.75
9.78
ROW
-0.3
-0.6
72.01
α
Production
constant
Ex-Tax
constant
bi
pi
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.00
0.00
0.00
0.00
1.15
2.06
3.21
0.00
1.52
3.96
0.010
0.011
0.013
0.012
0.011
0.011
0.011
0.015
0.010
0.009
0.2
31.02
Production
elasticity
β
C*
(US$)
2.16
2.16
2.16
2.16
2.16
2.16
2.16
2.16
0.8
0.8
25
Table A3: Impact of a coordinated tax hike (base case)
Before tax hike
Country
France
Germany
Italy
Spain
UK
Other OECD Europe
Total OECD Europe
Japan
Canada
USA
ROW
World
Motor gasoline
Motor
Non-motor
Crude Oil
Total
Total oil
gasoline
consumption
production Price
Ex-tax price
Taxes
consumption
consumption
(m barrels per
(m barrels (US$ per (US$ per liter) (US$ per liter)
(m barrels per day)
(m barrels per
day)
per day)
liter)
day)
2.05
1.13
0.92
1.07
0.30
0.77
2.81
1.59
1.22
1.17
0.33
0.84
1.84
0.95
0.89
1.14
0.39
0.74
1.49
0.88
0.62
0.89
0.36
0.53
1.72
0.92
0.80
2.28
1.25
0.32
0.93
4.93
3.24
1.69
4.06
1.13
0.33
0.80
14.85
8.71
6.14
6.34
1.12
0.34
0.79
5.39
3.67
1.72
0.91
0.44
0.47
2.04
1.13
0.91
3
0.52
0.30
0.21
19.65
6.69
12.96
7.82
0.39
0.28
0.11
36.47
36.47
61.24
78.40
Price of crude oil
56.67
21.73
78.40
$30 per barrel
After tax hike
Motor gasoline
Motor
Non-motor
Crude Oil
Total
Total oil
gasoline
consumption
production Price
Ex-tax price
Taxes
Country
consumption
consumption
(m barrels per
(m barrels (US$ per (US$ per liter) (US$ per liter)
(m barrels per day)
(m barrels per
day)
per day)
liter)
day)
2.05
1.14
0.91
0
1.12
0.30
0.82
France
2.81
1.60
1.21
0
1.22
0.32
0.89
Germany
1.83
0.96
0.88
0
1.18
0.39
0.79
Italy
1.49
0.88
0.61
0
0.93
0.35
0.58
Spain
1.72
0.93
0.79
2.27
1.29
0.31
0.98
UK
4.93
3.26
1.67
4.05
1.18
0.33
0.85
Other OECD Europe
14.83
8.77
6.06
6.33
1.17
0.33
0.84
Total OECD Europe
5.39
3.69
1.70
0
0.95
0.43
0.52
Japan
2.03
1.14
0.89
2.99
0.56
0.30
0.26
Canada
19.26
6.73
12.53
7.80
0.44
0.28
0.16
USA
36.72
36.72
0
61.10
ROW
78.22
World
Price of crude oil
57.05
21.17
78.23
Transportation
consumer
welfare
variation
Consumer
welfare
variation
Producer
welfare
variation
-2.48
-3.26
-2.34
-1.64
-2.15
-4.52
-16.39
-4.47
-2.43
-34.66
-2.34
-3.07
-2.23
-1.53
-2.03
-4.13
-15.33
-4.03
-2.29
-33.84
4.44
-51.06
$29.67 per barrel
Welfare variation
All figures in US$
billions per year
unless stated
otherwise
France
Germany
Italy
Spain
UK
Other OECD Europe
Total OECD Europe
Japan
Canada
USA
ROW
World total
Tax increase (in US$
per liter)
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0
1 barrel of oil=159 Liters
26
Non-transportation
consumer welfare
variation
0.14
0.19
0.12
0.11
0.11
0.39
1.06
0.45
0.14
0.81
4.44
6.89
-57.95
∆W
∆R
0
0
0
0
-0.28
-0.49
-0.77
0.0
-0.36
-0.95
-7.42
-9.49
Tax
revenues
variation
∆Φ
2.11
2.81
2.10
1.48
1.82
3.91
14.24
4.24
2.28
33.65
54.41
Total welfare
variation
without
externalities
Externalities
variation
-0.22
-0.26
-0.13
-0.05
-0.49
-0.71
-1.86
0.21
-0.37
-1.15
-2.98
-6.14
1.47
1.77
1.31
1.16
1.10
2.54
9.34
3.12
1.08
20.06
− ∆E
Total welfare
variation
including
externalities
∆S
1.24
1.51
1.18
1.11
0.61
1.83
7.49
3.34
0.71
18.92
Table A4: Impact of individual tax hikes (base case)
Before tax hikes
Country
Total oil
consumption
(m barrels per
day)
Motor gasoline
Non-gasoline Motor gasoline Crude Oil
Total
consumption consumption
production
Price
Ex-tax price
Taxes
(m barrels per (m barrels per (m barrels per (US$ per (US$ per liter) (US$ per liter)
day)
day)
day)
liter)
France
2.05
1.13
0.92
1.07
0.30
0.77
Germany
2.81
1.59
1.22
1.17
0.33
0.84
Italy
1.84
0.95
0.89
1.14
0.39
0.74
Spain
1.49
0.88
0.62
UK
1.72
0.92
0.80
2.28
0.89
0.36
0.53
1.25
0.32
0.93
0.47
Japan
5.39
3.67
1.72
0.91
0.44
Canada
2.04
1.13
0.91
3
0.52
0.30
0.21
USA
19.65
6.69
12.96
7.82
0.39
0.28
0.11
Price of crude oil
$30 per barrel
After tax hikes
Country
Total oil
consumption
(m barrels per
day)
Motor gasoline
Non-gasoline Motor gasoline Crude Oil
Total
Crude oil
Ex-tax price
Taxes
consumption consumption
production
Price
price
(m barrels per (m barrels per (m barrels per (US$ per (US$ per liter) (US$ per liter)
($ per barrel)
day)
day)
day)
liter)
France
2.04
1.13
0.91
0
1.12
0.30
0.82
29.99
Germany
2.80
1.59
1.20
0
1.22
0.33
0.89
29.99
Italy
1.83
0.95
0.88
0
1.19
0.39
0.79
29.99
Spain
1.48
0.88
0.61
0
0.94
0.36
0.58
29.99
UK
1.71
0.92
0.79
2.28
1.30
0.32
0.98
29.99
Japan
5.36
3.67
1.69
0
0.96
0.44
0.52
29.98
Canada
2.02
1.13
0.89
3.00
0.57
0.30
0.26
29.99
USA
19.24
6.72
12.52
7.81
0.44
0.28
0.16
29.74
Consumer
welfare
variation
Producer
welfare
variation
Tax
revenues
variation
Externalities
variation
∆Φ
Total welfare
variation
without
externalities
Total welfare
variation
including
externalities
Welfare variation
All figures in US$
billions per year unless
stated otherwise
NonTransportation
Tax increase (in
transportation
consumer
US$ per liter) consumer welfare
welfare variation
variation
∆W
∆R
− ∆E
∆S
France
0.05
0.00
-2.65
-2.64
0
2.08
-0.57
1.57
1.00
Germany
0.05
0.00
-3.51
-3.51
0
2.75
-0.75
1.90
1.15
Italy
0.05
0.00
-2.56
-2.56
0
2.06
-0.50
1.43
0.93
Spain
0.05
0.00
-1.77
-1.77
0
1.45
-0.32
1.26
0.94
UK
0.05
0.00
-2.31
-2.30
-0.00
1.79
-0.52
1.18
0.66
Japan
0.05
0.02
-4.93
-4.91
0.0
4.17
-0.74
3.43
2.69
Canada
0.05
0.01
-2.60
-2.59
-0.02
2.26
-0.35
1.15
0.81
USA
0.05
0.63
-35.17
-34.54
-0.73
33.59
-1.68
20.34
18.66
1 barrel of oil=159 Liters
27
Detailed calculation of welfare variations
Q iNT Quantity of crude oil consumed for period i.
Q iT Quantity of gasoline (or diesel) consumed for period i.
q iD Domestic oil production for period i.
Ti Taxes on gasoline/diesel for period i.
C * Externalities generated by the consumption of one unit of gasoline.
Pi C Global price of crude oil for period i.
Pi XT Ex-tax price of motor gasoline/diesel(14) for period i.
1.1 - Consumers
In this section, we introduce a difference between transportation ( Q iT ) and non-transportation related
consumption ( Q iNT ). The welfare calculations follow the same line as the simplified ones described earlier.
When taxes increase from
T1 to T2 , consumer welfare varies according to the following formula.
∆W =
Q1T + Q2T
Q NT + Q2NT C
(
( P1XT + T1 ) − ( P2XT + T2 ) ) + 1
P1 − P2C
2
2
(
)
1.2 - Producers
In the detailed model, we now take domestic oil production into account. When taxes increase from T1 to
T2 , the surplus of domestic producers varies according to the following formula.
q1D + q 2D
∆R =
⋅ ( P2C − P1C )
2
D
1.3 - Government
Government has a direct interest in oil consumption because it generates tax revenues. These revenues can
then be used to cut other taxes. However, we first consider these revenues as accruing to the Government,
even though they are likely to be retroceded to consumers over time. The variation of tax revenues for the
government can be calculated with the following formula.
∆Φ = T2 Q 2T − T1 Q 1T
1.4 - The environment
In our calculations, we only take the external cost of driving into account.
∆E = (Q2T − Q1T ) ⋅ C *
Hence, the total welfare variation can be written:
∆S = ∆W + ∆R D + ∆Φ − ∆E
∆S =
Q1T + Q 2T
Q NT + Q 2NT C
q D + q 2D
(
( P1XT + T1 ) − ( P2XT + T2 ) ) + 1
P1 − P2C + 1
⋅ ( P2C − P1C ) + T2 Q 2T − T1 Q 1T + (Q 1T − Q T2 ) ⋅ C *
2
2
2
(
(14) The weighted average price for diesel and motor gasoline.
28
)
Bibliography
British Petroleum, Statistical review of World Energy, 2004.
N. Carnot, C. Hagege, Le marché pétrolier, DGTPE Analyses Economiques, Novembre 2004.
John C.B. Cooper, Price elasticity of demand for crude oil: estimates for 23 countries, March 2003.
The Economist, What if?, May 27th 2004.
Energy Information Administration, Oil market Basics.
Energy Information Administration, Emissions of Greenhouse Gases in the United States 1998, 1999.
Energy Information Administration, A primer on gasoline prices, 2004.
D. Gately, OPEC's incentive for faster output growth, Energy Journal, September 2003.
International Energy Agency, Oil market Report, 2004.
International Energy Agency, World oil supply outlook through to 2010, March 2000.
International Energy Agency, International energy outlook 2004, 2004.
A. Lovins, E. Datta et alii, Winning the oil endgame: Innovation for profits, jobs and security, Rocky
Mountain Institute, 2004.
Ministère de l'industrie, Direction des ressources énergétiques et minérales, Le prix des produits
pétroliers.
Ministère de l'industrie, Direction des ressources énergétiques et minérales, Les prix DIREM, 19th May
2004.
Ministère de l'industrie, Direction des ressources énergétiques et minérales, Consommation de
carburant des voitures particulières en France 1990-2002, Energie et matières premières, January 2004.
I. Parry, K. Small, Does Britain or the United States have the right gasoline tax? Resources for the
future, March 2002.
E. D. Porter, US Energy policy, economic sanctions and world oil supply, API research study, June 2001.
T. Sterner, C. Dahl, M. Franzen, Gasoline tax policy, carbon emissions and the global environment,
Journal of transport economics and policy, May 1992.
www.pointcarbon.com, Carbon market indicator, November 2004.
29