How do Environmental Fuel Taxes affect Carbon Emissions? Analysis of Fuel Tax Effects in Nordic European Countries

Abstract

In the Paris Agreement of 2015, many nations agreed to mitigate carbon emissions to avoid drastic climate changes. To achieve this, emission reductions in transportation are essential. In this paper, I investigate effects of fuel taxation in Finland, Norway, and Sweden. I estimate emission reductions, using a synthetic control unit chosen from the OECD. Carbon emissions declined by 10.5 percent for Finland and 17.3 percent for Sweden between 1990 and 2005 after major increases in fuel taxation compared to its counterfactual. Norway reduced carbon intensity by keeping emissions constant under massive economic growth. However, observed effects show that emission reductions in road transportation are achievable. Moreover, I conduct a regression analysis to inspect for stronger tax than price effects on fuel consumption, referred to as tax salience in literature. Previous literature provides evidence for North America. If salience is present policy evaluations using price elasticities may underestimate emission reductions. Evidence for tax salience in Europe is ambiguous. This work indicates that tax salience is present, but overestimated by previous literature as complexity of fuel taxation and effects from diesel substitution in the European Market are neglected. This is critical as undertaxation may lead to miss emission reduction targets.