Pass-through of diesel taxes and the effect on carbon emissions: Evidence from China

Abstract

As one of the most important instruments for reducing emissions from fossil fuels, taxes have been widely used in government battles against air pollution and climate change across the world. However, the pass-through of taxes and their effect on emissions are not evident in all situations. This study investigates the pass-through of diesel consumption taxes to retail prices and estimates the consequent effect on diesel consumption and carbon emissions in China. The results show that the pass-through rate of diesel taxes in China is around 0.49. Also, there is a significant effect of an oil company's market share on the pass-through rate. Based on the pass-through rate and estimated price elasticity, we conduct further estimations of the impact on diesel consumption and carbon emissions and find that the increase in the diesel consumption tax in 2014/2015 reduces 1.64% of annual diesel consumption and 0.096% of annual carbon emissions in China.

Keywords: Carbon emissions; Diesel consumption tax; Pass-through; Price elasticity of diesel demand.