Differential fuel taxes and their effects on automobile demand

Abstract

Fuel taxation policy in Chile has always been to keep taxes ondiesel lower than those on gasoline. The proportion of automobiles withdiesel engines has grown considerably as a result. Just 20% of dieselengine emissions are equivalent to 80% of gasoline engine emissions,and this affects the level of externalities associated with automobile use,especially in cities such as Santiago where pollution levels are high. Thisstudy estimates the effect of the fuel tax differential on automobile demand.The findings indicate diesel automobile demand elasticities of -3.4 and 2.1with respect to the price of the vehicle and the tax differential. The scaleof these effects means there is scope for substantial emissions cuts byway of tax changes to equalize gasoline and diesel tax rates and createa specific tax on diesel automobiles.