How Low Petrol Taxes Drive Us Towards Less Efficient Cars

An iron law of economics is that people respond to incentives. If the petrol price goes up, it should be of little surprise that consumers alter their choices at both the petrol pump and the car dealership.

Picture: Nina Matthews

In a paper recently published in Energy Economics, Shuhei Nishitateno and I examine these responses to changes in petrol prices. Our research uses data for 132 countries over the period 1995-2008.

Our results indicate that a 10 per cent increase in the pump price of petrol on average causes a reduction in petrol use of around 3 per cent. Petrol consumption is what economists call "price inelastic". This means that while higher prices do reduce consumption, the response isn't as big as it is for some other goods.

Part of the response to higher petrol prices is via vehicle choice. If petrol is more expensive, consumers are less likely to opt for a gas guzzler. A 10 per cent increase in petrol prices typically results in a 2 per cent improvement in the fuel economy of new vehicles. Our findings are similar to most previously published estimates, although are for a more internationally representative sample of countries.

Australia's Gas Guzzlers

In the take-up of fuel-efficient vehicles, Australia remains near the back of the pack. Data from the International Energy Agency reveal that new vehicles sold in Australia on average guzzle more gas than new vehicles sold in Europe, Japan, China or India. Australia performs only slightly better than the home of the SUV, the United States.

There are a number of reasons for Australia remaining in the slow lane in terms of adopting fuel-inefficient vehicles. One is that Australia is less cramped than most other countries: we have enough space to find a park for our four-wheel drives. Another is that, among developed countries, the tax included in our pump price is relatively modest. Our petrol taxes are lower than those for all OECD countries outside North America.

Shrinking Excise

In 2001, the Federal Government removed the automatic indexation of Australia's petrol excise, freezing the excise at 38.1 cents per litre. While we also pay GST on petrol, this decision has meant that the total tax we pay at the pump has not kept up with inflation. Fuel excise collections are expected to continue to fall in real terms.

Our research indicates that our falling fuel tax is slowing our take-up of fuel-efficient vehicles. The 2001 decision has also reduced the revenue available for transport infrastructure and other priorities. Shrinking excise revenues create increasing pressure on the government to look to other taxes to raise the revenue that it needs.

Using Taxes To Improve Incentives

No-one likes paying tax. But almost everyone agrees that some taxes are necessary.

Economists typically argue that there is a special role for taxation of activities involving negative externalities. The congestion and emissions associated with road use are classic examples of negative externalities. As well as being a good revenue raiser, addressing negative externalities has been a part of the justification for fuel taxes both here and overseas.

In this context, there are opportunities to realign our road taxes to improve the incentives that road users face. One option is a return to indexation of the petrol excise. This would prevent the erosion of government revenue and strengthen the incentive to use petrol efficiently.

Another possibility is for the states to reduce stamp duties or annual vehicle registration fees and instead look to raise more revenue from congestion charges. Doing so would mean that those who drive at off-peak times, or who drive less, would make a smaller contribution to the government coffers.

The Henry Review threw its support behind a move to congestion taxes. The Review was less enthusiastic about fuel taxes, but did rate them as more efficient than major revenue sources such as labour and corporate income taxes (Chart 1.5).

Petrol Subsidies Overseas

Some countries provide large petrol price subsidies to consumers. In Indonesia, more than 10 per cent of government revenue goes to subsidising fuel. Fuel subsidies involve a high cost, as they displace resources that could be used to build schools, hospitals or roads. By encouraging fuel use, the subsidies also exacerbate Jakarta's famous traffic jams and smog. The subsidies work against the Indonesian Government's goal of a transition to more fuel-efficient vehicles.

Where is petrol cheapest? In Venezuela, you can fill up your car for just a couple of cents a litre. The result? Venezuela's petrol consumption and road-sector emissions are high for a country of its level of economic development, and those who can afford it are more likely to buy fuel-hungry vehicles such as Hummers. It is hard to escape the iron law of economics.

Gasoline prices, gasoline consumption, and new-vehicle fuel economy: Evidence for a large sample of countries is published in Energy Economics. The paper and data can be accessed from Paul Burke's website.

Paul Burke is a research fellow at Crawford School. He does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations. The ConversationThis article was originally published at The Conversation. Read the original article.


    I am a tall person, and I have permanent back problems (specifically, a herniated disc). In early 2011, my back problems started causing me issues again, and one of the things I had to do to fix this was to get a new car (it was either that or stay at home to recover, which would mean quitting my job). It is slightly larger than the car I had before, because this allows me to open the door and get in and out without bending my back (which is necessary when the pain comes back), and actually sit up straight in the car (my previous car forced me to be hunched over the steering wheel). Of course, the extra mass of the vehicle means it is less fuel efficient, and I can tell, because I now live much closer to work, and I still use just as much fuel as I did when I lived further away with my previous car.

    Unfortunately, this basically means that all vehicle purchases I make have to be based on comfort and health, not fuel efficiency. Increased fuel taxes will not entice me to buy a more fuel efficient car, unless I'm lucky enough to find a model that is very fuel efficient *and* allows me to sit properly. Tell me, why should I be punished by having to pay more for fuel, just because my back problems force me to have more important concerns?

      There are a lot of 7-seaters considerably lighter than 4 wheel drives, and the new ones are looking less dumpy. They tend to have quite high head-liners.
      Many German sedans, and coupes, are designed for much taller people than most others, though you would likely have to bend your back a little when climbing in and out. It's only once you're inside that it would be comfortable.

      It's fair to say Govt. policy shouldn't be built around one person's health issues, but rather on what is good for the majority.

    This analysis also overlooks the role of the Australian dollar in driving fuel prices down. That - far more than the freezing of the excise - is what is making petrol "cheap".

    Sydney already has a congestion tax for using the Harbour Bridge and Harbour Tunnel, and there has been no appreciable shift in volume of traffic or patterns of usage.

    It makes far more sense to tax the purchase of low-fuel efficiency vehicles, and offer rebates for where the vehicle is required for commercial purposes. Potentially, you could also change the licence structure for large, usually inefficient vehicles like 4WDs, so that they would require a different, more expensive licence (again, with rebate options where the vehicle is essential for work or health reasons).

    you really think our petrol prices are LOW?

      Well considering it is a non-renewable resource that takes millions of years to develop is highly taxed and takes multi billion dollar infrastructure to extract/refine and is cheaper than coca-cola or milk...then YES.

        Went to Woolies last night -

        Milk $1/litre (2 litre bottle)
        Coca cola $1.43/litre ($2 litre bottle)
        BP 92 ULP $1.58/litre (in Launceston TAS)

        Try again Boomzzilla

    Cheaper than any other country I have ever lived / worked in.
    What's your benchmark for saying it's expensive?

Join the discussion!

Trending Stories Right Now