Working Paper Series, Department Economics, Swedish University of Agricultural Sciences
Abenezer Zeleke Aklilu
Gasoline and diesel demand elasticities: A consistent estimate across the EU-28
Abstract: Several studies have examined gasoline and diesel demand
elasticities. These studies usually cover a single country or a group of
countries that belong to a specific economic alliance such as the OECD.
Even though consistent elasticities are necessary to analyze and forecast
the effects of EU-level fuel policy, there has not yet been a study that
provides consistent gasoline and diesel demand elasticity across the EU-28.
This study sets out to address this literature gap by estimating price and
income elasticities for gasoline and diesel. For this purpose, an ARDL
Bounds testing approach was used to test the existence of a long-run
relationship and estimate the elasticities. The estimation provided short
and long-run price and income elasticities of gasoline and diesel demand
for the EU-28 countries and showed the countries in which a long-run
equilibrium relationship was confirmed. The results show that there was a
high variation in elasticity estimates between the EU-28 countries. The
estimated long-run elasticities were higher than their short-run
counterparts, which was in line with expectations based on the existing
literature. The short and long-run income elasticities of gasoline and
diesel demand were both found to be more elastic than their price
equivalents. This implies that if a charge on fuel is designed to decrease
emissions by increasing the price, the charge needs to rise at a higher
rate than income. An analysis of the EUís long-term emission and fuel
consumption reduction targets shows that, with the current tax scheme, it
cannot be guaranteed that emission targets will be achieved and thus a more
stringent fuel tax policy is essential.
Keywords: fuel demand; income and price elasticities; EU countries; ARDL bounds testing; (follow links to similar papers)
JEL-Codes: Q42; Q48; (follow links to similar papers)
42 pages, December 18, 2016
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