Working Paper Series,
Swedish University of Agricultural Sciences, Department Economics

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 EU’s 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

JEL-codes: Q42; Q48

42 pages, December 18, 2016

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