Carbon tax pass‐through in Canadian retail gasoline markets

Abstract

AbstractA carbon tax's pass‐through is one factor influencing its effectiveness in internalizing the externality created by greenhouse gas emissions. This paper measures the pass‐through of carbon taxes introduced in retail gasoline markets of four Canadian provinces that did not meet the carbon pollution pricing federal benchmark stringency requirements. Those four provinces are Saskatchewan, Manitoba, Ontario and New Brunswick. Using daily retail gasoline prices for 40 treated cities and nine control cities we find the pass‐through rates are city‐specific and vary from 0% to over 140%. City‐specific pass‐through rates imply that estimations at a higher level of geographical aggregation assume homogeneous effects where heterogeneous effects might be present. Our results also suggest it would be difficult for a government to impose an optimal and nationwide carbon tax on automotive greenhouse gas emissions. Although the degree of competition can explain city‐specific pass‐through rates, it cannot explain over‐shifting. Over‐shifting can be explained, however, by the demand functional form.