Dynamic behavior of transport fuel demand and regional environmental policy: The case of Portugal

Abstract

<abstract> <p>Despite the increase in electric mobility, fossil fuels still dominate the transport sector. For a sustainable management of these fuels, environmental policy plays a significant role. It is key to know if higher taxes are effective to moderate demand, which will depend on demand elasticities. While price elasticities determine the effectiveness of higher taxes, income elasticities are important for macroeconomic policy considerations. Furthermore, in dynamic societies and economies, it is possible that elasticities change over time or as a response to certain events, determining the need to adjust policies. We study the case of a small, open economy, highly dependent on fuel imports: Portugal. Our estimation of price and income elasticities for gasoline and diesel demand control for breakpoints and uses a dynamic perspective. The period covered (1995–2015) includes important macroeconomic events, such as the fuel market liberalization and a severe economic crisis. Results for the whole period show that long-run price elasticities are −0.368 for diesel and −0.911 for gasoline. Hence, taxes are more effective to moderate gasoline demand than diesel demand. Long-run income elasticities are 2.338 for diesel and 0.877 for gasoline, demonstrating the strong dependence of diesel consumption on the level of economic activity. The breakpoint analysis indicates that contrarily to the fuel market liberalization process, the economic crisis impacted elasticities. Furthermore, we find variability in elasticities around the period of the economic crisis, which justifies the need for a flexible policy. Dynamic policies can use specific periods as opportunities to promote technical and behavioral desirable changes.</p> </abstract>