FUEL TAXES AND COINTEGRATION OF ENERGY PRICES

Abstract

Creating a successful energy tax policy requires understanding the markets that the energy policy targets. This paper analyzes coal, natural gas, and oil markets to determine the extent to which these fuel prices move together. Results indicate that a stable long‐run relationship between coal and oil prices existed until 1974 and that this relationship changed after 1974. The long‐run relationship between coal, natural gas, and oil prices implies that a single fuel tax in these markets would not be effective as a single tax policy. Similarly, an equal percentage tax on these energy sources, which does not change relative prices initially, would not keep relative prices unchanged in the long run. Energy policy must take account of the long‐run relationship between different energy prices. Otherwise, the long‐run results of energy policy could be quite different than intended.