The benefits of elastic fuel taxation

Abstract

Current fuel taxation in France presents a blind spot, since it does not consider the oil price. This article explores the benefits of a tax rate 'elastic' to the price of a barrel of oil: if international prices soar, the tax rate would be lowered, and vice versa. Such a mechanism has generated limited literature, even though it could be of interest given the strong volatility of oil prices over the two last decades. We analyze the conditions of implementation and the implications of such an elastic tax, first from a theoretical point of view, and then empirically through a retrospective quantification of its effects, if it had been introduced in France from 2010. We conclude that an elastic tax could efficiently lower price peaks at the pump, thus increasing the acceptability of fuel taxes. The impact on public finances can be controlled and would be limited. With such a mechanism, the Yellow Vests movement might have been more limited, as well as the costly measures put in place in reaction to the war in Ukraine. This principle of elasticity in fuel taxation thus deserves the attention of all oil-importing countries, well beyond the French case.