Are “flexible” taxation mechanisms effective in stabilizing fuel prices? An evaluation considering wholesale fuel markets

This paper analyses the incidence of specific taxes in fuel markets, and exploits the findings to simulate the effects of government interventions aimed at mitigating oil price fluctuations. Several reduced-form model specifications are estimated to study tax incidence, using wholesale equilibrium prices for both gasoline and motor diesel in the Italian fuel industry over the period 1996-2007 as dependent variables. We then assess the impact on fuel prices stemming from the creation of an automatic fiscal mechanism consisting of reductions in specific taxes matching the rise in oil prices. Our evidence supports the idea that “flexible” taxation mechanisms focused only on excise taxes could not be a viable policy for stabilizing the price level in fuel markets and more complex policies (based also on ad valorem taxes) are needed. Alternative interventions to control prices can be designed focusing on the market structure of these industries, where Antitrust Authority could play a significant role.

► “Flexible” taxation mechanisms respond automatically to oil price variations. ► We first estimate the incidence of excise taxes in the Italian fuel markets. ► We then assess the impact on prices of these “flexible” taxation mechanisms. ► We show that these mechanisms are not effective in stabilizing prices. ► We suggest that more complex policies are needed to reach this aim.