Energy taxes and oil price shock

Cremer, Helmuth, Gahvari, Firouz and Ladoux, Norbert (2011) Energy taxes and oil price shock. LERNA Working Paper, n. 12.15.372

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Official URL: http://tse-fr.eu/pub/26539

Abstract

This paper examines if an energy price shock should be compensated by a reduction in
energy taxes to mitigate its impact on consumer prices. Such an adjustment is often
debated and advocated for redistributive reasons. Our investigation is based on a model
that characterizes second-best optimal taxes in the presence of an externality generated
by energy consumption. Energy is used by households as a consumption good and by
the productive sector as an input. We calibrate this model on US data and proceed
to simulations of this empirical model. We assume that energy prices are subject to
an exogenous shock. For different levels of this shock, we calculate the optimal tax mix
including income, commodity and energy taxes. We show that optimal energy taxes
are affected by redistributive consideration and that optimal energy tax is less than
the Pigouvian tax (marginal social damage). The difference is an implicit subsidy representing
roughly 10% of the Pigouvian price. Interestingly, the simulations show that
an variation in the energy price only has an almost negligible effect on this percentage.
In other words, even a very large oil price increase will only have a small effect on the
optimal tax on energy. Nevertheless, it appears that the energy tax is used to mitigate
the impact of the energy shock. However, this result is not explained by redistributive
consideration but by the fact that the Pigouvian tax (rate) decreases as the price
of energy increases. This is a purely arithmetic adjustment due to the fact that the
marginal social dammage does not change. Consequently, the marginal dammage as a
percentage of the energy price (which defines the Pigouvian tax rate) decreases as the
price increases.

Item Type: Monograph (Working Paper)
Language: English
Date: September 2011
JEL codes: H21 - Efficiency; Optimal Taxation
H23 - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 09 Jul 2014 17:30
Last Modified: 07 Mar 2018 13:22
OAI ID: oai:tse-fr.eu:26539
URI: http://publications.ut-capitole.fr/id/eprint/15436

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