Changing Prices in a Changing Climate: Electoral Competitiveness and Fossil Fuel Taxation
For over 40 years, economists have advocated carbon taxes as the most efficient policy for addressing climate change. However, not all governments have increased the price of fossil fuels. When do politicians decide to increase consumer prices? This paper highlights the role of electoral competitiveness. I argue that carbon tax increases are most likely when competitiveness is low and politicians are insulated from voter punishment. Moreover, this effect depends on the personal costs that tax increases impose on voters. If a good is not widely consumed, politicians can tax it more easily, even when competition is high. I test this explanation using a unique dataset on gasoline taxes and new data on electoral competitiveness across high-income democracies between 1978 and 2013. The results are consistent with the theory. In addition, a case study of eco-tax reform in Germany across two sequential electoral periods demonstrates how changes in the electoral fortunes of the Social Democratic-Green coalition generated changes in fossil fuel tax policy. This analysis points to a crucial mechanism that plausibly accounts for the differential ability of governments to tackle a wider range of long-term policy challenges.
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