Changing prices in a changing climate: electoral competitiveness and fossil fuel taxation
Economists advocate a tax on fossil fuels – or a ‘carbon tax’ – as the most efficient policy to reduce greenhouse gas emissions as part of climate change mitigation. However, while many governments have adopted climate policies that include increased fossil fuel taxation, many others show reluctance to increase the price of fossil fuels. According to the High-Level Commission on Carbon Prices, only 15% of global emissions are subject to a carbon price, and OECD research shows that only 10% of emissions are priced sufficiently highly to meet the Paris Agreement objectives.
To date there has been little research into the politics of policy decisions on carbon taxes. This paper examines the influence of electoral competitiveness on such policy decisions and in particular on politicians’ preferences for imposing short-term costs on voters. The paper argues that policymakers are most likely to increase taxes when competitiveness between political parties is low and when voters perceive there to be a low personal cost as a result of increases.
Key points for decision-makers
- The study uses data on petrol/gasoline taxes and on electoral competitiveness across 20 advanced democracies from 1978 to 2013.
- The study finds that policymakers are more likely to raise taxes on fossil fuels when a low degree of competition with other political parties means they are insulated from punishment by voters in the form of being voted out of office.
- The personal cost to voters also plays a role. Even when competition with other political parties is high, policymakers are more likely to increase taxes on fossil fuels when few voters consume the taxed fuel and voters thus perceive the personal cost to be low.
- The paper includes a case study of eco-tax reform in Germany across two consecutive electoral periods, which shows how heightened competitiveness in the electoral environment saw the Social Democratic party willing to increase tax rates on fossil fuels after the 1998 election, but not after the 2002 election.
- The results help explain why the price of fossil fuels varies across countries and over time.
- The paper concludes that when electoral competitiveness is high, politicians should be expected to use policies that hide costs from voters, such as fuel efficiency standards or subsidies for electric vehicles, over fuel tax increases.