Optimizing fuel taxation between environmental benefits and socio-economic costs

Our communication deals with the optimal level of fuel taxation in France, as a balance between environmental benefits and socio-economic costs. If energy taxation is usually perceived as an efficient tool to reduce car use externalities, this efficiency nonetheless depends on price elasticity. In addition, by rising energy prices, fuel taxation also generates socio-economic costs for car users, through the increase in transport expenditures, and the disutility caused by the partial renouncement to travel, resulting in a loss of consumer surplus. In order for fuel taxation to be beneficial at the socio-economic level, collective benefits – the environmental benefit resulting from avoided externalities, and socio-economic welfare created through public spending – must exceed its individual shortcomings – the extra energy cost for households, and the welfare loss caused by the renouncement to travel. The optimal level of fuel taxation will be obtained by maximizing this net socio-economic outcome. For our calculation, we use official traffic series at the national scale, conventional externality values, while fuel price elasticities are taken from the literature, and different assumptions are made about the socio-economic return rate of public spending. In France, car traffic was found to be quite inelastic in recent econometric studies, implying that the environmental benefit, along with the welfare loss of fuel taxation, are negligible. As a result, its net socio-economic outcome mainly depends on the good use of public funds. This outcome is also deteriorating with rising oil prices, reducing the optimal level of fuel taxation over time. However, as parameter values are uncertain – in particular, the valuation of externalities, and the socio-economic return of public spending, do not rely on a scientific basis, but rather manifest a temporary political consensus - sensitivity tests are implemented. Finally, we question the reproducibility of our methodology and results in other national contexts.