Greenflation or Greensulation? The Case of Fuel Excise Taxes and Oil Price Pass-through

JaeBin Ahn

No 2024/153, IMF Working Papers from International Monetary Fund

Abstract: Can a carbon tax reduce inflation volatility? Focusing on fuel excise taxes, this paper provides systematic evidence on their role as a shock absorber that helps mitigating the impact of global oil price shocks on domestic inflation. Exploiting substantial variation in fuel tax rates across 28 OECD countries over the period from 2014 to 2021, a simple idea that a per-unit, specific tax takes up a portion of the product price immune to cost shocks goes a long way toward explaining heterogeneity in the degree of oil price pass-through into domestic inflation across countries. A back-of-the-envelope calculation from the estimation results supports its quantitative significance---differences in fuel tax rates could explain about 30% of the variation in annual headline CPI inflation rates observed between the U.S. and U.K. during the 2021 inflation surge.

Keywords: Fuel excise tax; gasoline tax; diesel tax; oil price pass-through; retail fuel price; inflation; greenflation; greensulation; inflation volatility; headline CPI inflation rates; oil price shock; back-of-the-envelope calculation; Oil prices; Fuel tax; Fuel prices; Excises; Global (search for similar items in EconPapers)
Pages: 36
Date: 2024-07-12
New Economics Papers: this item is included in nep-ene, nep-mon and nep-tre
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