Policy diffusion and the interdependent fuel taxes

Fossil fuels remain undertaxed worldwide despite the accelerating threat of climate change. While subscribing to the existing literature on that domestic politics matters, I contend that policy diffusion is yet another mechanism here: risk-averse policy makers carefully follow their counterparts abroad, so incrementalism in taxing fossil fuels is self-perpetuating transnationally. Using data from 29 OECD countries, 1990-2019, various spatial econometric analyses lend support to my argument: the excise tax on gasoline in one country positively correlates to that in other countries, with this interdependence being more pronounced between geographic or linguistic neighbors and trade or political partners. Substantively, a gasoline tax cut by one unit in a single country could spread over 60% of its negative effect elsewhere. This Letter concludes with its contribution to the literature, possible avenues for future research, as well as important policy implications.

Automated summary

Despite the growing threat of climate change, fossil fuels are not taxed adequately on a global scale. The policy diffusion mechanism, as well as domestic politics, play a role in this issue. Analysis of data from 29 OECD countries between 1990 and 2019 supports the argument that changes in gasoline excise tax in one country are positively correlated with changes in other countries, particularly among geographical or linguistic neighbors and trade or political partners. A reduction in gasoline tax in one country could spread negative effects to about 60% of other countries.